Unit shortage looms over Australian housing market

CoreLogic expects that the national housing deficit in Australia,  was forecast to reach approximately 106,300 by 2027, with around 59% of the shortfall expected in the unit market.

In August, the firm estimated that units made up 25.9% of national housing stock and around 30.4% of Australia’s capital city housing stock, up from 19.6% and 22.9% at the start of 2010, respectively.

“The continued reliance on the unit sector to deliver fresh housing stock is particularly evident across some of Australia’s largest capitals, including Sydney and Melbourne, as well as the ACT, where limited land supply has made further development of low-density dwellings increasingly difficult,” it said in a report.

“With a median value of $637,593 (around 30% cheaper than capital city houses), capital city units offer a significantly more affordable entry point for first home buyers, as well as a lower maintenance option for both investors and downsizers.”

According to CoreLogic, on the demand side, a stronger-than-expected level of net overseas migration has seen overall housing demand skyrocket and this has occurred amid high levels of overseas arrivals, and about a 25% drop off in departures relative to the pre-COVID average.

In the year to March 2023, net overseas migration reached a new record high, with 454,400 people added to Australia’s population. At the current average household size, this equated to an additional 181,723 households.

“While worsening rental affordability has seen the pace of unit rental growth ease in recent months, unit rents are likely to remain elevated for some time, especially with net overseas migration expected to remain high through 2023 and 2024,” the firm said.

In a low and declining interest rate environment, the apartment boom of the 2010s contributed to persistently low growth in annual rents across the country (averaging about 2% per year), and through the recent pandemic upswing, detached house values ballooned relative the unit sector.

However, CoreLogic has said that in the face of rising demand and record low interest rates, the early 2020’s had not been marked by the same uplift in unit construction.

“At the moment, an elevated pipeline of units under construction, high interest rates and low consumer sentiment could temper unit demand and price growth. But once the pipeline is worked through, Australia faces a relatively low number of approved projects, which may create a temporary vacuum in new unit supply.

“With the cash rate potentially easing in 2024, greater purchasing demand could fuel a stronger price boom in the unit market at this time.”