How Housing Shortages and Increased Immigration are driving up house prices

Posted By Chris Nicholson

AMP's senior economist Diana Mousina states that there will be "upward pressure on home prices for some time yet."

House prices and rental rates across Australia are expected to rise this year, except in Melbourne. A housing shortage, combined with increased immigration, has led to an estimated 8 percent increase in national house prices for this year. However, Melbourne's market is not keeping up.

In fact, certain areas in Melbourne are experiencing falling prices. CoreLogic's latest year-to-date figures show a 0.9 percent drop in Melbourne compared to a 4.3 percent national increase.

Diana Mousina's new report on the national housing market indicates an "undersupply" of new housing in NSW and Queensland, while Victoria has an oversupply.

Mousina explains, "Overall high population growth in recent years and low levels of dwelling construction have worsened the housing shortage. We believe that construction levels will stay below underlying demand, maintaining upward pressure on home prices." The report identifies Queensland and NSW's housing undersupply as the main factor driving prices higher.

In contrast, Melbourne's oversupply makes it the weakest metropolitan market for investors, while Western Australia shows the strongest home price growth and remains relatively affordable compared to eastern states.

Despite warnings from some analysts of a mid-year housing market slowdown after softer figures in July, the AMP report suggests that the market's upward trend, which has lasted for two years, is unlikely to change significantly.

New home constructions peaked in 2019, and the number of new builds has not recovered since. Over the year to March, 172,000 dwellings were completed, but recent data suggests that this will drop to 160,000 per annum over the next 12 months.

CoreLogic economist Eliza Owen notes, "We are now seeing the biggest divergence among different regions in over a decade." Owen explains, "Melbourne is different – there has been a significant building program across Victoria, with around 100,000 more homes built there than in NSW over the last decade. Additionally, there are more sellers than buyers, creating a distinct market in Victoria."

Nationally, Queensland and NSW face the largest housing undersupply, followed by Tasmania, the Northern Territory, Western Australia, and South Australia. Conversely, Victoria and the ACT have the largest oversupply of dwellings.

Higher home prices also mean higher rental costs. Nationally, the rental market remains tight, with Mousina expecting rental growth of 8 percent over the year to March. However, lower immigration volumes may start to slow rental growth, with future increases estimated at around 5 percent. Even at this level, rental growth would still outpace inflation.

The AMP report concludes, "Fundamentally, Australia is not building enough homes to meet demand, which is driving up home prices and rents."