One of the key positive surprises since the Covid-19 pandemic started has been the resilience and strength of the Australian housing market. In recent months, we have all witnessed house prices around our neighbourhoods jump to levels higher than pre Covid-19. Whilst lower interest rates help explain much of these price rises, we have also seen a dramatic increase in housing construction and renovations. This has predominantly been in detached houses rather than apartments.

House prices have become a national obsession

Australian house prices have risen 10% from September through to the end of April. The month of March alone appears to have been the best month for major capital markets in this recovery with April still up at a slower place. However, apartments are recovering much slower.

  Source: ABS, CoreLogic, Jarden Research

Owner occupiers have been the main buyers with first homeowners more engaged than usual. Further gains are likely especially if investor interest grows with indications suggesting they will. Vacancy rates have risen in capital cities but are low in many regional markets so signs of stabilisation in cities like Melbourne, could see a strong investor recovery.

Yet, we could find the pace of price growth slow due to a lack of affordability, extra supply from sellers who may no longer hold off to sell along with the effects of new builds coming through. We also need to keep an eye out for any macro prudential tightening by regulators to restrict the level of credit by lenders.

Why are so many people building new houses?

For us, the main positive surprise in housing has been the strength in approvals to build new homes. There are a variety of reasons for the rapid rise in housing approvals and construction apart from lower interest rates. The main reason appears to be the Federal Government’s HomeBuilder policy that has encouraged more than double the applicants forecasted. Such was the success, the Government recently was forced to extend the timeline for builders to complete the work.

Source: Treasury, Macquarie

For most Australians, Covid-19 has meant more time spent at home allowing many people to work away from the office. Whilst the long-term effects remain uncertain, we do know that Australians will spend more of their working day at home. One effect is for more people to move further away from the inner city and so new houses are required in outer suburbs and regional areas.

Since we are spending more time at home, we are renovating to improve the home office experience or to update the kitchen for the numerous visits to grab a biscuit! Whilst monthly data points will remain volatile, we expect approvals for new single dwelling homes to remain elevated for the rest of 2021.

Source – ABS, RBA, Macquarie

All these factors suggest the underlying demand is strong and as a result, the boom in construction could last for a while. This is where we are concentrating a lot of our efforts to determine the cycle’s duration. The restart of international travel could signal a major slow down in construction as people spend on overseas holidays.

How could immigration change the outlook for housing?

We have less confidence on higher density homes where approvals have been deteriorating even before Covid-19 albeit from lofty levels. A major reason for the past high levels of housing construction was immigration since we had to build more roofs to accommodate the extra people. With Covid-19, the level of net migration has plummeted to the lowest since the First World War. The large number of returned expats has tended to help the supply of single dwelling homes. We are already seeing some industry groups calling for the restart of immigration to help keep the building industry going once the current pipeline of renovations and new single dwelling homes slows.

A few companies are being impacted

Companies like CSR are highly exposed to new single houses supplying products like gyprock and bricks. James Hardie supplies fibre cement but is more exposed to the bullish US market and Boral Australia is more exposed to general construction but still supplies products like concrete and roof tiles for homes. Many of these names have performed well so determining the cycle duration is crucial to their investment thesis going forward.

Conclusions

House price growth should continue to grow for the rest of the year but at a slower pace. Milford’s analysis and feedback suggest that the cause of this, is that there is more supply hitting the market which gives more options for buyers.

There are risks of a faster slowdown such as macro prudential restrictions, but such a policy would be more designed to slow rather than cause a fall. Single dwelling homes will continue to be constructed at high levels for the rest of 2021 but probably at lower levels in 2022.

The length of this construction boom into 2022 will be heavily influenced by further house price growth. A big unknown is the speed by which immigration picks up as further delays will put a dampener on the positive call for housing prices and construction. There are plenty of moving parts to keep us occupied.