The undersupply of new housing is unlikely to spur strong price growth over the near to medium term in markets such as Sydney and Melbourne because listings are already surging, experts say.
However, over the longer term, a chronic supply shortage in new homes is likely to underpin the country’s next housing boom. That could take off within the next couple of years if, as expected, the Reserve Bank of Australia moves to cut interest rates.
The negative impact of higher interest rates, poor affordability and rising listings is expected to dampen price growth in Sydney and Melbourne, despite rising undersupply of new housing. 
AMP chief economist Shane Oliver estimated that the housing shortfall would be likely to increase to about 170,000 by June next year, given constrained home building and strong population growth.
“The supply shortfall will remain a key driver and will remain in place until we get more new housing,” he said.
“This will help protect prices from falling deeper and ultimately help drive the next cyclical rebound, mainly because we’ve had a chronic undersupply problem.
“So it’s quite possible the trigger for the next boom will be the Reserve Bank moving to cut interest rates some time later next year, and the undersupply of housing will be the fundamental underpinning it.”
But the impact of higher interest rates and affordability constraints would probably dominate over the near term, Dr Oliver said.
Higher interest rates have finally caught up with buyer demand as evidenced by rising listings,” he said.
“The underlying undersupply problem dominated the market this year, and swamped the affordability concerns associated with high interest rates, whereas now I think it’s losing some of its potency because the interest rate and affordability constraint have become even bigger.”
Jarden chief economist Carlos Cacho agreed the undersupply of housing would not be enough to support price growth in the near term if other market conditions were unfavourable.
“When you have factors such as reduced borrowing capacity and rising listings that are moving against it, it’s a lot less clear cut that the undersupply of new housing is going to lead to inexorable rise of house prices,” he said.
“If we were to get rate cuts, if we were to get an increase in borrowing capacity or regulatory easing and positive sentiment in the market, then I think the underlying undersupply could lead to price increases.”
CoreLogic head of research Eliza Owen said the estimated borrowing capacity had collapsed by about 30 per cent since the RBA started raising rates last year, which reduced buyer demand and fuelled a rise in total listings.
“Buyers are so constrained by high interest rates and stretched affordability. And even though a lot of people would probably want to buy, they would not be in a position to do so at the moment – that’s why total listings are rising in Sydney and Melbourne,” Ms Owen said.
Total listings had increased by 7.9 per cent in Melbourne and were up by 3.1 per cent in Sydney over the four weeks ended December 3 compared to a year ago, according to CoreLogic.
Ms Owen said there were signs demand could slow further next year as interest rates stayed higher for longer.
“The rate of savings in the September quarter of this year has dropped to 1.1 per cent, which is the lowest savings rate since 2007 and down from a savings rate of over 20 per cent at the onset of the pandemic,” she said.
“So, you’re going to have a lot less savings being built up to put towards a deposit to buy a home, which means lower demand.”
Dr Oliver said housing demand was also expected to ease with immigration forecast to slow to 375,000 this financial year and 250,000 in 2024-25, helped by a tightening in visa requirements.
“It looks like immigration has peaked, so the growth in the supply of people coming into the property market, whether it’s renters or buyers, will slow down as immigration eases,” he said.
“But immigration will still be at relatively high levels. So, we’ll still be adding to the underlying shortfall in the meantime, as we had a year or two of low construction numbers.”
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