Posted 26 Aug 2009 2:25 PM
The housing shortage is real
by Christopher Joye
Christopher is the Managing Director of the award-winning research group Rismark International, having established the business in 2003 on the basis of a landmark report he produced on affordable housing for the Prime Minister's Home Ownership Task Force. Rismark has successfully developed and deployed a number of investment products that allow individuals and institutions to efficiently access the risk and return profile of the residential real estate asset-class. In conjunction with Australia's largest property information company, RP Data Ltd, Rismark produces the RP Data-Rismark Hedonic House Price Indices. The RP Data-Rismark Indices are reported by the RBA in its Statement on Monetary Policy and have recently been selected by the ASX as the basis for its new residential property derivatives market. In 2007 Christopher was selected by The Bulletin magazine as one of Australia's "10 Smartest CEOs" and by BRW Magazine as one of "Australia's Top 10 Innovators". He previously worked with Goldman Sachs and the Reserve Bank of Australia. He has published widely on policy matters relating to housing and financial economics.
1. Estimates from the Commonwealth Treasury (specifically Dr David Gruen) with forecasts of housing demand of over 200,000 homes per annum and completions of less than 160,000 homes per annum:
Source: Commonwealth Treasury
2. ANZ Bank estimates of Australia's housing shortage of over 200,000 homes and counting. To quote ANZ: "If housing supply remains on its current trajectory, Australia will face a critical and potentially intractable shortage of housing that would force rents and house prices significantly higher... By mid-2010 that Australia will have an unprecedented underlying housing shortage of 250,000 dwellings!". The blue bars in the chart below show ANZ Bank's estimates of housing demand less housing supply. You can see that they forecast that the housing shortage is over 200,000 homes by 2009 and 250,000 properties by 2010.
Source: ANZ Bank
3. Westpac Bank estimated that Australia's housing shortage had risen to a record 140,000 homes by June 2008 (and growing at about 40,000 homes per annum, which would put them in line with ANZ).
Source: Westpac
4. BIS Shrapnel estimate that Australia's dwelling stock deficiency (ie, housing shortage) will peak at 160,000 properties by 2010, although they have been constantly revising their estimates upwards (see chart below):
Source: BIS Shrapnel
5. As I have noted many times before, the RBA has repeatedly drawn attention to Australia's growing housing shortage.
To quote the RBA Deputy Governor in late 2008:
"In the US, the rise in house prices elicited a very strong supply response...Here in Australia the rise in house prices did not elicit such a strong supply response...In fact, the consensus is that there is currently a shortage of dwellings."
To quote the RBA Board minutes from last week:
"The recent strength in housing prices was fairly widespread, including in the higher-priced suburbs, where repeat buyers predominate. Members observed that the strength in housing prices also reflected other factors, including low mortgage rates, strong population growth and inelastic supply. They noted that commencements in recent years had been below estimates of underlying demand."
To quote the RBA's August 2009 Statement of Monetary Policy:
"Over the past few years, between 140 000 and 150 000 dwellings have been built annually, which is well below most estimates of underlying demand. However, in late 2008 the flow of monthly residential building approvals had fallen to a level that, if maintained, would imply only around 115 000 commencements per year. Since then, the improvement in affordability from the significant fall in mortgage rates, as well as the boost in grants to first-home buyers, has seen a noticeable improvement in the outlook for dwelling construction. Surveys now show that households generally consider that it is a relatively good time to buy a home (Graph D1)...Bank liaison with builders indicates that high-rise developments remain constrained by the availability of finance...
The number of housing starts is likely to remain at levels well below most estimates of underlying demand. Lifting home-building in the longer-run will require further progress on the supply side, including addressing factors that are increasing the cost of development of new housing, both on the edges of cities and closer to the city centres."
To quote the RBA Governor in testimony to Parliament two weeks ago:
Following questions from the Coalition's Scott Morrison about whether Australia was in the grip of a house price bubble, Stevens responded, "I never used the word "bubble" [in his previous speech]...but I noticed it has been freely used by various other people who reported the speech."
Stevens continued: "Relative to mean income, [Australian] dwelling prices have actually declined since about the end of 2003...I thought that showed that you could have an adjustment here in a way that was not really disruptive - unlike some of other adjustments that we are seeing in other countries."
Morrison further queried, "Do you think it is fair to say that, whether it is the issue of taxes and charges or rising building costs, planning issues - whatever those issues are that largely relate to supply - instead of facing a housing bubble we are really faced with a housing bottleneck?"
Governor Stevens concurred: "I think what you have put your finger on here is really the point I was trying to make in the speech. I was not really trying to say, ‘Look, there's a bubble,' with implications that some people draw from that word being used. It is more that we need more dwellings."
6. Finally, as I noted back in a post in April 2009, the federal government formally confirmed the extent of the housing shortage using an alternative "bottom-up" approach to the top-down method used by the various banks and government agencies above. Here is what I said at the time:
"The federal government formed the National Housing Supply Council in May 2008 to address mounting concerns about a range of government-imposed barriers to the production of new housing supply, which has led to a growing housing demand-supply imbalance documented by many, including the Treasury, the RBA, ANZ, Westpac, UBS and BIS Shrapnel (in contrast to some silly claims to the contrary). The Council has just delivered its 2008 State of Supply Report in which it confirmed the existence of a significant gap between demand and supply (quoting from the report):
"The gap between total underlying demand and total supply is conservatively estimated to be approximately 85,000 dwellings as at June 2008, taking into account information on homelessness and low vacancy rates in the private rental market.
Over the five years to 2013, the overall gap is projected to grow to 203,000 dwellings (based on assumptions of medium growth in supply and underlying demand).
By 2028 the same projection assumptions produce a cumulative gap of 431,000 dwellings.
Under medium supply and medium demand assumptions... over the two years to 2010, the gap grows by an estimated 46,000 dwellings to be 131,000 dwellings. This is the result of an estimated 259,000 net new dwellings over the period while underlying demand increases by 305,000 households.
After five years, by 2013, the gap grows by an estimated additional 118,000 dwellings to be 203,000 dwellings. By 2018, the gap has increased to 316,000 dwellings and, by 2028, it is 431,000."
The Council's approach differs from the "top-down" analysis typically undertaken by the Treasury and market economists like BIS Shrapnel, ANZ, Westpac, UBS and others.
Whereas the latter estimate the number of underlying homes required given assumptions about population growth, demolitions, and changes in the number of persons per household (which does conceal some important elasticities) and then compare this with the actual supply of homes being delivered by the market, the Council has focused on the number of new homes required to address:
- Homelessness (sleeping rough);
- Homelessness as defined by staying with friends and relatives;
- Marginal residents such as those living in caravan parks; and
- Dwellings required to increase vacancy rates back up to 3 per cent
This gives the Council's estimate of a minimum demand-supply imbalance of 85,000 homes as at June 2008, which notably excludes around 234,000 "overcrowded households". The Council cautions that:
"An important exclusion from these calculations is an allowance for the number of people who are living in non-private fixed dwellings such as rooming houses, hotels, motels and institutions and have no other residence. Further research is needed to determine what proportion of this group should be included in the demand-supply gap...
There are other aspects of housing need that could be considered for inclusion in the definition of the demand-supply gap. One such aspect is overcrowding. The 2006 ABS Survey of Income and Housing identified that 2.8 per cent of Australian households in 2005-06 were overcrowded using the Canadian National Occupancy Standard. Applying updated population projections and assuming this distribution is the same, it is estimated there would be 234,000 overcrowded households in 2008. This includes 42,000 households where two or more bedrooms are needed to avoid overcrowding."
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