Why aren’t we building more homes?
In large part because we don’t need to according to CommSec chief Economist Craig James. He gives some insightful views into household size, construction numbers and what this means to our real estate markets, for interest rates and to you and me as property investors in his latest report.
More bedrooms, more people: The number of bedrooms in the average home remained at a record high of 3.11 in 2011/12.
The number of people in the average household was broadly steady at 2.57 after lifting over the previous four years.
Plenty of room: More than three out of every four homes have at least one spare bedroom.
Owners in minority? Over the next few months it is likely that the minority of households will be those who own their homes outright – exceeded by the proportion of households that are renting and households with mortgages.
Construction weakness: Construction work done in the June quarter fell by just 0.3 per cent, the third straight decline. Commercial building work done fell by 1.3 per cent in the June quarter with residential work down 0.1 per cent while engineering work fell by 0.2 per cent.
Economic growth estimates the slight fall in residential building will mean “residential investment” will neither detract nor contribute to June quarter GDP growth. Overall growth is expected to be around 0.5-0.8 per cent over the quarter, which would take annual growth between 2.4-2.7 per cent.
What does it all mean?
Why aren’t we building more homes?
In large part because we don’t need to. According to the latest data, 78 per cent of households have at least one spare bedroom. And of those who own their homes outright, amazingly just over 18 per cent have three or more spare bedrooms.
The latest data confirms recent trends showing that there is plenty of spare capacity in our existing homes, even though we have been utilising some of this extra capacity in the past five years. The latest figures have clear implications for the housing industry. If Australians are keen to utilise their homes more efficiently then construction will be constrained in coming years.
[sam id=37 codes=’true’]More renters than home owners. Who would have thought? There has been a major change in attitudes concerning home ownership with renting continuing to be preferred – either because Generation Y is choosing a different lifestyle or because the cost of purchasing a home continues to lift.
Businesses aren’t keen to spend, invest or employ ahead of the Federal Election. So the slight fall in construction activity won’t come as a surprise. But given some expectations that mining investment has peaked and could fall off a cliff; that certainly isn’t happening. Construction work done peaked in the September quarter of 2012 but has only eased gently from the highs.
On a positive note the Reserve Bank has few worries when it comes to cost pressures in the construction sector with prices growing at the slowest annual pace in three years. The slight fall in residential building will mean “residential investment” will neither detract nor contribute to June quarter GDP growth. Overall economic growth is expected to be around 0.5-0.8 per cent over the quarter, which would take annual growth between 2.4-2.7 per cent.
Notwithstanding the trend to greater housing occupancy, there here are good reasons to expect a lift in construction work – especially in the residential sector – when the election is out of the way.
What do the figures show?
Housing Occupancy & Costs
The average number of bedrooms per dwelling was unchanged at a record high of 3.11 in 2011/12. In 1994/95 there were 2.88 bedrooms per home.
The average number of people in a home was steady at 2.57 in 2011/12 (but there was a slight increase when viewed to three decimal places). In 2007/08 the number of people in a home increased for the first time in a century – up from 2.51 to 2.56 people. It lifted further to 2.57 people per home in 2009/10.
In 2011/12, the proportion of households with a mortgage lifted from 36.2 per cent to 36.6 per cent; the proportion of households owning their property outright fell from 32.6 per cent to 30.9 per cent; the proportion of households renting rose from 28.7 per cent to 30.3 per cent.
There were 18 per cent of households where housing costs accounted for more than 30 per cent of income.
The biggest rise in home occupancy is “other one family households”, up from 11.7 per cent to 12.6 per cent in 2011/12. This grouping includes dependent and non-dependent children and extended family such as grandparents.
Construction work done fell by 0.3 per cent in real (inflation-adjusted) terms in the June quarter, after falling by 1.9 per cent in the March quarter and easing 0.2 per cent in December quarter 2012. Work done is down 0.9 per cent on a year ago and down just 2.5 per cent from record highs. Public sector construction work fell by 0.6 per cent in the quarter while private sector activity fell by 0.3 per cent.
Five of the states and territories recorded weaker output in the June quarter: Queensland (down 5.0 per cent), followed by Victoria (down 2.5 per cent); Tasmania (down 2.1 per cent); South Australia and the ACT (both down 0.3 per cent). Construction work rose in Northern Territory (up 7.6 per cent), followed by Western Australia (up 4.0 per cent) and NSW (up 1.0 per cent).
Engineering work fell by 0.2 per cent in the June quarter after falling 2.5 per cent in the March quarter and falling 2.1 per cent in the December quarter. Engineering construction is down by 2.2 per cent on a year ago.
Commercial (non-residential) building fell by 1.3 per cent in the June quarter (private sector -1.4 per cent) to be down 3.4 per cent over the year.
Residential building fell by 0.1 per cent in the June quarter (private sector, flat) but was up 4.3 per cent over the year. Alterations & additions rose by 5.7 per cent while new residential work fell by 1.0 per cent.
The measure of inflation in the construction sector (deflator) rose by 0.3 per cent in the June quarter after falling by 0.1 per cent in the March quarter. The annual rate of construction inflation is at a 3-year low of 1.0 per cent. Engineering prices were flat in the quarter (0.8 per cent annual) while building prices rose by 0.7 per cent in the quarter (1.5 per cent annual).
What is the importance of the economic data?
The Bureau of Statistics releases quarterly estimates of Construction work done. The estimates are based on a survey and cover around 80 per cent of the construction work done in the period. Revised estimates will be released in coming months. The data is useful largely for historical purposes but the work yet to be done estimates provide an early warning signal of future activity. The residential work figures give a good early guide to the strength of residential investment in the national accounts.
The Bureau of Statistics releases estimates of Housing Occupancy & Costs every two years. The data shows whether people are buying or renting and how efficiently people are utilising their homes.
What are the implications for interest rates and investors?
Those who believe that we are “under-building” need to dissect the latest figures. Times have changed. There is significant spare capacity in Aussie homes and there has been a greater willingness in recent years for younger people to share accommodation with others or stay longer in the family home.
The trends in housing occupancy have clear implications for builders, developers and building material companies.
Despite initial fears, the mining/engineering boom is not leading to a bust. Engineering building – and construction more broadly – has soared in recent years and recent trends show a mere flattening is occurring.
And some of this flattening may be temporary, related to the Federal Election uncertainty and recent financial market consolidation in China
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