Firstly, decades of underbuilding in the US
US housing market gains last year were the biggest in 15 years, even though the US economy suffered its biggest blow since the Great Depression at the hands of Covid. Millions were laid off but the housing market saw the highest pace of sales growth since the height of the unprecedented housing boom in 2005. This time, price rises are being driven by a lack of inventory.
US new home annual growth rate
There was a long period of underbuilding following the GFC housing collapse. The result is an underbuilding gap of over 5.5 million units over the past 20 years, meaning there is now a housing deficit in the US.
That severe housing shortage, caused by an underinvestment in housing construction, means the current inventory to sales ratio is at an all time low. Economists are suggesting the market has at least two years just to get back to a level of normalised supply. In order to normalise supply, building would need to accelerate by about 60pc, so President Biden has proposed spending over $300 billion to add two million more affordable housing units as part of a $3.5 trillion investment package.
Despite dizzying demand for new homes in the US coupled with ultralow mortgage rates, maddening construction delays meant that just 34,000 completed new homes were on the market in July, well below the 87,300 average for the month since 1973. On the back of pent up demand and impending Government stimulus, building stocks in the US are soaring.
Buyers are desperate to secure land and papers are reporting that bidding wars have broken out, premiums are being paid for land lots, and buyers are camping out with umbrellas and barbecues on the sidewalk to be first in line for residential land to build new houses on.
To build all these new homes in the US, builders need cement, timber and steel, all of which are in short supply. But steel is the real deal breaker.
Secondly, a global steel shortage is a major factor
A rally in steel prices globally is being driven by a strong demand recovery in metal consuming sectors across the world. At the same time China and Russia – two of the biggest steel suppliers – are making dramatic changes to production and export policies.
Firstly China, who has been the world’s largest steel exporter, now has a focus on decarbonisation, so the Chinese government is actively discouraging steel exports by way of removal of export rebates. One of the largest steel producers in China – and indeed the world – has been ordered by Beijing to cut down production by November.
Another major steel exporter, Russia, has introduced a temporary export tax to discourage steel exports, in order to protect its own domestic supply for construction and defence. The decrease in supply from Russia and China, coupled with the United States’ dire need for new housing is having a flow on effect in Australia.
Thirdly, Australia’s constructions costs are up
The rapidly rising cost of construction materials, namely structural and reinforcing steel, is slowing the pace of new real estate developments and contributing to the rising values in existing properties.
Engineered timber is in short supply too, specifically our own domestic supply which was damaged by last year’s bushfires, and the New Zealand and United States export supply which is nowhere near meeting global demand.
The result is that residential construction costs in Australia showed a 1.5% increase for the June quarter thanks to high demand for new homes and the shortage of building materials I’ve discussed above, outpacing the 0.8% inflation rate, and the 0.4% increase in wages.
And that’s one of the underappreciated reasons behind our house prices
A substantial pipeline of residential construction work is likely to keep both building materials and trades in short supply for an extended period of time. This will, in turn, deter aspiring home builders from that path, instead forcing them into the existing home market – where the buyer pool is already creating competition and driving prices.
And that, my friends, is the long-winded reason behind one of the biggest factors underpinning strong house prices right now.