Why rising prices make sense
Money Magazine Australia|October 2021
As well as disrupting supply chains, lockdowns are limiting the supply of houses coming onto the market
PETER ESHO

Only a few months ago we thought we were out of the woods, and then Delta came along and changed everything. As most of the country went into lockdown, property prices kept rising.

Many people were scratching their heads. If you’re sitting there thinking this doesn’t make sense, you’re not alone. We have never lived in such a strange period when asset prices are rising while the underlying economy is being disrupted, and in some cases destroyed.

It only starts to make sense when we look at both demand and supply in the real estate equation. Most of the discussion around property prices focuses on the demand side of the equation. You’ll hear arguments such as people have more money saved up, they can’t travel overseas, interest rates are low, etc. That’s all true, but I don’t think it’s the key driver driving prices at the moment.

To me, the single most important thing to watch is supply, and not just the level of supply but the cost of supply. Construction costs around the world are rising because supply chains have been massively disrupted.

If you call around your local timber yard or speak to your local carpenter, they will tell you just how hard and expensive it has become to source certain materials. It’s not that there are no materials around, it’s just that there are fewer materials.

Supply chain costs

Supply chains have a butterfly effect: a small ripple somewhere can compound throughout the chain and have a massive impact at the end. As the cost of building a new home, or renovating an existing one, becomes more expensive and takes longer to complete, this will have a flow-on effect on the existing housing market.

Boral says lockdowns will bite. Boral CEO Zlatko Todorcevski advised shareholders in August that his business will suffer a $50 million hit to profits in the September quarter of 2021-22 due to the brakes on construction work in lockdowns. It has also decided to sell its large fly ash business in the US.

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