Regional population growth data was recently released by the Australian Bureau of Statistics (ABS) for the year to June 2014.
By combining this data over time with dwelling approvals over time we can derive localised information to approximate the extent of oversupply and undersupply in the capital city housing markets.
The combined capital cities recorded an increase in population over the 12 months to June 2014 of 288,994 persons, down from an increase of 308,206 persons the previous year.
While the population increased by 288,994 persons, there were a record-high 145,268 dwelling approvals over the year.
The population increase was -6.2% lower over the year while the number of dwelling approvals was 25.6% higher.
Based purely on a ratio of population growth to dwelling approvals there was one dwelling approved for construction for every 1.99 residents added to the capital cities.
This represents a significant improvement on the ratio of one dwelling approval for every 2.66 new residents over the previous year.
The 2011 Census reported that across the nation, households had an average of 2.6 persons
Based on this figure, we have approved significantly more homes than required based on population growth over the past year.
Unfortunately, measuring housing demand is not quite so simple.
We must also consider how much of the new demand is from overseas migration compared to natural increase as well as factors such as demolitions and holiday home demand.
I haven’t found any literature on housing demand from overseas migration compared to natural increase however; I think it is a reasonable assumption that overseas migration creates a more immediate addition to housing demand than natural increase.
There has been a noticeable slump in net overseas migration to Australia over the past year
Although it is a little bit old now, the former Deputy Governor of the Reserve Bank (RBA) gave a speech entitled ‘Housing and the Economy’ to the National Housing Conference in November 2009.
Two of the most interesting and relevant points to housing demand from the speech were:
1. A higher proportion of the new dwellings built are simply replacing existing homes that have been demolished.
The RBA estimated that between 2001 and 2006, around 15% of new dwellings built replaced those that had been demolished; 10 to 15 years earlier that figure was less than 10%.
2. A significant proportion of dwelling investment appears to have gone into holiday homes or second homes. Census data (2006 Census) shows that the number of dwellings built has exceeded the increase in the number of households by a large margin.
As a result, the ratio of the number of dwellings to the number of households has been rising over time; as at 2006, there were 8% more dwellings in Australia than there were households. Presumably, most of this surplus reflects holiday homes and second homes.
Based on these two points from the former deputy governor’s speech, in order to cater to dwelling replacements and secondary homes we should construct 23% more dwelling than the previous simplistic analysis of measuring the rate of population growth compared to approvals.
There are a few points and assumptions to keep in mind here:
1. This analysis is based on approvals not completions and approvals won’t necessarily become a completion; based on our calculations completion rates are historically 98% for houses and 85% for units.
2. The heightened level of inner-city unit development in most instances would see fewer homes demolished to make way for this new construction.
3. Holiday and second homes are generally more likely to be located outside of the capital city than within.
4. Anecdotally activity from foreign buyers is increasing, a proportion of these homes sit unoccupied and don’t even enter into the rental market. So while the supply of housing has increased if the property sits vacant it is more reflective of secondary homes.
Given these qualifications, the point about holiday and second homes is likely to be less relevant here, but in the absence of more up-to-date data we will still allow for the 15% of homes which have been demolished when looking at the approvals data.
The 2011 Census reported that on average, Sydney, Brisbane and Darwin had 2.7 persons per household, Melbourne, Perth and the ACT had 2.6 persons per household and Adelaide and Hobart had 2.4 persons per household.
Returning to the original findings, over the year to June 2014 the capital city population increased by 288,994 persons and 145,268 dwellings were approved for construction.
If we adjust these figures based on the average household sizes as at the 2011 Census, based on population growth the capital cities required 109,825 new homes.
If we further adjust for the assumption that the country needs to approve 15% more homes to replace demolitions, the capital cities required 126,298 new homes last year.
Given this, 18,970 more homes were approved for construction than were required over the year compared to a deficiency of 19,076 homes the previous year.
The above chart shows that new dwelling approvals were typically sufficient for the rate of population growth throughout the 1990’s however, since the beginning of the 2000’s population growth has boomed while new approvals have largely been unresponsive.
Dwelling approvals are now climbing on the back of rising home values and increasing demand for homes
Keep in mind, the heightened level of dwelling construction will have to persist for a number of years to make up for the cumulative effect of the insufficient supply response over the past decade or so.
Over the past year, each capital city had more homes approved for construction than was required based on population growth.
