Australia's housing market is oversupplied. Yes, oversupplied

Australia’s population growth has slowed by close to 150,000 in just two years, with a 100,000 drop in the actual growth rate over the last 12 months.  As a result, the underlying demand for new housing has dropped from 180,000 starts per annum to around 125,000.  While dwelling starts are declining, we are now building too much stock.

Unless new housing starts decline in earnest or population growth accelerates, Victoria, South Australia, Tasmania and the Northern Territory face an oversupply.  Perth and Canberra are better positioned, with Queensland currently at equilibrium and New South Wales undersupplied.

Much of Victoria’s potential pain lies in Melbourne’s recent inner-city apartment boom, during which an unprecedented proportion of the state’s new dwelling starts are apartments.  This mostly speculator-fuelled surge has provided some very misleading media headlines of late about the rise of apartment living and how it is becoming the new Australian dream.  Yet two-thirds of Australians continue to buy a detached dwelling.

What?!  This cannot be right.  The housing industry and banking economists keep reminding us how undersupplied the Australian housing market is.  Don’t we have a shortfall of something like 300,000 new homes across the country?  And isn’t this shortfall going to double in size within the next decade?

But I ask you, with an average of 2.6 people per dwelling (as per the 2006 census), where are these 800,000-odd displaced people living?  Yes, too many are living it rough, but 800,000 people equate to two cities the size of Canberra or one and a half of the Gold Coast.  Where are all these people living?  I don’t see thousands sleeping in cardboard boxes in Queen Street, for example.

With this thought in mind, a few years back I started questioning the undersupply myth.  I, too, was guilty of its circulation, and maybe more so than others.  But once you look into the facts and ignore the spin, you find that Australia’s new housing market isn’t that undersupplied at all.  Yes, we don’t have enough affordable new homes (under $400,000 for two and three-bedroom stock), but we have an ample supply of new dwellings pitched at speculators.

Also, as I have outlined numerous times before, the housing industry is being forced to deliver the wrong stock, and that which is supplied costs way too much.  Ask yourself why new housing sales only a decade or so ago accounted for 30% of the total residential transactions in this country, but today they account for just 10%.  Hmmmm.  And if we are so undersupplied, why do developers need to sell their new dwellings overseas and increasingly via aggressive investment selling campaigns and expos?

So, why is underlying demand much less than the urban boosters want us to believe?

Spare capacity. The 2006 census showed that there were 830,000 unoccupied dwellings across Australia.  They aren’t all apartments on the coast.  They are second-hand homes, used only occasionally.  Estimates suggest that about 40% of them are detached homes and many are in inner- and middle-ring suburbs in our capital cities.  Since the GFC, our survey work suggests that about 10% of these have been used on a permanent basis – either via being rented out or sold to a buyer intending permanent use.

We also have spare capacity in terms of bedrooms, in both owner-occupier and rental stock.  In tough times these rooms are used.  We can fit more people in our existing homes and often comfortably.

Different migration mix While our high migration intake gets a lot of airplay these days, what is often not discussed (other than xenophobic rants) is the change in where these migrants come from.  Today, migrants from China, India, Africa and the Middle East equal those coming from our more traditional sources such as the United Kingdom, Europe and New Zealand. These new migrants often live in bigger family groups than the more traditional migrant mix (and older Australian households as well), which in turn is pushing up the average household size and reducing the need to build as many new homes. 

Rapid rise in Australian births. Another trend that is pushing up the average household size is the rapid rise in the country’s birth rate, with over 300,000 babies born in Australia last year alone.  The current federal baby bonus no doubt helped, as does the recent 18-week paid maternity leave scheme.

In contrast to recent media reports, this surge in births suggests a strong and rising demand for multi-bedroom dwellings and mostly detached.  Most of our new migrants, too, want to live in a detached house with freehold land rather than a tight apartment.

These three factors, we believe, have caused a paradigm shift in underlying housing demand.  Past trends would suggest that for each new person in Australia, we needed to build about 70% of a new dwelling.  The current need is to build around half a new home (45%) for each new person in Australia.  This suggests that the new Australian housing market is nowhere near as short-changed as most of the industry bodies would have us believe.

Our recent property investor survey found that most local investors don’t think that the new housing market is undersupplied.  In fact, many think that there are too many new dwellings (and importantly, without substantial points of difference) on the market at present.

Property sales-related businesses that continue to spruik “undersupply” are doing themselves and their developer clients a disservice.  More time and effort should be spent in meeting a market’s needs – and subsequently selling these design/locational benefits to buyers – rather than just relying on the standard spruiking formulae of “undersupply means price growth”.

The rental market, in general, however, remains tight.  What happens with interest rates, rents and the amount of stock (new and resale) for sale will direct dwelling price growth in coming years.  We expect a return to price growth, albeit anaemic when compared to that experienced during the noughties.  But this assumes that rents continue to grow by about 5% per annum, interest rates don’t rise too much (0.5% to 1% over the next 18 months) and that the number of properties listed for sale drops (down at least 20% on current levels) back to more sustainable levels.

Michael Matusik is the director of independent property advisory Matusik Property Insights. Matusik has helped over 500 new residential developments come to fruition and writes the weekly  Matusik's Missive.