Housing shortage expected to drive property prices higher in Sydney, Melbourne, and Brisbane

Property prices in Australian capital cities are expected to rise as the housing shortage is predicted to worsen over the next two years. Population growth is driving demand, leading to further increases in property prices and rents, according to private credit investment manager and non-bank lender Capspace.

Research by Performance Property for Capspace highlights the extent of the housing shortage, with building approvals not meeting demand in major cities.

Tim Keith, Managing Director of Capspace, said the probability of price rises for houses and units is high in Melbourne, Sydney, and Brisbane as these cities face further undersupply over the next 24 months.

“Continued supply chain issues and the cost of construction mean the unit and housing markets remain undersupplied. Overseas skilled migration is likely to push demand for housing higher,” Mr. Keith said.

“Strong rental growth is evident across the country in most capital cities, with the national vacancy rate currently below 2%. As of March 2024, national dwelling approvals stand at 162,640 for houses and units. Performance Property’s analysis reveals that building approvals are not keeping up with population increases. We saw a direct increase of 303,000 skilled migrants moving to Australia over the last 12 months.

“This will put further pressure on rental markets nationally. Evidence of increases in net interstate migration to Queensland and Western Australia is positive and could make a case for investors to gain more exposure to these capital cities for further diversification,” Mr. Keith added.

Capspace uses property as security on the loans it offers customers, making it crucial for the private lender to continually research and understand the property market.

While property owners have benefited from price rises, investors should consider diversifying their portfolios into other assets, according to Mr. Keith. Recently released ABS Household Wealth data shows household net wealth at a record $15.50 trillion in the December 2023 quarter, boosted by a record level of property assets of $10.50 trillion as of 31 December 2023. Households held $1.35 trillion directly in equities, $1.67 trillion in cash and deposits, and $3.59 trillion in superannuation, all record high levels. Residential property accounted for around 64.5% of net household wealth, up from 61.7% in December 2020.

Australians should devote more of their household wealth to fixed income assets such as private credit to diversify their investment risk and reap more attractive income yields, Mr. Keith advised.

“The key driver of household wealth gains is rising property prices. With a large proportion of individual wealth tied up in the property market, it makes sense for investors to diversify into other asset classes, particularly those from which they can draw an income, such as investments in private credit via non-bank loans to companies,” Mr. Keith said.

“Ultimately, assets other than your home, particularly those from which you can draw income, will support investors in everyday living and in retirement. Other investment strategies should consider diversification into fixed interest,” he added.

“Private credit can deliver investors yields close to 10% per annum, and investors understand their capital has protection based on the stringent loan process, lending, and compliance policies along with the security taken over borrower assets,” Mr. Keith said.