Paul is a co-founder and director of Debuilt Property. Paul has extensive experience in construction, project management, development management and asset management.
On Monday 28th June, the Treasury published the latest Intergenerational Report (IGR) – a document which attempts to forecast the state of the budget over the next 40 years. Significantly the report’s opening paragraph states that the outlook has been severely impacted by COVID, ‘which has caused the most severe global economic shock since the Great Depression’.
The IGR revealed that the Australian economy suffered dramatically and will take years to recover. Despite emerging from recession quickly, the economy is forecast to grow by 2.6% each year for the next 40 years, well below the current 3% average.
The economy’s 3P’s – population, participation and productivity – were the focus of the IGR. Population growth, or the lack thereof, is a particular driver of the economic slowdown.
In 2020, Australia’s population dropped by 0.014% from June to December. In the same period, Victoria’s population dropped 0.52%, the largest decline of all the states.
The IGR indicates that Australia’s population is expected to hit 38.8 million in 2060, significantly lower than the 44 million previously forecast. Ageing also reduces participation rates in the long term.
JP Morgan analysis indicates that Australia’s working age population is already about 300,000 less than the pre-Covid trajectory. This will compound over the coming years.
Since border closures, Australia has lost its largest contributor to the nation’s finances – skilled migrants. This cohort is also younger than the average Australian which helps balance the ageing population. The return of immigration could add $260bn to the economy in the next 40 years.
What about the property market?
For now, much of the property market is booming.
Australia is currently experiencing a surge in supply of homes since mid-2020 due in part to the HomeBuilder stimulus and low interest rates. The housing pipeline is full and is showing few signs of slowing. Building construction rose 2.5% in the March quarter across the nation.
However, the IGR paints a dreary picture for the future of the sector.
Under the IGR’s forecasting, housing undersupply, which is one of the main drivers of our decades-long property boom, will probably reverse during the next forecast period. This is bad news for property owners and investors and will be a blow for developers and builders. According to Shane Oliver, chief economist at AMP Capital, the sector will likely evolve into a saturated, and more affordable, market opportunity for first-home buyers.
In reflecting on the IGR, Shane Oliver told the AFR that if migration levels return to pre-pandemic levels by 2024-25, and do not make up for lost ground through the pandemic, our population will be nearly one million smaller than previously assumed. He expects this will create a net loss in demand for homes of around 350,000 over five years compared to pre-COVID expectations.
However, not all property professionals have faith in the IGR’s forecasting. And migration and population are not the only drivers of the housing market’s success.
Chris Richardson, a partner at Deloitte Access Economics, criticised the IGR’s underlying assumptions about the size of potential rate rises. He believes that the weaker economy and wage growth will keep the cash rate low and house prices higher.
Andrew Wilson, chief economist at My Housing Market, is seeing investor preferences changing, with demand for bigger townhouses increasing and shifting away from high-rise developments. He believes this indicates a change in investor circumstances and could suggest that the past is not an accurate guide to future events.
What is the overall takeaway?
It would be foolish to disregard the IGR – it is, after all, the Treasury’s job to make accurate economic predictions. It is obvious that population growth has been temporarily stalled, and it is hard to deny that this will negatively impact housing in some capacity. The symbiosis between Australia’s economy and the property market’s success cannot be ignored.
Regardless, an optimist would assess the forecasts differently and focus on more resilient modelling.
At the height of the pandemic, Australia’s economy was depressed and set to crumble – banks were predicting 20% falls in house prices and unemployment was expected to skyrocket. But we managed to adapt and recover. We have since seen unprecedented house price growth and the ASX has hit records time again.
In Josh Frydenberg’s speech last week he emphasised that the IGR is ‘not a guarantee of what will be, but an insight into what could be’. Importantly he noted that the purpose of the IGR was to inform and educate, and therefore provide a guide for future policy decisions.
Whilst leadership from government through the implementation of policy and support to alleviate the potential impact of lower migration is anticipated, the resilience of the property industry should not be underestimated.
With the IGR providing information and a roadmap, the industry will monitor the ‘actual against forecast’ and will react and adapt as it has did through COVID and other economic challenges.