Undersupply of housing is real

May 4, 2010

Comments 9

House prices were released by APM last week and the ABS this week showing another relatively strong quarter of price growth. While not as strong as the December 2009 quarter, a quarterly rise in the national median price of over 3% is still at the upper end of historical results. Most analysts and commentators, including the Reserve Bank, realise that the sort of median price growth we are currently seeing, and indeed the resilience of the property market seen during the GFC, is being driven by a mismatch between supply and demand.

Yet I still regularly get emails or comments that doubt this “undersupply”, implying that there’s no real analysis behind it, but that we’re simply assuming this is so based on the price changes we’re seeing and the absence of other reasonable explanations.

The fact is that there are multiple rigorous ways of looking at whether there is an oversupply or undersupply of dwellings relative to demand, and it was comforting that the latest contribution from the National Housing Supply Council, their State of Supply Report 2010, came to broadly the same conclusions that other analysis has.

Most analysis from private sector economic departments and government bodies like Treasury and the RBA use a top-down approach. On the supply side, this is relatively simple, as the ABS provides data on housing finance for new dwellings, building approvals and actual new dwelling commencements. An estimate of demand is derived from projected population changes (due to both natural increase and immigration), the average household size, and the need to replace old housing stock.

Once you have these, you have an estimate of the annual difference between demand for new housing and the supply. Select a reliable historical point where the market was in equilibrium and it’s not hard to get an estimate of the current surplus or deficit and estimate future trends.

The State of Supply Report 2010 came to broadly the same conclusion of a significant undersupply, estimating that there is a shortfall of just under 180,000 properties across the country, and projected to get worse. This estimate came about using more of a bottom-up approach, examining demand and supply for different sectors of the population and estimating the current demand-supply gap by taking into account factors like homelessness and rental vacancy rates.

The main fly in the ointment is the over 800,000 vacant dwellings in Australia at the time of the 2006 census. But it’s likely that these were largely second homes or homes in the process of sale or renovation and have limited capacity for absorbing demand. If these were available and soaking up demand, we should see this number plummet at the next census. We didn't see it happen in the 2006 census, which covered the 2003/04 price boom period, and I doubt we will see it when the data is collected again in late 2011.

9 comments

Supply side fixes have been the continual solution touted by people who want the Australian property bubble to continue. But demand is the other side of it. The current bubble is predicated on an assumption of ever growing supply which in turn depends on banks and their lending policies sustaining demand by lending to home owners and builders. Australia already has overly high household debt - largely grounded in properties. It stands to reason that bank lending will become subject to tighter criteria as interest rates rise. The risk is that the supply side will not enduringly restrain prices if high interest rates or other economic events force banks to tighten lending criteria and trnaches of current owners default on mortgages.

Commenter

SimonA

Date and time

May 05, 2010, 5:51AM
I know what the State of Supply Report 2010 says. It's vague and lacks credibility. And despite the fact that you say it's simple to work out the alleged shortfall, you fail to show any numbers to back this up.

In fact I'm sure you know quite well that it's actually very complex, and riddled with more questions than answers. Just off the top of my head: every year there are about 150,000 deaths, 280,000 births, and 180,000 permanent arrivals from overseas. The births are unlikely to contribute much to demand; the deaths may actually reduce demand, given that many elderly people live alone in otherwise empty houses. Migrants tend to not buy, and many live in shared accommodation. In addition, the number of people per dwelling is somewhat flexible. For a long time, it was falling, but lately it has been rising. It has plenty of room to increase further.

So the question is, Matthew, how do you think these numbers really add up? You're an economist; have a stab at it. Dig out the facts. Break out Excel. Prove that there's a shortage. You could be the first.

Commenter

Phil H

Location

Ultimo

Date and time

May 06, 2010, 1:23PM
if it looks like ponzi spruiking, sounds like ponzi spuiking then it most likely is........

Commenter

davidH

Location

Ponziland

Date and time

May 18, 2010, 10:25AM
There are other factors contributing to under supply of housing

1. People owing multiple properties
2. I read recently that there is an estimated 1,000,000 house, 90% habitable, in Australia unoccupied. I am also aware that many overseas buyers brought houses and never occupied them.

Commenter

ampleeko

Date and time

May 15, 2010, 9:45AM
Matthew, this is a great article. However, how can an srticle written on 4 May still remain on top of the "Comments and Analysis". Please replace it with something more recent. I don't think many people would be prepared to read the same article eleven times, no matterhow good it is.

Commenter

PS

Location

Geelong

Date and time

May 13, 2010, 9:45PM
I must miss something when it comes to a shortage. If I have an unlimited budget, I can buy a house any day of the week. So can the owner selling to me. Where do these 180k people reside while there is a shortage?

Commenter

Davis

Date and time

May 13, 2010, 12:33PM
The classical market theories state that increasing supply will take the pressure off prices and prices will settle. It seems to me that everybody that can buy has bought which implies that the problem with bringing new properties onto the market is that there is no demand for them (at the prices they are at). To put it crudely, prices will only come down if more houses are built, but more houses will only be built if prices come down. It looks like stalemate to me. Any ideas out there?

Commenter

Gman

Location

Sydney

Date and time

May 31, 2010, 12:22PM
Just as there is a difference between deficit and debt, such that a business or government with a high level of savings can operate a deficit for some time without getting into debt, so there is a difference between having a deficit in housing supply and an actual shortage of supply. While the data (see ABS link below) shows that we are currently experiencing a housing supply deficit, over the long term this is not the case. According to that data, we have overproduced housing for all but 4 of the last 50 years. Add to this the fact that the number of residents per dwelling has been increasing over recent years, and it is clear that there is, in fact, plenty of housing in the country. Now it may be that a large portion of those houses are uninhabited and not available for sale, but such a situation could easily be changed by external forces, e.g. a protracted series of interest rate rises. An annual rise of 20% in house prices is clearly not repeatable. Once the speculators holding onto empty properties realise the market has peaked and all the quick money to be made from property has been made, I suspect we will see a flood of properties all aiming for prices that are no longer realistic.

http://www.businessspectator.com.au/bs.nsf/0bd6ea4d7e0e401eca257300000473fc/5317d232f231d646ca25771c0014f0d5/bodyhtml/0.D60!OpenElement&FieldElemFormat=jpg

Commenter

Deficit Yes, Shortage No

Date and time

May 24, 2010, 1:01PM
Finally, some common sense, thankyou SimonA! The property shortage seemed very real in US, UK & Ireland before the bubble burst. Now these markets are commonly accepted to be suffering from a glut of properties. Maybe, just maybe it is demand that was overinflated Matthew! Not that hard a concept to grasp really. Supply of credit has exploded over the last 2 decades. This is what has driven property prices, consequently every man and his dog thinks he can get rich by leveraging themselves as much as possible to the biggest bubble in Australian history. The supply shortage argument relies on demand (which a large portion of is speculative eg. 600% rise in property investors over last 30 years), continuing it's current trend. Individuals per house has fallen dramatically (country is littered with spare bedrooms), and the property spruikers believe this trend will continue unabated without factoring in any impact on availability of credit or people's willingness to take on bigger mortgages at higher prices. In short, a housing shortage will ALWAYS appear to exist in a property bull market because it is DEMAND that is overinflated! When the music stops and demand falls off a cliff, we will have an oversupply of homes just like US, UK, Ireland etc. So let's stop this arrogant "we are different here", and wake up to what is really going on here. I urge you to read some real economic analysis on the so called housing shortage. See below:

http://www.unconventionaleconomist.com/

Commenter

Tim

Location

Melbourne

Date and time

May 24, 2010, 8:48AM