While dwelling construction is a positive outcome for the economy, it is important to note that an approval doesn’t necessarily translate into a completion.
Furthermore, there is a time lag between approval and completion; these homes are required right now, not in a year or twos time (or longer in some unit developments).
The following charts track the annual population growth and annual number of swelling approvals across each of the capital cities.
The above charts show that the disconnect between new dwelling approvals and population growth since the beginning of the 2000’s has been largest across the four most populous capital cities.
These four cities are also home to a majority of the national population and have also been recording the greatest increase in residents over that period.
A further important consideration for housing supply and demand is the type of new product that is being built
While the city-wide analysis can be useful it should be remembered that new housing is typically either new detached houses on the outskirts of the city or medium to high density product within the inner city areas.
We are seeing over time a shift from greenfield and brownfield detached housing development to inner city infill and higher density development across most capital cities.
In fact, over the past year more than half of all capital city dwelling approvals have been for units as opposed to houses.
The analysis shows that within the four largest capital cities there has been a deficiency of dwellings approved for construction over recent years compared to the rate of population growth.
Over the past 24 months or so there has been a surge in dwelling approvals, at the same time the rate of population growth has slowed.
The RBA has spoken many times about looking to extend this period of heightened construction activity for a number of years.
Not only would this have a multiplier effect throughout the economy but it would also help to improve the undersupply of housing which currently exists.
In 1991, 29.9% of all dwelling approvals across the combined capital cities were for units showing an overwhelming majority of approvals were for houses.
Over the most recent year, 51.6% of capital city dwelling approvals were units. In 2013 (50.1%) and 2014 (51.6%) it was the first time that there were a greater number of capital city unit approvals than house approvals.
The above chart shows that since 2010 when 38.1% of all approvals were for units, there has been a strong trend towards a smaller proportion of house approvals.
Over the past 12 months, each of Sydney, Melbourne, Brisbane, Darwin and Canberra have approved more units than houses.
Sydney, Darwin and Canberra have approved a majority of units for more than a decade however, in Melbourne and Brisbane the rising prominence of unit approvals is a relatively new phenomena.
Adelaide, Perth and Hobart have each recorded a significantly lower proportion of unit approvals, in fact as a proportion, Perth and Hobart had fewer unit approvals last year than they had 20 years ago.
Data from the 2011 Census showed that across the separate house category, the most prevalent number of bedrooms is 3 bedrooms (49.6%) and 4 bedrooms (32.4%).
When you combine the Census data for semi-detached and units, the most prominent number of bedrooms in 2 bedrooms (50.1%) and 3 bedrooms (28.6%).
To look at it another way, 88.8% of detached houses have three bedrooms or more compared to 66.9% of units having 2 bedrooms or fewer.
The point being that more units are being approved (and constructed) however, they typically have fewer bedrooms and are likely to have a smaller average household size than a detached house would.
Given this, it is likely that as more units are constructed, we will actually need more housing than we would have if houses had been exclusively built because of the potential smaller household size.
The challenge of course is that while the pipeline of approvals is very strong, there are more unit approvals than houses and ultimately these units are less likely to be built than houses.
The other feature we are seeing in the market is the rise and rise (and rise) of the investor segment
In fact the value of loans to investors has been greater than new loans to owner occupiers over each of the past 6 months and that has never happened before.
A lot of the new unit construction taking place is to cater to demand from the investment segment of the market.
The important thing to note is that while investment style detached houses are fairly similar to houses for owner occupiers, the same is not necessarily the case for units.
The type of unit that someone is willing to live in while they are renting is often quite different to what they would be willing to live in as an owner occupier.
This is largely in relation to internal floor area, kitchen size and design and balcony size.
With investment purchases surging, a large proportion of the new unit development is targeted at that market while units for owner occupation are not as prevalent.
Of course developers build what product is going to sell.
The potential cause for concern is that many of these investors exit the housing market when the returns aren’t as strong as they currently are.
What could then happen is a lot of investment stock hits the market at a time of falling demand coupled with a product offering which is not what the market wants.
Despite this potential cause for concern, it is very encouraging to see an improving relationship between housing demand and housing supply.
With population growth looking likely to slow further it would be encouraging, particularly from a housing affordability perspective if the heightened level of approvals persisted.
More importantly of course will be that we see these approvals ultimately constructed, particularly in our largest capital cities where housing deficiency has been greatest.