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Crunch Time for Australia’s Apartment Construction is a Wake Up Call for Governments

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The property market has been a wild place in recent years. Even before the unprecedented impact of a once-in-a-century pandemic, indications pointed towards market volatility from (initially) an oversupply and (now) an under-supply. In this Masco Insight, our Managing Director Abdul Majid examines recent Property Council advocacy in this space, and suggestions for how the supply crunch can be eased.

The supply crunch that faces the apartment market in Australia needs little introduction to those intimately aware of the challenges facing the construction sector generally. After what seems like just yesterday where there seemed to be more apartments than were ever needed, the long-lead-time behemoths that are (large) apartment projects have tailed off as government scrutiny and regulation come home to roost in earnest.

In fairness, it isn’t just the regulation that has led us here. It is also the economics of the sector and the inevitable dampening on investor appetite in the face of rising surcharges and poor government planning around population and urban management.

A recent Property Council of Australia seems to corroborate this perspective, calling for coordinated state government efforts to reduce international investor surcharges, stimulate apartment construction and improve planning to avoid the looming apartment supply crunch across Australia’s largest housing markets.

The Council commissioned an analysis by consultancy Urbis, and it makes for sobering consumption.

The report highlights that by 2024, apartment supply will be at “crisis levels” across Australia’s three largest markets, with construction only 20% of 2018 levels.

While approval numbers are increasing, they mask a decline in construction activity that will lead us to a severe structural undersupply by 2024

The various layers of government actions mentioned above over time have led to a reduction in investment that predates the closure of international borders due to COVID-19 by some time.

The impact: Construction jobs at risk

The Property Council notes in the report that the reduction in building activity would see the loss of 30,000 construction jobs across Melbourne, Sydney, Brisbane and Perth in the next few years.

It is no secret that apartment construction is a critical component of Australia’s future housing supply and a vital job-creator for the economy.

The lag in approvals of the last few years (since the much-touted construction boom) means that there will be a structural undersupply by 2024. This means an undersupply that cannot be remedied by short-term, bandaid-like actions.

This is the real, concerning conclusion that is often masked by “rising approvals”, which seem the fixation of government ministers and politicians keen to point out that activity is improving.

Simply put, without significant changes in government policy, the apartment building industry will shed some 30,000 direct jobs and produce $5.9bn less in housing assets over the next four years, according to the report.

What’s needed: imminent government action

One of the major handbrakes on investment into potential projects remains international investment surcharges.

Property Council Chief Executive, Ken Morrison, rightly noted that “over recent years we’ve seen a proliferation of new taxes and regulations across Australia that have been a handbrake on investment and directly impacted our levels of apartment supply”.

The conclusion is sound, as are the overall conclusions of the report, which outlines actions for government to take to avert job losses in the apartment sector, including:

  • Providing relief from foreign buyer surcharges.
  • Accelerating planning approvals.
  • Extending off-the-plan apartment stamp duty concessions.
  • Removing land tax barriers to build to rent projects, and
  • Abandoning Victoria’s new “Windfall Gains Tax.”

Given the 3 to 5 years it typically takes from project inception to completion, Morrison and the Council argue that it is imperative that governments “act now” to boost apartment investment and avoid a supply crunch in 2024.

If anything, COVID-19 has been somewhat of a blessing in disguise, given it will dampen migration-led population growth for some time to come. Morrison rightly notes that this supply crunch is “a wake up call for governments as our biggest apartment markets will welcome growing numbers of people once COVIDsafe immigration inevitably returns”.

The Property Council of Australia proposal to fix the apartment supply crunch

In my view, without government action to boost apartment supply urgently, apartment prices and rent increases across Australia’s major cities are inevitable in the coming years.

 

About the Author

About the Author

Abdul-Majid Abu Mahmoud is the Managing Director of Masco Group, a growing construction group focused on delivering exceptional quality. Abdul Majid is a young business leader with an intimate understanding of the construction industry in Australia, and leads projects across the commercial, industrial, remedial and residential segments.

Find out more about Masco Group here.
About the Author

About the Author

Abdul-Majid Abu Mahmoud is the Managing Director of Masco Group, a growing construction group focused on delivering exceptional quality. Abdul Majid is a young business leader with an intimate understanding of the construction industry in Australia, and leads projects across the commercial, industrial, remedial and residential segments.

Find out more about Masco Group here.

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