Is Australia’s Housing Supply on Track?

Welcome to another episode of The Property Nerds. And in this particular episode, we get very nerdy because we're going deep into property economics, market research, understanding some of the forward-looking data points, as well as talking housing supply, both new and established. So lots to unpack. But in this particular episode, we've got a special guest by the name of Cameron Kusher, former executive manager of economic research at PropTrack, also known as realestate. com.

au. Cameron Kusher joins us not only with experience at PropTrack and economics, but also from CoreLogic as well. So we're very lucky to have a guest as established as Cameron with the knowledge that he has and insights that he'll be sharing on all things property market supply, the housing market fundamentals, and some of the forward-looking indicators. Let's jump into it. Nerd alert!

Property Nerds, the home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. Cam, welcome to the Property Nerds show, mate. It's not your first rodeo with us. No, but good to be here in person. Thanks for having me.

Well, we always love it when a fellow nerd and the kindest of ways we say that joins us here. The research of property is a hot topic amongst our community, and it's one of our favorite things to go into. And so we couldn't have thought of anyone better than yourself to be on the show today. We've just come off the elections, and it's been a major blowout win, right, in terms of one side. But the thing that's been on the mind for many property investors or property owners or even just those who want to be a property buyer one day has been this talk about housing supply.

And I want to zone in on new supply in particular because there's talks around the target we're trying to reach as part of the housing accord. Now, I want your honest opinion here. Are we on track for it? And if so, yes, why? And if not, why?

We're not on track. All right, podcast over. We know it's not on track. The government itself, their supply council came out recently and said that they're looking at probably about 250,000 fewer homes being delivered than the target of 1. 2 million.

And if you actually factor in demolitions, it's more like 350,000 too few homes. To be honest, I didn't think the accord target of 1. 2 million new homes over five years was ever going to be achievable, particularly at the time in the property cycle that they made this target. That is an achievable target, but there needs to be a lot of work to be done before you start heading towards that target. And you also need to have the right economic conditions.

When that target was announced, interest rates were the highest they've been in 12 years. Construction costs had just surged 35, 40 percent. And those are all massive headwinds for actually trying to deliver that volume of housing. So we're not on target, but I think what we are likely to see from here as interest rates have already started falling, as construction costs have stabilized, that we will start to see new housing volumes pick up. And that's because things are going to be more feasible.

The borrowing costs are going to be lower. Lower interest rates will pull more buyers into the market and that will see more housing construction going on. But the target is 240,000 new dwellings every year for five years. We've never maintained that pace ever before. And I don't even know that any of these next five years will get to that level, but we'll certainly pick up from the about 177,000 completions we had over the last 12 months.

And I wanted to ask, outside of costs, how much role do you feel like sentiment from the end consumer makes? Because I know over the last few years, what's also happened in Australia outside of the building parts itself has been this confidence impact of like, am I going to get a completed home? Is the builder going to be alive to go through this all? I heard this horror story. Maybe let's not do it.

Do you feel that plays a very big role in the end outcome of everything too? Yeah, definitely. And I think we do have this shortage of builders. We've got the trade shortage and we don't have enough people. We've also got a huge infrastructure program going on, which attracts people away from building houses to go and work on these big government projects.

But we've had the Opal Towers in Sydney. We've had other examples as well. And I think that does, to some degree, scare people off. I think the other big part of it is things are changing very slowly, but most properties, most new properties are built to sell. So you don't actually get them out of the ground unless you get 60% of it pre-sold before you get your finance to go and construct.

So pre-sales are a really important part of new supply. And again, interest rates have been the highest in 12 years. The gap between new and existing home prices has been quite large. So it's been hard for developers to get enough pre-sales to go ahead and actually start constructing these projects. Now, I don't want to shift the conversation too much away from housing, but this part I feel is valid to ask about, at least, is the supply side, but then there's also the other side of demand, which is where they're trying to balance out the supply with the supply component.

Migration's had a big part here. I'm very grateful to call Australia home as a migrant from New Zealand. But how does that play a role in relative balance towards the need of that target and how much comes out? I mean, is it a side of you that goes, well, if we can't control this side as quickly or as easily as we can, does that side make a difference? Or are we talking two separate things because of the nature of how many don't just come out and build a home as a migrant off the plane?

What are your thoughts on that side? Yeah, look, I think migration policy and housing policy are not aligned, and that is a problem. And I think it's really reared its head over the last three years because, of course, we had international border closures and then the borders reopened and we saw a massive influx of migrants coming to Australia. Australia's always had a high level of migration, but it's got to levels we've never seen before. And at the time the international borders reopened, it was already apparent that construction costs were surging, the housing cycle, the new housing cycle was turning lower, the rental market had already tightened quite a lot.

