Dwindling Housing Approvals Raise Rental Inflation Risk

Building approvals for residential properties in Australia have hit a decade-low in January, signalling a potential increase in rental inflation as immigration numbers return to normal levels. The number of standalone home approvals declined by 13.5% compared to December, reaching the lowest monthly total since June 2012. Rising interest rates and escalating construction costs have driven buyers away from the market, leading to a significant drop in housing supply.

Understanding the Drop: Lowest Home Approvals in a Decade

The outlook for housing supply appears concerning, with a 44% decrease in approvals for attached housing such as apartments, townhouses, and semi-detached homes. Consequently, total new approvals experienced a nearly 28% decline in January, reaching the weakest figure since July 2012. The pipeline of apartments has already narrowed significantly, and the scarcity of new attached dwellings is not expected to improve before late 2025, which will contribute to higher rental prices.

Dire Outlook: Slump in Housing Supply Looms Ahead

While the focus has primarily been on apartment supply, the Australian Bureau of Statistics figures indicate that the pipeline of houses is also set to slump. Industry bodies have warned about the impending decline in new housing supply once the current wave of work, prolonged by weather-related delays and shortages, completes. Economists predict that activity will weaken by the end of the year, emphasising the need for increased efforts to stimulate housing supply.

Impact on Rental Market: Less Supply, Higher Rent Prices

Economist Angela Jackson highlights the effectiveness of the Reserve Bank of Australia’s actions in slowing down investment, particularly in the housing sector. However, the reduced housing supply will have a negative impact on the rental market, leading to higher rent prices in the future. It is crucial to address the diminishing supply through collaborative efforts between all levels of government and industry to deliver a diverse range of housing across the country.

Call to Action: Boosting Housing Supply for Affordability

The decline in January’s approvals can be partially attributed to the processing of fewer applications by under-resourced councils and planning authorities. However, economists anticipate a continued downward trend in approvals during the first half of 2023, driven by higher financing costs for new builds due to increased mortgage rates and the growing attractiveness of existing dwellings amid softer house prices.

Addressing Barriers: Streamlining Approvals and Financing

The impending decline in new housing construction is likely to prompt state governments to reduce barriers for build-to-rent developments. The market failure in new housing creation coinciding with a rise in migration necessitates action to stimulate housing supply. While higher interest rates currently deter individuals from investing in new housing stock, the expectation of further rate increases could further dampen demand for new dwellings.

Long-Term Demand: Factors Limiting the Decline in Approvals

Despite the decline, there will be a limit to the downward trend. High vacancy rates and surging rents are expected to draw investment back into the market, particularly in higher density housing. Increased immigration, rising rental yields, and low housing vacancy rates will contribute to the long-term demand for new housing, providing a floor for approvals.

Conclusion: Collaborative Efforts for Rental Affordability and Housing Supply

The dwindling housing approvals present challenges for rental affordability and housing supply in Australia. The current market conditions, including rising interest rates, escalating construction costs, and decreased approvals, call for collaborative efforts to stimulate housing supply and address affordability challenges.

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