There is a strange disconnect developing in the housing market at the moment.

Most of the headlines are focused on falling prices. Auction clearance rates are weak, buyer demand has dropped and listings are rising. Sydney and Melbourne have already fallen from their peaks and even some of the stronger markets are beginning to slow.

On the surface, this looks like a housing market moving back towards buyers. But prices are only one part of the system. The more interesting question is what today’s weak market does to the supply of housing over the next couple of years.

That is where I think we could have a problem.

Today’s Weak Market Becomes Tomorrow’s Supply

Australia already has a housing shortage. Rental vacancy rates remain low, and we are still adding a significant number of people through population growth and migration.

At the same time, it remains extremely difficult to build new housing. Construction costs are high, finance is expensive and many projects are already marginal. Developers therefore need enough presales before lenders will provide the construction finance required to actually start building.

This creates an important lag that is easy to miss when looking at today’s market.

The apartments being completed now were generally conceived, sold and financed well before the current downturn. Likewise, the projects struggling to obtain enough sales today won’t show up as missing housing supply immediately. We won’t really see that effect until those projects should have been completed, potentially 18 months or more from now.

That is why looking at current completions can give a misleading picture of where supply is heading.

The SMSF Changes Add Another Problem

The recent changes to SMSF property borrowing are unlikely to have a meaningful direct effect on Australian house prices. Leveraged residential SMSF purchases represent a very small part of the overall housing market, so removing them doesn’t suddenly remove enough demand to materially change national prices.

The main problem is where those buyers were concentrated.

SMSF investors have historically been disproportionately represented in new property and construction presales. Developers we have spoken with estimate that SMSF buyers can account for around 20% to 30% of presales on some projects.

If you remove 20 buyers from the established housing market, you have probably just removed 20 transactions. The houses still exist and someone else can eventually buy them.

Remove 20 buyers from a development that needs a minimum level of presales to obtain construction finance and something very different can happen. The developer doesn’t necessarily build 20 fewer apartments. The entire project can fail to proceed.

A relatively small change in demand can therefore create a much larger change in future supply.

This Is Happening While Population Is Still Growing

This would matter less if housing demand was also disappearing. But it isn’t.

Migration has come down from the extraordinary post-COVID levels, but Australia is still adding a large number of people each year. Those people need somewhere to live and many new arrivals enter the rental market first.

So we potentially have two forces moving in opposite directions.

Population continues to increase the number of people requiring housing while today’s weak sales environment reduces the number of projects that make it through presales, finance and ultimately construction.

You won’t see that collision immediately because one side of the equation has a long construction lag.

Why I Think the Impact Appears in Rents First

This is also why I don’t expect the major consequence of the SMSF changes to appear in house prices.

House prices are being driven by much larger forces at the moment. Interest rates affect borrowing capacity across almost the entire market. Sentiment has deteriorated, listings have increased and buyers have become cautious. Against forces of that size, removing leveraged SMSF buyers is relatively minor.

Rental markets work differently.

What ultimately matters for rents is the relationship between the number of households looking for somewhere to live and the amount of available rental stock. If fewer projects commence today, there will eventually be fewer new dwellings entering that market.

Initially nothing much happens. Projects that are already under construction keep getting completed and existing rental stock remains available. But over time the pipeline starts thinning.

That is when the effect becomes visible.

A project that doesn’t commence in 2026 becomes an apartment building that isn’t completed in 2027 or 2028. Repeat that across enough projects and the rental market gradually becomes tighter than it otherwise would have been.

With population still growing, that means more competition for the stock that remains.

Falling Prices and Rising Rents Aren’t a Contradiction

This is probably the part that seems strange if you only look at housing through headline prices.

We can have falling house prices and rising rents at exactly the same time because they are responding to different constraints. While it is common for even highly seasoned professionals to treat them as the same, they are effectively two separate markets that respond to different drivers.

Higher interest rates can reduce borrowing capacity and push asset prices down. But higher interest rates also make projects harder to finance and can reduce new construction. If population continues growing while fewer homes are built, rental conditions can tighten even while the price of existing homes is falling.

In other words, today’s weak housing market can actually contribute to tomorrow’s rental shortage.

The SMSF changes potentially amplify that effect because they remove buyers from one of the areas where demand has a direct relationship with whether new housing gets financed and built.

The 18-Month Problem

This is why I’m watching rents over roughly the next 18 months rather than expecting an immediate reaction.

There is still housing moving through the existing construction pipeline. That supply was largely determined by decisions made before the current downturn and before the SMSF changes.

The more important information is sitting further upstream. Which projects are getting enough presales? Which ones are obtaining finance? Which ones are actually commencing construction, and which ones quietly disappear from the pipeline?

By the time a shortage becomes obvious in completed dwelling numbers, the decisions that caused it may have been made a year or two earlier.

That is the part of housing cycles that often gets missed.

We spend a lot of time looking at what prices are doing today. But housing is a slow-moving system. The market we experience in 18 months is partly being created by the decisions developers, lenders and buyers are making right now.

At the moment those decisions are being made against weak buyer demand, high construction costs, expensive finance and the removal of an important source of new-property presales.

None of that suggests we are about to solve Australia’s housing shortage.

It suggests we may be building the next rental squeeze. More importantly, we are now at the early stages of a spike in rental yields, when they reach a local peak that is one of the most reliable single point indicators that the market is ready for another round of price growth.