Single greatest factor driving property prices

The thing that caught my eye from the RBA this week was the admission that China is growing slower than expected. The RBA is now watching this as part of their domestic juggling act. I did note this last week and we now have somewhat confirmation that the RBA isn’t asleep at the wheel. That’s good news.

I focus a lot on the demand factors of property week to week via the RBA and interest rate policy. This week I want to add some more feedback on supply. I’ve held a view since the pandemic that supply is a big problem. I get a great vantage point from our businesses, which deal with developers and builders everyday.

We get to see what supply will be like in 2-3 years from today. Not paper approvals, but actual supply pipeline. It ain’t pretty, and I actually think in the past few weeks supply has become worse. One of the largest and most respected developers I work with in Melbourne has had numerous suppliers going bust on them over the past few weeks. Their site is almost finished and very well advanced.

The project will hit its completion milestones no problem. But the headaches for the building industry are not improving. They’re still very bad and the construction industry will completely collapse unless there is a policy response. I’m not in favour of government intervention, but if we do nothing, supply will get worse and cause social unrest in the next few years.

I’m already seeing it on Tiktok with many young people now finding themselves priced out of the rental market. Rents are rising because supply is tight. It’s going to get worse and from my vantage point, rents will only continue to rise as the lagging impact of migration is still yet to fully settle in.

As a property investor, rising rents are good for my pocket. But as an Australian citizen, I don’t want to live in a society where most young professionals cannot afford to live a dignified life in a comfortable home. Country first.

The reason we invest in Australian capital cities is because they are great places to live for everybody. But the dwelling approval and supply pipeline issue cannot be swept under the carpet.

I see nothing on the policy front changing this. Just talk. No action.

Property prices and rents will continue to skyrocket in the coming years because we simply can’t build and complete homes to the extent that we need. Even if we shut the borders today (which we wont), supply is not enough to absorb our demand for the next 5-10 years.

The best developers in the market are struggling to complete projects without prices skyrocketing. Something has got to give. I just hope that someone is listening.

Peter Esho is an economist and Founder of Esho Capital. He has 20 years of experience in investments and markets.