And the thing with migrants is that most of them, as you say, they don't have a home when they get here, so they're very reliant on the rental market. So this has put huge pressure on the rental market. It's driven up rents substantially, and people that were already here are feeling the impact of that. A lot of the people that have been coming into the country have been overseas students, and I think one of the big questions is, well, the universities reap the benefits financially of overseas students. They've got a lot of land.

Why aren't they building housing for the international students? So I think it really hasn't impacted on established property prices too much, but it has had a big impact on the rental market. Yeah, mate, you mentioned interest rates. Now, at the start of the year, amongst people I was listening to, a lot of people said that we'd probably get a 1% decrease this year, another 1% decrease the year after that. So we're midway through the year now.

We've had a couple of rate decreases, thankfully. So where do you see it going? What trajectory are you subscribing to? I think interest rates are still going to come down. We're at 3.

85%. I believe by the end of the year we'll probably have two or three interest rate cuts, 25 basis point cuts. I think that might actually be the end of the easing cycle. If you look at inflation is back in the target range, basically where it needs to be at the moment. I guess the economy is still pretty slow.

Household spending is still pretty slow. But you would think that slowly as interest rates come down, consumer confidence will lift. People that are really struggling with relatively high interest rates, the big burden of their mortgage, they ease some of that pressure and spending picks up a little bit. But I think a lot of people are quite happy that interest rates are heading lower. Of course, when you do get an interest rate cut, that will increase borrowing capacity in the housing market each time by about 2% to 3%.

So it will allow people that haven't been able to get into the housing market to then potentially access the market and buy a property. So I don't think interest rates are going back to where they were during the pandemic or even just before the pandemic. But I think they'll probably be hovering around that 3% interest rate, remembering that we're at 3. 85% at the moment. Yeah, I mean, what's interesting is we used some research formulas that the University of South Australia had when it came to measuring overvalue and undervalue in housing markets.

And look, it's so hard. It's such a subjective measure to look at that. But one thing we already know is the decoupling of, say, price to income ratio. That's quite behind us. But we've actually been breaking down things like overvalue and undervalue by household income and using a call it 30% to 33% benchmark against mortgage repayments.

And what's crazy to see is how many markets across Australia get marked under this overvalue because of this heightened interest rate. And as you said, even on our measure, what's interesting is when we move the interest rates down to, say, a hypothetical 3% cash rate, or actually it's like 2. 75 to 3, we start to You know, RBA sees them one way, we see them another way. What are your thoughts on that? Yeah, I think that's definitely the case.

I think that, you know, ask anyone and they'll have a different favorite indicator. Look, I think the key things to really look at when you're looking at the housing market is the supply. How much property is on the market? How long is it sitting on the market? Is it moving?

Is it not moving? Are people adjusting prices downwards? Are prices being adjusted upwards? It's hard to get, but measures of inquiry, measures of, you know, the number of people turning up to open homes, registered bidder numbers. I mean, that's telling you the real interest and real demand for properties.

And I think also a lot of people get hung up on backwards indicators, you know, oh, the market's jumped 20%, so this is a great market. It's like, no, it was a great market before it jumped 20%. It's probably not going to do another 20% in the next couple of years. So I think it's trying to get ahead of the curve. And I think it's a lot of it's looking at that relative affordability.

So if you look at the market at the moment, obviously Brisbane has had a great run. Brisbane prices are now more expensive than Melbourne. Yeah, interesting how that works, right? I mean, I live in Brisbane, but, you know, Melbourne's a city of more than 5 million people. Brisbane's two and a half million.

There's way more business opportunity in Melbourne than there is in Brisbane. And I would say that it makes sense that Melbourne prices should be higher than Brisbane's. You look at even prices in Perth and Adelaide, they're pushing up towards Melbourne prices. Now, Melbourne's not a great place for investors at the moment because there's a lot of tax going on there. But I think longer term, that looks to me like a market that is likely to push forward in price.

The challenge, of course, at the moment is you don't have investors buying in that market and you've got quite a lot of stock on the market. So you need that volume of stock that's out there for sale to start moderating. But I think longer term, that's a market where prices should be higher than pretty much any other capital city, except for maybe Sydney and Canberra, which has always been quite expensive. Yeah, it's an interesting point you mentioned about the stock and market and what's happening in Melbourne. I think what we see when we do our supply analysis is that Melbourne has a little bit more stock compared to the rest of the markets.

And what we're seeing is even if we take the examples of the smaller markets, call it Adelaide, Brisbane, Perth, the established stock there is a lot lower than its long-term averages. Why do you think that's the case? Yeah, that's a tricky question to answer. And I've asked a lot of real estate agents, why aren't people putting properties on the market? And it becomes this kind of game that I'm not going to put my property on the market because there's nothing else to buy.

