We know that one of the prime factors affecting property prices is the supply and demand ratio.
A lot is written about the supply side of property with reports of overconstruction in some sectors – particularly inner city apartments.
So what’s happening on the demand side?
BIS Shrapnel recently prepared a report Australian Housing Outlook – 2015-8 for QBE Insurance and looked at this issue.
They found underlying demand for new dwellings is driven primarily by population growth which, at the state level, is a combination of an increase in births less deaths and net overseas and net interstate migration flows.
The demand from net overseas and net interstate migration is more immediate because this group will require accommodation upon arrival, be it owner occupied or rental.
Long term arrivals – which predominantly compromise people on student or skilled temporary subclass 457 visas – surged to an annual record of 638,220 in the year to March 2013.
Solid employment growth in mining sector-related industries resulted in a re-emergence of skills shortages which underpinned the rise in long term overseas visitors.
Although arrivals from overseas were at record levels in March 2013, departures from Australia have also been increasing with the net effect that net overseas migration is below the record levels set in 2008.
Since the second half of 2013, long term arrivals have contracted in response to the slowing conditions in the Australian economy.
There has been a decline in work-related visas such as subclass 457 visas as the reduction in the resource sector investment leads to diminished employment opportunities.
Long term departures are on the increase as temporary migrants return to their country of origin upon expiry of their visas.
Net migration from New Zealand has also declined in this period because its economy has improved relative to Australia.
With the decline in annual net inflow from long term arrivals, net overseas migration decreased to 184,100 at December 2014.
This trend and increasing departures, due to the lack of opportunities for temporary migrants to extend their stay, is forecast to continue over the period to June 2018.
Mitigating this decline is increased overseas student arrivals, a function of the lower Australian dollar.
The Department of Education and Training reports that the number of overseas students commencing courses in Australia has increased by 27% in the two years to 2014/15.
Net overseas migration is forecast to decrease to 150,000 nationally by 2017/18, which remains high in an historical context.
All states have benefited from an increase in net overseas migration inflows nationally since 2006/07.
Compared to the long term average of 178,700 per annum in the sixteen years from 1999/2000 to 2014/15, net overseas migration inflows have risen to an average 201,000 per annum during the nine year period to 2014/15.
Western Australia and the Northern Territory were the main beneficiaries due to the skills shortage generated by resource sector investment.
Compared with the long term average, both states experienced an increased share of national net overseas migration in the 2006/07 period, at 16.1% and 0.9% respectively.
The share of net overseas migration settling in Queensland fell by about the same amount as the increased share settling in Western Australia and the Northern Territory, with the figure for Queensland being 18% in the same period.
Weak economic conditions outside of the resource sector after the Global Financial Crisis held back overseas inflows to Queensland.
New South Wales and Victoria generally account for the greatest share of overseas migrants, with Victoria closing the gap between the states during the nine years to 2014/15.
The weakness in the New South Wales economy in the past decade saw a decreased share of overseas migration, which was down to 30.8% in the period.
In contrast, Victoria’s proportion of total net overseas migration edged higher to 26.8%.
South Australia, Tasmania and the Australian Capital Territory all experienced a slightly increased share.
The transition in the economy from resource sector investment has seen strength maintained in non-resource states since 2013/14, with the business services sector picking up and boosting employment in New South Wales and Victoria.
As a result, overseas migration is forecast to hold up better in these two states through to 2017/18.
New South Wales and Victoria are forecast to account for an increased 40% and 31% share of the national net overseas migration inflow.
Moreover, the share is projected to rise in South Australia to 6.5% and remain steady in Tasmania and the Australian Capital Territory.
These states did not benefit from the rise in resource sector investment, and as a result the impacts will be less pronounced.
The contraction in resource-related investment has created fewer job opportunities in the mining states.
Consequently, the proportion total net overseas migration is expected to decrease to 13% in Queensland, 8% in Western Australia and 0.5% in Northern Territory, with a commensurate decline in population growth.
The main drivers of migration between the states are relative housing affordability and economic conditions.
Reduced interstate movement occurs when economic conditions deteriorate – i.e. limited job prospects elsewhere encourage people to stay where they are.
- Queensland’s net interstate migration inflow has declined from its long term annual average of 18,600 (1999 – 2015) to 11,200 (2007 – 2015), reflecting recent economic conditions.
