I have said countless times in the many, many speeches and articles that I have presented in the past that Australia is different to many countries in that it is a nation of people who strive to own a home and these houses aren’t “shanty”, they are generally well constructed dwellings.
I have also emphasised the fact that our housing markets are more predictable than say the stock market for example, because unlike the stock market the population who participate in the housing market doesn’t constantly change with differing needs, aspirations and levels of greed. Human needs and failings in our housing market tend to be constant because we are all there, all the time as a tenant, owner or purchaser. So, given this we should be able to point to timing and issues which will cause correction and booms in our housing markets based on history and past performance.
What I am saying is obvious. It is equally obvious that house price growth and rental increases are caused by demand in a market where there is a supply issue due to insufficient stock or stock which is inappropriate. An alternative might be that there is simply speculation and no intention by an owner to use the stock they purchase (it is built or purchased and left vacant) where they are simply intending to hold and sell at an appropriate time for a capital profit.
In Australia, housing speculation is not prevalent but where we do find it is generally in “off the plan” buying. Unfortunately, buying ‘off the plan’ generally results in buyers paying more than a property is worth on completion. This happens for a large number of reasons, one being that people are prepared to pay more based on the need to inject a small or limited amount of cash outflow in the anticipation of making a high profit when they buy and immediately sell. Yes, greed offsets buying price rational behaviour.
When this occurs, the buyer inherently expects there to be future demand which is what would cause capital growth. Hence in a market where demand is falling away we should expect to find speculation injury and losses. These speculator injuries are therefore pointers to demand failing to meet available (over) supply. We are currently seeing this situation unfold on the Gold Coast and some other markets in Australia.
Our ‘off the plan’ investors can be forgiven for their overly optimistic expectations. We are constantly reading that there is a shortage of supply and that predicted shortage will significantly get worse in future years.
Those who predict housing supply shortages can be equally forgiven because, in the very long term, they will probably turn out to be correct. I am sure you will have noted that these predictors speak more about the long term outcome rather than the here and now. This is because long term trends are more statistically predictable and reliable. As with all modeled predictions, short term outcomes can be distorted by government policy and immediate changes in human attitudes to the issues which confront them at the time.
Statistical information from all housing related analytical companies for some time now has been constantly negative so it is reasonable to ponder why we are reading about housing shortages while the growth rates in rent and capital don’t seem to be supporting the supply issue.
The answer is simple. Right here and now we are actually approaching a situation where, for the moment, there is no actual significant shortage in stock. In the following table we present our calculated stock situation, state by state:
|State||Immigration, Last Qtr*||Calculated Supply**|
|Queensland||-4.90%||3,000 to 7,000|
|New South Wales||-15.42%||5,000 to 9,000|
|Australian Capital Territory||-30.06%||-5,000 to -1,000|
|Victoria||-17.23%||-26,000 to -22,000|
|Tasmania||-16.98%||-4,000 to 0|
|South Australia||-17.24%||-7,000 to -3,000|
|Western Australia||-12.12%||-4,000 to 0|
|Northern Territory||5.58%||-3,000 to 1,000|
* The current quarterly immigration change when compared to the median quarterly change over last 5 years.
** Surplus or a shortage of housing stock being developed – a negative number indicates a surplus while a positive number means there is a shortage of stock being developed.
The surplus or shortage of stock calculated by any party is based on their best judgment. Net immigration numbers, net natural population increases from 20+ years ago and dwelling commencement numbers provided by the ABS will all be used in their calculations. It is the next step where real judgment comes into play. A conclusion needs to be drawn about two things:
1. The number of people in a group that will move into a dwelling; and
2. If there were stock shortages in prior years, the number of stock that should be carried forward into current year calculations as being needed.
In the past when housing was generally affordable and it was relatively easy to obtain finance, the decisions to the two points I just made were easy. That is, simply carry forward the shortages because, provided there was stock people would buy, people could afford to buy and live in houses with ‘people density they were most happy with. However today, not only has the immigrant population changed along with different views about the acceptable number of people per dwelling, people who are seeking to establish a home don’t have the luxury to be too choosy because the cost of a dwelling is a limiting factor.
In the above situation, people adapt to affordability issues and the people density level per dwelling changes. They get used to the higher density and become accepting of the environment they find themselves in. It is in this situation that it is not appropriate to simply keep adding past housing shortages to current calculations. In fact, it may be that even the current year’s calculated shortage is overstating the real situation. This is probably more likely because I don’t believe any housing shortage numbers take account of what I call medium term demand. This demand is caused by temporary immigrants such as international students (in 2009-2010 there were 270,000 international students). At the moment, the high Australian dollar has reduced the number of students and so implicitly increased the volume of housing available for permanent residents.
Should the arguments above be correct, it should be confirmed in our housing growth numbers and increasing rental numbers. If in fact the shortages are as suggested by many in the market we should either be seeing significantly increasing house prices or significantly increasing weekly rentals. Both of which we are not.
Adjustments are occurring in all places where we have calculated a stock surplus and rentals are not, in reality, increasing at any significant pace. The two states where we do calculate shortages are New South Wales and Queensland and should be considered.
NSW is easy as that market is unaffordable but it is increasing in value modestly. So the shortage argument fits the profile. The Queensland market however does need some explaining.
There is a unique aspect to Queensland (and no, it’s not its fantastic climate) in that its economy and population are so spread out. Queensland is the most regionalised economy in Australia with a number of substantial regional cities: Bundaberg, Rockhampton, Mackay, Townsville, Cairns etc.
Brisbane and its surrounding areas are adjusting. I suspect Brisbane is not where the major stock shortages are to be found but rather the shortages will be in the rapidly growing economies in the regional towns that are supported by the larger regional cities mentioned above. It is in these regional towns where we find the developing new resource projects. Additionally, Brisbane is still suffering from the natural disasters earlier in the year but will benefit in due course as the state economy gathers pace as a result of the resources boom in that state. Taking this into account, there does seem to be a rational reason for Brisbane price adjustments; however it is not a clear cut case.
I have taken time to put forward my case because, in my view, the immigration policies of the federal government are critical to what happens to housing prices. Yes, interest rates are also important but it is demand that will shape future price growth in rentals and capital cost, and also the number of people living in each home. It seems to me that in the past immigration policies have not taken into account the country’s capacity to provide infrastructure and housing, and it is this failure that can be blamed as much as lending practices for high house price growth. It is also true that the separation of power between state governments and the federal government are probably an issue. Simply our planning seems to so often be reactive or short sighted.
You may find the Australia wide net immigration statistics for the last four years interesting:
|Year (Ending June)||Net Immigration|
From all of the above, where we should be focusing in the medium term should be evident:
– Sydney first and to a lesser extent, regional Queensland;
– Brisbane next; then
– Western Australia.
Until next month, happy Investing!
John Edwards is a director of Residex, a leading Australian research organisation providing quality information on the real estate market to government, financial institutions, valuers, real estate agents, accountants, solicitors and individuals. Go to www.residex.com.au
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