A collapse in new home approvals is set to exacerbate the nation’s rent and housing affordability crisis as Treasury secretary Steven Kennedy warns the Australian economy may have already entered a weak period of growth.
As the Reserve Bank mulls another interest rate rise next week, Australian Bureau of Statistics data showed dwelling approvals dropped another 8.1 per cent in April to 11,594. They have now fallen by more than 24 per cent over the past 12 months.
Private house approvals have tumbled by 23 per cent in NSW, almost 21 per cent in Victoria and by more than 19 per cent in WA over the past year. Total approvals are now at the same level as in April 2012, when there were 3 million fewer people in the country.
Since peaking at more than 23,200 in March 2021, approvals have collapsed by 50 per cent.
The property sector is showing the most strain of any part of the economy from high inflation and the increase in official interest rates to 3.85 per cent over the past year.
That’s despite the government expecting a record 400,000 net overseas migrants to enter the country this financial year, and another 315,000 in 2023-24. Almost half of those migrants are expected to be international students who had been kept out of the country by COVID-19 restrictions.
Commonwealth Bank senior economist Belinda Allen said the sharp drop in approvals for new homes would put even more pressure on the market.
“The lack of new supply at a time when vacancy rates are low, household formation rates remain well below pre-pandemic levels and [there is] rapid population growth will mean rents and home prices will continue to face upward pressure,” she said.
St George Economics senior economist Pat Bustamante said it could take years to build enough homes to accommodate the surge in migrants.
He said the troubles in the property market would have substantial flow-on impacts.
“Excess demand for housing and too little supply means the cost of housing will increase – both rents and sales prices. This implies there’s downside for non-housing consumption and, therefore, the broader economy,” he said.
Treasury secretary Kennedy, giving evidence to a Senate committee on Tuesday, said the rental market was very tight, with advertised rents growing 10.1 per cent in the year to April. Those advertised rents will eventually feed into average rental costs as new lease agreements are signed.
According to Kennedy, one pressure point on the rental market has been people moving out of home. He said about 130,000 extra households had been created, compared to the pre-COVID period, because of this phenomenon.
“This is partly a result of local residents choosing to live in smaller households, for example, adult children moving out of their parents’ home,” he said.
In this month’s budget, Treasury forecast economic growth to slow to just 1.5 per cent for the coming financial year after growth of 3.25 per cent this year.
Kennedy said economic growth probably peaked in the September quarter last year and was now losing steam under the weight of higher interest rates. He warned that previous rate rises had yet to fully hit the economy.
“The economy … is actually about to enter a very weak period of growth. In fact, it may have already entered that period,” he said.
The slowdown in the economy is becoming evident in the retail sector, with the head of the company that runs Bunnings and Kmart noting shoppers were moving to budget brands.
Wesfarmers managing director Rob Scott said the COVID-19 surge in spending was coming to an end.
“I would say that now the honeymoon is very much over,” he said.
“We expect value to become even more important for customers, and we are seeing that today … with more customers trading down within categories and increasing their share of spend in more value-orientated products.”
The surge in inflation has left most Australians dealing with a fall in the real value of their incomes. Unions are seeking a 7 per cent increase in the minimum wage to help low-income earners deal with high inflation.
This has prompted fears by business groups and some economists of an upward spiral in wages that would add to inflation.
But Kennedy rejected claims of a wage-price spiral, saying wages growth would soon start to slow.
“There are no signs of a wage-price spiral developing,” he said.
“Medium-term inflation expectations remain well anchored and it is usual for wages growth to accelerate during an upswing in the economic cycle.”
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