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    The housing market is now showing the first clear signs of the changes announced in the May Budget. Established home prices are falling, particularly in the parts of the market that had previously been supported by strong investor demand. At the same time, however, rents are still rising and the pipeline of new housing remains weak.

    Across the combined capital cities, dwelling values fell 4.3 per cent over the September quarter. Rents, by contrast, are still 5.5 per cent higher than a year ago. The clear divergence between the two really emerged around the time of the May Budget, with home values turning down while rents continued to rise. 

    Investor activity has also weakened since the Budget. That is putting downward pressure on more affordable parts of the established market, but it is also reducing the amount of rental housing being added. In a market where rental supply was already tight, fewer investors means more pressure on rents. Lower house prices therefore do not necessarily mean housing conditions are becoming easier.

    The next problem is new housing. Since the end of 2019, the cost of a new dwelling has risen by around 48 per cent. Established home values also rose strongly over this period but are now falling, while the cost of new housing continues to increase. New dwelling prices were still 5.4 per cent higher over the year to August.

    That gap is becoming increasingly difficult for developers. New homes have to compete with the established market, but the cost of delivering them is not falling at the same rate. Labour remains expensive, construction costs remain high and finance costs are still elevated. If the price of an established home falls while the cost of building a new one continues to rise, fewer projects will make financial sense.

    This is happening at a time when Australia is already struggling to build enough homes. Trend dwelling approvals were 18,202 in August, below the average pace of 20,000 a month required to deliver 1.2 million homes over five years. Approvals have recovered from their 2024 lows, but they are still not back at the level required.

    Approvals also overstate what will eventually be delivered. Some projects will be delayed, some will not commence and completions remain well below the rate needed to meet the housing target. The improvement in approvals is encouraging, but the pipeline still has a long way to go.

    The problem is the feedback loop this creates. Higher interest rates are pushing established prices lower and the budget has further weakened the supply of rental properties. Lower established prices then make new development harder to stack up. If fewer projects proceed, fewer homes are built and the housing shortage becomes worse.

    A housing shortage does not stop prices falling when borrowing capacity is being hit by higher rates. We are seeing that now. But it does make a prolonged downturn harder to sustain if fewer homes are being added at the same time.

    The post-Budget market is therefore becoming more complicated than simply lower house prices. Established prices are falling, rents are still rising, new housing is becoming more expensive and approvals remain below the level Australia needs.

    The risk is that today’s price falls make tomorrow’s housing shortage worse. If weaker established prices discourage new development while investor demand continues to retreat, Australia ends up with fewer rentals and fewer new homes. Once interest rates stabilise and demand recovers, the supply problem will still be there, only larger. 

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