Is the Australian housing market oversupplied?
Well yes and no – it is in a few selected pockets, buy overall there is no oversupply according to a research note from the ANZ Bank.
Here’s how the bank report answered the question about oversupply:
While the solid pipeline of housing construction has raised concerns about oversupply of housing in the Australian market, analysis of population growth and additions to housing stock show that current construction levels have only recently increased to levels that are sufficient for annual underlying new housing requirements.
That is, accounting for population growth, household formation propensity (accounting for the household age profile) and subtraction from the available housing stock (ie demolitions and vacant dwellings) the Australian housing market requires around 197,000 dwellings to be completed in 2014-15.
Based on current estimates of housing construction ‘to be done’ we estimate that housing completions add around 195,000 dwellings.
We’re not building enough dwellings
So, in terms of annual requirements, the Australian housing market is expected to add around 2,000 dwellings less than underlying demand requirements in 2014-15.
In addition, reports of a higher unoccupied rate in the Sydney, and Melbourne apartment markets suggest that recent trends would increase the proportion of unoccupied dwellings, effectively increasing the underlying demand requirement3 relative to our current estimates.
Population and housing construction trends show that solid population growth, led by a strong pick-up in net overseas migration since 2005, have coincided with a surge in demand for higher-density housing.
While this relationship does not suggest that higher migration alone has driven strong demand and construction of higher-density housing, it does support the view that foreign investor demand is not the only factor driving high-rise apartment construction in the major Australian capital cities.
Strong population growth, consumer preferences and solid house price growth have also contributed to a structural shift in occupier demand for higher-density housing.
In addition, analysis of underlying population requirements relative to dwelling completions show that a relatively balanced housing market in 2014-15 does not eliminate almost 10 years of significant underbuilding (see Figure 8 above).
While this analysis does not address potential issues with housing market supply-demand at the regional or suburban level (such as the inner-Melbourne CBD apartment market), it does highlight the extent of the supply problems facing the Australian housing market.
Based on underlying market supply-demand fundamentals, the Australian housing market requires around 370,000 dwellings, or almost 29 months of building at current construction levels even with no additional increase in underlying housing demand) in excess of underlying housing requirements to be ‘in balance’.
The bottom line:
House prices will continue to fluctuate in the short-term on home buyer sentiment, income growth and interest rates; however in the long-term market imbalance issues will continue to support elevated home prices for some time yet.