Labour’s $10 billion Housing Australia Future Fund (HAFF), which plans to build 30,000 new social and affordable rental properties in the next 5 years, is yet another government scheme that falls short of any real solution to Australia’s rental crisis.
Once established, the government expects that the fund will generate returns which will then be used to fund more social and affordable housing projects.
The problem is… 30,000 new social housing properties isn’t even a drop in the ocean for rental demand.
Australia’s population is set to boom
According to the Australian Bureau of Statistics, the population of Australia is currently estimated at 26.8 million.
Notably, over the past decade leading up to June 2022, the population surged by 3.2 million, resulting in a 14% increase from 22.7 million in June 2012.
And in the latest federal budget, projections expect that Australia’s population would grow by 2.18 million people over the next five years, driven by record net overseas migration of 1.5 million.
To help visualise, that’s the equivalent of the total population of Perth and Adelaide respectively.
And, looking further out, the latest Intergenerational report projected that Australia’s population would grow by 14.2 million people over 40 years, driven by a surge in net overseas migration of 235,000 per year.
That’s the equivalent of adding the combined population of Sydney, Melbourne, Brisbane and Adelaide to Australia’s current total population.
In essence, Australia’s rental crisis and housing shortage are the direct result of sustained high net overseas migration which has occurred for the past 20 years… and which is expected to continue for decades to come.
30,000 new properties is not enough
Just to make things clear…the HAFF is not there to alleviate the current housing crisis caused by Australia’s growing population.
Its aim is to provide supply housing for those that are socially disenfranchised and I believe it is our government’s role to do so.
My concern is that it’s clear that 30,000 new social and affordable properties are just not enough.
In fact, it’s so little that it won’t even move the needle in terms of supply to help ease our huge housing social supply shortage.
Think about it… 30,000 homes is just 6,000 extra homes per year spread across the country to help service the 2.18 million additional people in Australia over the next five years, and at a time when there is already a shortage.
Would you like to be standing in that queue?
But there is another supply problem…
The plan is to splurge $10billionn of taxpayer money to purportedly “deliver” – note, not actually build – 30,000 so-called “social and affordable” rental homes over the next five years.
Whether those 30,000 homes ever get built is highly dubious given the government’s poor track record in actually delivering anything tangible.
And you have to add this to the 1.2 million homes that Labor has already committed to – supposedly - getting built over that same “five years”.
Most industry commentators agree that there is virtually no chance of those 1.2 million homes getting built, so there’s even less chance of 1.23 million getting built.
The underlying problem is the massive shortage of both materials and labour.
AMP chief economist, Shane Oliver, estimates that 220,000 new properties per year are needed to meet the backlog of demand and resolve the rental crisis.
Not to mention high levels of continued property construction going forward to meet projected population numbers.
But dwelling approvals and commencements have fallen to their lowest level in a decade thanks to the perfect storm of rising interest rates, the hangover from the Coalition’s poor HomeBuilder policy and supply chain issues.
The combination of headwinds around soaring materials and construction costs means fewer projects are being completed and there has also been an uptick in the number of building companies going into insolvency.
Which in turn has reduced the industry’s capacity to reach potential building projections as needed.
In other words, the costs are high and available workers are thin on the ground.
Australia is struggling to build around 165,000 new dwellings per year at present, let alone the 220,000 needed to catch up with demand.
Governments are pouring money into housing but materials, land and labour are still in short supply.
Supply chain constraints, ballooning construction costs and labour shortages suggest Australia isn’t even ready for the construction boom we need.
These issues in materials, labour, and land will not solve themselves.
Pouring more money into the housing market without addressing construction and materials supply shortages will only increase prices.
And that certainly doesn’t translate to ‘affordable housing’.
It’s just not possible to build the amount of new property Australia needs.
Instead, perhaps governments need to think about reducing import taxes on materials like construction timber and steel frames to boost short-term supply, supporting new technologies in the construction industry, increasing skilled migration to boost our supply of workers or even making it easier to release land for development.
Only then will any money poured into the construction of new properties actually be feasible.
Here’s what I think needs to happen.
The truth is that there is no easy fix to this rental crisis.
However the key issue is a supply problem, and the only way to increase the supply of rental properties is to encourage more private investors into the market.
There are a few things that governments can do to achieve that:
- Make sure rental laws are balanced by providing enough protection for renters whilst still giving landlords enough control over their valuable assets.
- Encourage more Australian mums and dads to invest in property and stop putting barriers in the way.
- Make it a little easier for investors to borrow
At present, lenders “stress test” a borrower’s ability to service a loan at 3% above current interest rates, which means interest-only investment loans are being tested at a rate of 8.70% p.a.
For principal and interest on a 25-year loan for a $1 million investment, that translates to repayments of $94,000 p.a. – almost double actual repayments ($56,000 p.a.).
The benchmark interest rate must be reduced because a 3% buffer is no longer necessary if we are close to the top of the interest rate cycle.
Investors with a long-term view can benefit right now
With no end in sight for the housing supply or rental crisis I see an opportunity for investors with a long-term focus.
Going forward, demand will continue to outstrip supply.
As I said, this supply crisis isn’t going away soon.
At the same time, the cost of construction of delivering new dwellings will keep increasing not only because of supply chain issues and the lack of sufficient skilled labour but because builders and developers will only commence new projects if they are financially viable and currently new projects will need to come on line at considerably higher prices than the current market price.
In due course, consumer sentiment will rebound when it becomes clear that inflation continues to fall and interest rates have peaked.
At that time, pent-up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does as the property cycle moves on.
So strategic investors should get ahead of the curve and take advantage of the opportunities our property markets offer over the next couple of years.
