One of Australia’s largest property developers is confident the housing market in Sydney and Melbourne will recover in as soon as a year.
Mirvac CEO and managing director Susan Lloyd-Hurwitz says she anticipates a lack of housing supply in the two cities, which could drive up house prices.
Lloyd-Hurwitz told Your Money chief business reporter Leo Shanahan that, despite the current weakness in the housing market, the company is already preparing for an imminent recovery in house prices.
“We are gearing the business up to start restocking because we think we are about to head into a period of under-supply, where we will again, just not build enough dwellings for the 110,000 people that come to live in Sydney and Melbourne every year,” she said.
“If you assume the amount of people that are coming to Sydney and Melbourne, you assume a household formation rate, you need to build in order of 40,000 dwellings a year.
“We don’t build anywhere near that on average.
“And so we are assuming there is going to be an under-supply in a year or two and we are gearing the business up for that.”
What does that mean?
An under-supply in the housing market simply means a shortage of houses for people to buy. Lloyd-Hurwitz is banking on the principle of supply and demand: a lack of houses on the market drives up demand and price for those few properties.
Let’s break this down a bit further.
The recent house price boom in Sydney and Melbourne over the last five years or so largely reflected that the supply of housing had been unable to keep pace with strong demand.
A rise in population in Australia’s two biggest cities will likely mean more people looking for a roof over their heads.
But if one of the biggest property developers in the country foresees that it won’t be able to keep up and build enough houses to match population growth, it’s fair to say population growth will lead to fierce demand and competition for fewer properties, driving prices up.
Banking on owner-occupiers
Mirvac has so far come through the recent property slump relatively unscathed, announcing on Thursday it saw a near 40 per cent surge in half-yearly profit to $648 million, compared to $465 million a year earlier.
Demand for Mirvac property is coming from owner-occupiers, with first home buyers back on the market too, Lloyd-Hurwitz said.
“Investor demand is weaker. But we build for the domestic owner-occupier and that market is continuing to be solid.
“We did 900 sales in the half year as well as 1000 settlements.”
Lloyd-Hurwitz credits the success and popularity of Mirvac residential properties to “markets that are affluent, low arrears, good credit customers, good amenity, close to transport”.
The company’s default rates are at historic lows of two per cent.
But Lloyd-Hurwitz also admits the challenging property conditions led to a slowdown in sales volumes.
“There is no getting away from deteriorating residential conditions. We have falling volumes, low auction clearance rates and you see the approvals data is sharply off.”
Reading the tea leaves
While she is bullish on the property market’s recovery prospects, Lloyd-Hurwitz predicts this year will see more price falls.
“Increasing interest rates or increasing unemployment are usually what drives a downturn. This is not the instance in this case.
“A credit tightening is causing a lack of customer confidence, even if they can get access to finance. And that’s the trigger.
“We don’t see those conditions changing in the short term. We believe we will have this challenging credit situation for another year, there probably will be more price falls on average,” she said.