Last week we saw jobs losses across the car industry joined by the loss of 5000 jobs at Qantas projected for the next three years which, along with jobs going from the State and Federal Governments is bound to keep our eye on future headline unemployment rates as they trend past 6%. In reality across the residential market we will now be looking as hard at these figures as we do official interest rates.

However while we see unemployment head up we are also seeing continued strong demand for new projects, and in recent weeks in both Sydney and Brisbane we have very strong demand with new releases ‘selling out’ on release day or soon after. Alongside higher levels of unemployment consumer sentiment has seen a fall in confidence as the post election glow of the Abbott government starts to fade, and in NSW we also have a collapse of the FHB market with activity down to a miserable 9% of activity.

A Trio of Market Drivers

With FHB activity at an all time low just who is driving the current market? It would appear that apartment buyers are being driven by investors, cashed up baby boomers and off-shore buyers in particular those from China, and while all of these groups are also able to take advantage of very low interest rates, the FHB remains locked out and this is despite the fact that the banks are very keen to lend, after all the bank’s profits rely upon new lending.

Still higher prices, and the negatives of the employment market are weighing much more heavily on the FHB and as yet the broader market appears to be unaffected. Many investors, in particular if they a self-managed super fund, and cashed up baby boomers may not be looking for big loans. And many off-shore investors from China come from the ranks of the wealthy and so again they are removed from such considerations as local unemployment levels.

Low Interest Rates & Low Levels of Supply

The current market has two ‘lows’ working to fuel demand and sustain prices; we have very low interest rates and very low levels of supply. Interest rates look set to stay low for another 12 months and with unemployment looking to head above 6%, early predictions of a mid-year rate rise look out of date. But it is supply that is the second low and possibly the most important factor while supply is improving it is at snails pace. It is not until at least 2016/2017 that there is hope of any long-term improvement in the level of average supply of new homes, and only then might a decade of below par activity be assigned to history. There is also the reality that in NSW delays to changes to planning laws are only going to further suppress supply.

However while we are facing a lag in supply this will also see the re-invention of some areas, as suburbs and cities re-invent themselves and this is a trend that is already apparent in Parramatta and already well-advanced in Brisbane, as these and similar locations bloom on the back of increased supply.

Unlock Planning Delays and Infrastructure Spending

While unemployment rates grab the headlines, and possibly restrain FHB activity there is, for the residential development sector an urgent call to unlock planning delays and to greatly accelerate infrastructure spending, both of which will help ease the threat of even higher unemployment. In particular the delays associated with the introduction of new planning laws in NSW are a roadblock to new development, and so contributes to keeping a lid on supply. And for NSW developers, concerns over a review of the strata act are also not helping, as some measures, such as the potential requirement for a development bond, may impact finances for some developments.

Growth in construction including residential construction, has been nominated as an important sector as the economy adjusts from the boom in mining and combined with infrastructure spending is now an essential employment generator. And while some governments might be hard pressed to fund infrastructure it would appear the private sector does have the capacity because the sector is awash with cash reserves. It is estimated that the global reserves stand at some US$7 trillion and at the end of 2013 our top 200 Aussie companies had reserves of $48 billion.

Looking Forward

Currently our residential markets are being impacted by strong demand from baby boomers, partly as super investors, along with investors generally and off-shore buyers from China, and in NSW this has reduced the FHB market to a very low 9%.

This trend matters, and while the FHB does not always have to be the key driver of activity, such low levels of participation could impact the future shape of the market in particular for two important groups who we will need for a healthy market. These two groups are the ‘peak-earners’ in today’s employment cycle, that is people aged between 25 and 45 and their children, if you like the next baby boomers, who are now of school age. A big increase in supply is vital if these groups are not to be locked out of the housing market, and if they are we need to understand the social impacts this might cause.

Currently the residential property market has a number of very active players, making it a vital market, however there is a need to keep a close eye on how supply can be increased more rapidly and also the possible negatives flowing from higher unemployment.

Currently our low home loan interest rates are helping to encourage demand, we now have 6% unemployment and variable rates around 4.88%, in 2004 when we also had 6% unemployment but variable rates were closer to 7.05%, the gap partly explains why markets are yet to be dented by job losses. However the persistent gap in supply is also a longstanding and an entrenched factor as the FHB struggles, it might well be time to look to support for the sector as the UK Government has done recently with raft of measures.