A Property Glut Looms Large

Stephen Koukoulas examines the supply and demand behind Australia’s rising housing prices.

For many years, one of the fundamental factors cited as a driver of Australia’s persistently high and rising house prices has been a shortage of supply of new dwellings relative to strong growth in demand. The story, which I think is correct, was that Australia had experienced an extended period of very rapid population growth driven by both natural increase and, more importantly, strong immigration inflows. This has driven ongoing demand for new houses, whether the additional Australians are buyers or renters, the new demand is there. While this unrelenting source of demand has been unfolding, there has been a simultaneous under-building of new dwellings for a range of reasons, which for the purposes of this article are not all that important. Suffice to say, in the period from around 2005 to 2013, there were simply not enough new dwellings being built to match the growth in demand. In terms of the specifics, in the period between the end of 2005 and the end of 2013, Australia’s population increased by around three million people. Over the same time, the number of new dwellings built was 1.2 million. According to the Australian Bureau of Statistics, for every 100 residential dwellings built, 20 are to cover demolitions of old houses, meaning that of the 1.2 million new dwellings in that time, the increase in the number of dwelling available for people to live in rose by only around 960,000. Given that the average number of people per dwelling is 2.3, this means those three million people would have needed an extra 1.3 million new dwellings to be built rather than the 960,000 that were actually added to the stock of housing. This shortfall of 340,000 dwellings perhaps best sums up the housing shortage that underpinned at least part of the house price increases over recent years. During 2014, there has been an important change in the supply and demand fundamentals. Australia’s population growth is starting to slow. In 2012, Australia’s population increased by 400,000. In 2013, this eased marginally to 390,000. The latest fi gures, which are only available to the June quarter of 2014, show that the annual population growth has eased below 365,000 with the June quarter population gain slumping to a seven-year low of 68,000. If population growth slows a little more – and averages around 325,000 per annum over the next couple of years as seems likely or even a little too high an estimate – the number of new dwellings will need to run at an annual rate of 175,000 to meet this rate of population growth. The most recent building approvals data show a sharp lift in new dwelling construction. In January 2014, the 12-month rolling sum of new dwelling approvals rose above 180,000, suggesting a meeting of supply and demand forces. The annual pace of new dwelling approvals rose to above 190,000 in April 2014, and in the last four months of 2014, it has been above 195,000. For the month of December, the annualised rate of new dwelling approvals was 219,000. These recent trends suggests that new dwelling construction will more than satisfy demand for the next year or two, at least. In very simple terms, the shortage of dwellings is ending and this will spell downside risks to house prices over the next couple of years. Indeed, the downside risks could be acute if the rate of annual population growth eases to below 300,000 as it was in the period prior to 2006 and new construction remains around recent levels of 190,000 to 200,000 dwelling per year. One factor, although clearly not the only one, that drove the recent sharp falls in house prices in parts of the United States, Spain and Ireland was a sharp increase in supply just when demand for new housing fell away sharply. While no one is sensibly forecasting that Australian house prices will see the 30 percent and more falls in ouse prices in these areas, it would be no surprise if the simple interplay of weakening demand from lower population growth and extra supply from a record level of new building will see house prices in Australia fall. Other factors such as interest rates, wages growth and unemployment will feed in to estimates about how much prices may fall, but it would be no surprise to see house prices five to 10 percent lower over the next three years or so. Stephen Koukoulas is Managing Director of Market Economics thekouk.com.au