Scroll Top
Oversupply – the greatest risk to residential housing

Australian house prices for the last 12 month period was up 22%, led by Sydney, where prices were up by 25%. Across the world it was the same story with New Zealand up 27%, the USA up 19% and the UK up 10%. Even Turkey was up 40%, and this has occurred where interest rates have moved from 11% to 18%. The reasons are varied, but we don’t think it’s just about the record low-interest rates. We think there is more at play and specifically that many people are contemplating a continuation of the work from home environment, and to be frank, many people have got used to working from home and don’t necessarily wish to change. This has contributed to the renovation explosion, given more people are spending more time at home, and accounts for the popularity of renovation shows such as Grand Designs, Dream Home Makeover and the like.

Certainly, the situation has created a social divide which I have written about previously, between those who have the bank of Mum and Dad to lever them into the market versus those who are attempting to save but have little chance since the house price escalation is always faster than the ability of these people to save.

So is there light at the end of the tunnel? Yes, I think so, but I don’t necessarily believe it will be interest rates that brings about the slow down. We assert greed will end the bubble as it always does. Greed will be reflected in increasing oversupply as the construction price escalates way above the cost to build and into super profit territory for builders and developers. This will create a supply response from other builders and developers who also want to cash in on the super profit margin. Inevitably, greater supply will come onto the market and prices should revert to a more reasonable level, meaning the cycle resets and starts again. That’s the theory.

I can’t pick when this will be, but given there are very few fixed-price contracts and people seem to be content to pay well over the cost of construction then I would suggest that we would have to be close. We also understand that it’s in the interests of the building companies, the materials supply companies and the real estate industry to keep prices high for as long as they can. However, it can’t and should not last. It could well be prolonged by a European war but that’s another story for another day.

The supply line crisis will recover, and unless there is a major increase in immigration which I somehow doubt, then oversupply will eventually occur and prices will begin to normalise.

Speak to one of our financial adviser