Apparently Australia has a chronic housing shortage.
In other words, we need to build heaps more homes to cater for pent-up demand & population growth.
New housing construction is a great thing, as it does generate work; usually plenty of it.
And we need this as the employment baton passes from mining to other things.
But as we will outline, we are already building too many new homes.
Not only are they the wrong ones, there are also, now, too many.
Let’s look at some trends.
Australia already has too many homes
One in ten of our residential properties is not used on a permanent basis. That’s close to one million properties!
Many of those who have locked up their homes are investors; many of whom have told us that they would rather forgo rent (and not put up with tenant hassles) & just rely on price growth as the main contributor to their asset’s economic performance.
This has been a somewhat long term trend, but one which we think will start to change as generic price growth fades & rental yield becomes much more important.
Also, many of these owners are older. They are now selling, or soon will.
The timing is right, given low interest rates & the market cycle. Most of the new buyers will either occupy or rent out these properties. If we are right, then this will see Australia’s housing supply increase, and maybe significantly.
As a footnote here, not only does Australia have plenty of vacant homes, it has yonks of spare bedrooms.
The official stats suggest 1.3 bedrooms per average Aussie home are not being used at all. Even more are underutilised.
But I do like this statistic better – Australia has about 12 million spare bedrooms.
There are about 9.4 million homes in Australia.
The ABS estimates that today there are 2.512 (I just love the three decimal places) people per dwelling. In the last three years alone it has risen from 2.492.
Big deal, I hear you say.
Well, if the number of persons per home hadn’t risen, then it is estimated that an extra 78,000 dwellings would have been required since 2011.
Household size has been rising for some time.
We have been banging on about it for close to a decade.
And nobody should be surprised.
If you give away a baby bonus, then expect more children.
And those migrating from Asia, more often than not, come here to start a family.
Also, our overseas migration mix has changed, with less old codgers from the old dart & many more from countries where larger households are the norm.
We think Australia’s average household size will continue to rise, at least for the next decade or so, and this means fewer new homes per household will be needed.
Our ageing population also means that fewer new homes will be needed.
Housing consumption drops dramatically once buyers hit their mid-50s.
Many of us, as we get older, would like to move into something more suitable – downsize in short – but the housing options available to most are either too expensive; too small or too far away from where many of us currently live.
Our recent Missives have sparked a raft of downsizer replies – and thank you – most of which bemoan the lack of local, affordable housing choice.e.
Most conclude that they will be aging in place; retrofitting their current abode & taking in a tenant or family member to help make ends meet.
Where allowed, many are looking to build a granny flat or equivalent.
We see this ‘housing compromise’ as a major movement & one which has only just begun.
The latest rental report from Domain Group records virtually no rental growth in the capital cities in the September quarter.
In annual terms, rental performance, according to Domain, ranges from weak, to nothing, to negative.
In half of the 16 rental markets covered in this report, rents either are falling or stagnant.
Now, I am a simple man, but surely if we had a chronic shortage of housing, then wouldn’t rents be rising?
They can take a breather every now & then, but if you look at Andrew Wilson’s charts, they show that rental growth has been flat lining for some time.
Such a trend usually means an adequate level, not a chronic shortage of housing supply.
We will leave you with two charts.
The first chart above shows the underlying demand for new homes.
This takes into account household formation by our six key buyer groups (again, revisit this Missive if you are a bit perplexed), rather than just the simple division of population growth by average household size.
Our way is much more accurate.
The second chart shows that housing starts – measured here by actual commencements, not approvals – have often been in excess of underlying demand.
This was particularly the case across Australia in the mid-2000s. The GFC wasn’t the only thing that stopped the residential market back then; overbuilding was a major contributor as well.
Yes, there have been times when we haven’t been building enough, but that now seems to have passed.
We do need to build more affordable homes.
But we are building the wrong homes.
We are now also building too many of the wrong homes.
We don’t have a chronic shortage of homes in Australia; far from it.
As this cycle plays out over the next 12 to 18 months, I think a more pressing issue facing Australia’s housing market is over not undersupply.
If we are right, then there will be less generic rental & price growth than many anticipate.
The ABS releases data on dwelling commencements each quarter. These are housing approvals that have actually started.
Housing approvals are released monthly by the ABS & reflect potential new housing activity based on local council records. An approval is one of the first stages of the construction pipeline.
Typically – over, say, the last decade – 97% of all approvals were actually built. In recent years, this average has dropped to 93%.
At present, there are about 112,000 new housing approvals across Australia which have not yet commenced; the highest level on record.
Hmmm, another sure sign of our chronic housing shortage.