And I think that drives that reluctance. So I know I can get a good price for my property, but where am I going to move to? Now, you go back three years ago, the same thing was happening in Sydney and Melbourne, but people just, I think at some point, just decided that we had to get on with it. We had to start putting our properties on the market. But the likes of Brisbane, Adelaide, Perth just haven't got to that stage yet.

But you would have to think, given how much prices have increased in those markets, that there are going to be more and more people that want to take that profit and look somewhere else, upgrade. I mean, people outgrow houses pretty quickly when you've got growing families. So I wouldn't be surprised in the next sort of six to 12 months if we start to see those markets moving a little bit more. And I wouldn't be surprised if we start seeing that larger volume of stock in Sydney and Melbourne starting to moderate as well. Yeah, I think the established supply is like one of the most under, I guess, appreciated points of supply movements that people don't talk about because it doesn't need that build out of the ground.

It doesn't need that construction, the approval, the red tape. And it's just, it either is on or it's not on. And I personally think whilst the new building side is going to be such an important part, yes, to long-term supply, that established supply stock mobility is something that's been missing for many, many years in many markets. And like we from the buying agency side of things, it's actually quite difficult to also find the right investors for clients because when you have criteria and due diligence, it's like you want to avoid certain things on main roads or flood impacted or bushfires and other things. And all of a sudden it's like there's 40% less supply in say Adelaide as an example from five years ago.

I definitely feel also it's like a triple whammy. It's like vacancy rates are low, building rates are low. And then on top of that whole established supply being low, it's like you said, where's that choice going to come from? Do I go left? Do I go right?

What do I do? And people might've in the past actually gone and built a new home, but it's taking longer to build new homes. There's a shortage of trade. So they can go, okay, I'll build a new home, but you might be waiting 12 months to get that home. And also the other problem in those markets is the vacancy rates are so tight.

So a lot of people will need to transition through the rental market. And if you've got kids in school, you don't want to move out of where the kids are going to school. Maybe you can't find a property to rent for that period of time as well. So the low rental vacancy is obviously really bad for renters, but it also has an impact on people trying to transition through the rental market once they've sold their home and looking to buy their next one. Yeah, we're seeing a lot of it.

Like we have to do things called rent back clauses as a way to secure stock for our clients. So what ends up happening is that we end up making off-market offers. And when we secure these off-markets, the real estate agent's like, I want this person to list, but they won't list it to any listing platform. They're like, I don't want to do it. So then they have collaboration with us and our relationships and our clients.

So they're like, well, if you offer my client a rent back for 12 months or six months at a certain level, they're willing to sell it to you. And that's exactly what you're talking about, that dynamic. So we get a lot of off-market stock to buy for our clients if we actually insert a rent back clause. So it's that win-win that we're creating. Everyone's got time to find what they need for the next move.

That's it. So I know in your past career, you were at PropTrack. And at PropTrack, you played the role of a leading economist there. Now, I'd like to understand in that company, what were some of the coolest forward-looking indicators? You talked to a few, but if you were to pick your one or two favorites that led towards price growth that you felt, hey, this has happened to us time and time again, we see these forward-looking indicators, what were they for you?

I think the big ones really were inquiries. Like once you started to see more inquiry happen, that's when you started to see markets shifting. And there are other things as well. Like you can really tell someone that's interested in a property on a listings portal by how many times they come back and look at those properties. Now, they haven't really, I guess, productized that metric so much.

But what you find is people that come back to a property and look at all of the photos three times or more are much more likely to buy that property than not. So it's that consumer behavior, which is quite telling and quite indicative of intent. Also, how often people spend on the site. Even things like emailing the link to their friends, this is the house I'm going to buy. So I think that's probably, in terms of forward-looking indicators, some of the really cool stuff, that inquiry and just how often people are coming back to look at properties and how much time they're spending on that site.

Yeah, very interesting. Yeah, so I've seen a lot of people start to pop up with new AI products in real estate. Do you think that's going to shape much of the industry or do you think it's just a bit of a fad? No, I don't think it's a fad at all. I really think that, I mean, we're just at the start of this kind of explosion in AI.

And look, I think there's going to be a lot of disruption from it, to be perfectly honest with you. I mean, even just talking about listing portals, for example, it's already pretty much at the stage where you can go, look, I want to buy a house in Mossman that's four bedrooms, two bathrooms, and I want it priced between 10 million and 15 million. Give me all of the properties that are on the market. Now, most of the time it will direct you to realestate. com.

au or Domain, but I think for the real estate franchise groups, there's a real opportunity there because all the traffic's fed to those listing portals. If they can improve their SEO and maybe not have those listings on those major portals, then they can drive that traffic there. And I think people will get smarter about searching and that's the sort of way that they will search.