The COVID 19 pandemic dramatically influenced housing markets around the world, nowhere more so than Australia. Since 2019, prior to the pandemic, until 2023, house price growth in Australia outstripped comparative global markets (United States, Canada, the United Kingdom and New Zealand) by 14.1%, as Australian house prices rose by 45.8%, compared to global average across comparative markets of 31.7%.
As well as monetary conditions being very accommodating during the pandemic period, another driving force behind this rapid period of house price growth has been significant, above trend, population growth which was underpinned by rapid international migration in the developed economies. With housing supply unable to sufficiently respond to the sharp increase in demand, due to a combination of capacity constraints, material and labour shortages and lockdowns, house price inflation accelerated.
If this was not enough, the supply/demand imbalance was further exacerbated by changing home buyers’ preferences. (fewer people per household, changing working from home requirements/private outdoor space) as well as Government stimuli (such as Jobkeeper in Australia) all adding to the upwards pressure on house prices.
This study considered a range of factors influencing housing markets:
- Dwelling completions
- Population growth
- House prices and
- Mortgage rates
The study found:
- In the post GFC period, between 2014 and 2020, housing supply was increasing slightly faster than population growth across the global markets reviewed – aside from Canada.
- However, the surge in migration once international borders reopened, post the pandemic, in late 2021/early 2022, the strength of population growth and hence dwelling demand, overwhelmed dwelling supply (outside of the USA).
- In Canada, the imbalance between housing completions and population growth is nearly 360,000 dwellings. In Australia this gap is 89,000 dwellings, the United Kingdom 65,500 dwellings and New Zealand, 12,700 dwellings. Only the USA, potentially due to a more institutional build to rent market and greater housing density, are dwellings outstripping population growth.
- The imbalance between population growth and housing completions is highlighted in the chart below.
- On average, in the five global markets, house prices fell by 2.7% in 2019. In 2020, house prices had started to pick up, growing, on average, by 3.9%. However, after this, the excess of dwelling demand over supply contributed to the sharp increase in house prices from 2020.
- House prices exploded in 2021. Across the five global markets prices increased by an average of 21.4% during the year. In New Zealand (28.5%), Australia (26.3%) and Canada (26.1%) house prices increased by more than 25%. In New Zealand, this equated to a 1% growth in house prices every 13 days.
- An easing in the rate of population growth, in conjunction with rising interest rates and increasing cost of living pressures, contributed to house price growth moderating in 2022, to an average of 11.7% and then decrease in 2023 (except in Australia) by 5.3%.
- As demonstrated in the chart below, there has been a strong symmetry in price growth across the global markets.
Implications
Across the world, various solutions are being sought to rebalance supply/demand dynamics. Policy actions and proposals have included:
- Limit immigration.
- Reduce red tape to help enable faster construction times.
- Increase Government housing.
- Reduce interest rates.
- Financial incentives – first home buyer grants, stamp duty exemptions and access to superannuation for housing deposits.
Given the continuing difference between population growth and housing completions, against a backdrop of construction capacity constraints, it appears unlikely that a greater equilibrium between housing supply and demand will occur in the short term.
To an extent, the experience of Australia, specifically increased demand for sea-change locations due to working from home and changing household structures, due to lower household formation, as a consequence of the pandemic, larger homes rather than apartments, which can accommodate home offices and private outdoor spaces could be in greater demand.
While house price growth has eased in 2024, actual and expected cuts to mortgage interest rates could spur an increase in housing demand while supply struggles to keep pace.
The USA experience, with greater density and a more institutional housing market anchored by “built to rent” products, may reduce house price pressures in other, low housing density, countries such as Australia, New Zealand and Canada.
Innovations driven by technology (robot builders) and design (smaller houses) may assist in easing price pressures, but these solutions are not broadly applicable. An increase in multi-generational houses, either by choice or necessity, could also assist by reducing short term demand for housing.
However, it seems the overarching conclusion is post the pandemic, there was a greater desire to live in countries with strong domestic economies, with good health, education and legal systems and a high level of amenity. The number of Australians returning to live in Australia after the pandemic, aside from the upturn in international migration, shows that to many there is no place like home.
Consequently, if there is a desire to limit the rapid growth in house prices and hence arrest the deterioration in housing affordability, migration will also need to be a function of the number of dwelling available or in the pipeline.
Related Articles