Moreover, net interstate migration is expected to decline further to a net inflow averaging just 8,000 per annum in the three years to 2017/18, with net interest migration improving toward the end of this period as the state economy recovers.
- In contrast, New South Wales’ net interstate population outflow has improved from a long term annual average of 18,600 (1999 – 2015) to 14,700 (2007 – 2015).
Despite house price growth from 2013/14 and affordability becoming more strained, a strong economy is forecast to continue to reduce the state’s net outflow to an average 6,500 per annum in the three years to 2017/18.
- In Victoria, net interstate migration inflows have improved from a long term average of 2,200 per annum (1999 – 2015) to 3,300 per annum (2007 – 2015).
Based on the latest published data published in September 2015, which provided information as at March 2015, it is anticipated that there will be a net intake of approximately 9,500 in 2014/15, which will be a record and the highest annual total among all states.
Victoria’s net interstate migration inflow is expected to remain strong, although it is expected to ease to an average of 5,800 per annum in the next three years to 2017/18.
- In Western Australia, weakening employment conditions as resource sector investment winds down is expected to result in interstate migration reverting from a net inflow of 4,900 per annum (2007 – 2015) to a net outflow of 3,000 per annum (2016 – 2018).
In the Northern Territory and the Australian Capital Territory, the same move to an increased net interstate migration outflow is also expected to occur due to fewer job opportunities.
- In South Australia, the current net interstate migration outflow of slightly above 3,000 persons per annum is projected to persist through to 2017/18.
In Tasmania interstate migration is anticipated to revert from a net outflow to a net inflow during the next three years.
Improved affordability relative to Sydney and Melbourne is expected to result in increased “tree change” migration to Tasmania.
Demand and supply
The underlying demand for new dwellings is driven largely by the increase in households, which is largely underpinned by population growth.
The balance between underlying demand and supply has an impact on vacancy rates, rents, prices and construction.
Chart 16 shows the forecast average underlying demand for additional dwellings by state in the next three years compared with current supply, as indicated by total new dwelling starts in 2014/15.
The recent upturn in residential construction activity has been widespread across Australia, with new dwelling starts in 2014/15 in all states on track to be higher than forecast annual underlying demand over the three years to 2017/18.
The boost to new dwelling supply should absorb any deficiency in dwelling stock, or cause an increase in the states estimated to be in oversupply.
The states where commencements are now highest relative to forecast underlying demand is Western Australia (100% above), the Northern Territory (84% above) and the Australian Capital Territory (68% above).
Chart 17 shows dwelling stock deficiency by state as a percentage of forecast annual underlying demand as at June 2015.
While Western Australia is estimated to contain an underlying dwelling deficiency at June 2015, this does not reflect the high 4.7% vacancy rate in Perth (which is an indicator of a dwelling surplus).
Western Australia’s temporary skilled migration did not translate to demand for dwellings, with many workers living in camps onsite and in temporary accommodation during periods of not working.
Consequently, any measured dwelling stock deficiency in Western Australia is probably overstated.
As the Western Australia economy continues to slow and the temporary migrants return to their country of origin, the oversupply emerging in the state from 2016/17 is expected to be more indicative of the actual dwelling stock balance.
By 2017/18, the oversupply is forecast to have increased further as people continue to leave and dwelling construction projects currently underway are completed.
In the Northern Territory and the Australian Capital Territory, the current dwelling surplus, is mirrored by the high vacancy rates at June 2015 in Darwin and Canberra.
The dwelling surplus is expected to increase through to 2017/18 to constitute around three times average annual underlying demand.
In South Australia and Tasmania, based on current and forecast construction levels, the current dwelling surplus is forecast to rise further through to 2017/18 and be considerably higher than annual underlying demand.
In Victoria and Queensland, new dwelling starts are noticeably higher than underlying demand at 30% and 40% above respectively, driven by record high-rise apartment construction activity in the inner city areas of both state capitals.
As a result, the dwelling stock deficiency in each state at June 2015 is anticipated to erode, with a forecast dwelling stock surplus by June 2018.
This dwelling stock surplus is projected to increase with the surplus likely to be most concentrated in the apartment sector.
New South Wales is experiencing the highest dwelling stock deficiency of all states at June 2015, which is reflected in Sydney having the lowest vacancy rate amongst all capital cities.
With starts also more in line with underlying demand, being only 13% higher, the dwelling stock deficiency in New South Wales is forecast to remain greater than one year’s worth of underlying demand through to 2017/18.