Understanding supply shortages and demand dynamics in the Aussie housing market

Understanding supply shortages and demand dynamics in the Aussie housing market

The Australian housing market is often described as undersupplied, with government policies focusing on addressing this issue. Housing Australia reports a projected shortfall of over 100,000 dwellings by the end of 2028. However, despite this perceived shortage, some housing markets are experiencing declines in value, attributed to an apparent oversupply.

For instance, in Melbourne, home values declined by 0.9% in the three months leading up to January, coinciding with a rise in total listing numbers, giving buyers more options and bargaining power. This apparent contradiction raises questions about the balance between supply and demand in the housing market.

It’s important to differentiate between the market for purchasing housing and the fundamental need for shelter. While terms like supply and demand are often used interchangeably, they represent different aspects of the housing market.

The market for purchasing housing reflects the availability of properties for sale and the number of potential buyers. Factors such as credit conditions, consumer confidence, income levels, savings, and tax settings influence the desire to buy property. However, the attractiveness of housing as an investment asset differs from the fundamental need for shelter.

In Melbourne, there were 81,203 dwelling sales in 2023, indicating market demand from potential buyers. However, the number of new listings added to the market exceeded 90,000, suggesting an oversupply scenario that contributed to a slight decrease in purchasing values.

Contrastingly, the demand for accommodation, especially in rental markets, remains strong. Melbourne’s population growth is likely to have increased significantly in 2023, with the city historically attracting around 30% of the country’s net overseas migration, according to the Australian Bureau of Statistics regional population data. Rental vacancy rates across Melbourne were less than 1% in November last year, compared to a historic five-year average of 2.2%. Rent values in Melbourne increased by 10.7% in 2023.

Each of these factors points to increased housing demand, even among those unable to buy. Private rental market values can serve as a reliable indicator of fundamental housing demand, as renting is a common alternative for individuals unable or unwilling to purchase property.

However, low purchasing demand amidst strong housing demand suggests that buyer interest may be sensitive to changes in interest rates and affordability factors. For example, a reduction in mortgage rates or the serviceability assessment buffer would increase borrowing capacity for lower-income households, boosting the number of buyers in the market.

It’s important to recognise that the supply and demand of dwellings can mean different things from a market perspective and a social perspective. Combining declining dwelling values with solutions to the housing crisis overlooks the diverse needs of households. Ensuring a consistent supply of social housing, independent of market fluctuations, is essential to meet the accommodation needs of vulnerable populations.

If you’re looking to purchase a home in the near future and want to explore your lending options, get in touch with our experienced home loan specialists who can help determine your borrowing capacity and help make the journey of buying your home uncomplicated.