Australia, NZ and Canada have the best performing property markets in the world. Some say we’re all due for a bust, but that overlooks the fundamental factors that are actually driving these booms – and what these countries all have in common.
I came across this interesting set of charts the other day.
It compares real (adjusted for inflation) house prices across the developed world.
There’s a few familiar stories there. There’s the sharp corrections in Ireland and the US (though prices are still higher than they were at the start of the century.)
But the interesting thing I thought was who’s leading the world. Strip out the others and your left with this chart here.
Yep, Australia, New Zealand and Canada all end with a podium finish, though it’s NZ who walks away with the gold.
Some people say that this means that the housing markets in Oz, NZ and Canada are all due for a bust.
That’s some pretty weak logic, but to see if that’s true, you really need to understand what’s driving prices.
So what is it that these three countries have in common? We all share a love of the great outdoors, and have accents that the rest of the world think are ‘cute’, but these don’t help explain the resilience of our housing markets.
One of the common narratives you hear about Aussie property is that we should have followed the long slide in American property, and we would have, if it wasn’t for the mining boom…
The mining boom, and the surge in investment and jobs, helped insulate Australia from the full effects of the GFC. In America, a shock to the economy and to the job market pushed a lot of people to the wall – enough to send property prices into a downwards spiral.
But Australia got a vaccination boost. Prices took a hit, but employment and wages held up. This kept prices out of a death spiral.
And so it’s tempting to look at the podium and put it all down to the resources boom being driven by the Chinese juggernaut.
And it is true that Canada has had a resources boom. There was a major boom in oil production throughout the central provinces, especially Alberta.
But it can’t be the full story. First, what resources boom did New Zealand cash in on? The NZ economy has performed relatively well in recent years (despite a drought-driven recession), but it’s not from selling oil or dirt to China.
Secondly, when you look at both Canada and Australia, you can see that the hottest property markets are not those located in the resource states. Perth and Brisbane have done well this decade, but in recent years all the action’s been in Sydney. Likewise, in Canada a lot of the action’s been in the economically sophisticated city of Vancouver.
So if it’s not the mining boom, what is it?
Well, have a look at this chart here. This compares Canadian population growth to growth in dwelling approvals.
You can see that in recent years, a clear mismatch has opened up, with dwelling approvals failing to keep pace with population growth, in part driven by a surge in immigration.
Does that sound familiar? It should.
It’s exactly what’s going on in Australia. Immigration has helped drive a surge in the population, but building construction just hasn’t kept pace.
This chart here shows the mismatch for Victoria, but it’s the same story around most of the country, particularly in Sydney.
Around the time the GFC kicked off, population got a solid jump on building approvals, and they haven’t connected since.
I’ve highlighted a few reasons why supply remains constipated in Australia – tight planning laws probably being a key factor. And I’ve highlighted how this keeps prices high and moving higher. Looks like exactly the same dynamic’s at play in Canadia.
And across the Tasman in NZ? How are they going?
Well, it turns out there’s a shortage there too. Tony Alexander from the Bank of New Zealand has explained why there was no property market crash in NZ following the GFC:
NZ did not enter the 2008 recession with a housing over-supply but with an under-supply caused by not so much the absence of bank lending as occurred overseas, but a lack of people to build the houses. New Zealand’s unemployment rate hit 3.5% in 2007 and builders became in short supply.
That under-supply got rapidly worse from early-2008 and dwelling consent numbers fell below the 23,000 long term annual average in July 2008 and have been below that ever since, hitting a four decade low of 13,269 in mid-2011…
… The shortage is only getting worse with annual consents at 4,722 when 7,000 is the long term average and the Auckland Council estimates 13,000 per annum are needed. I can find no record of consents having ever reached that level.
Again, sound familiar? It’s exactly what we’ve seen in Australia, with build rates falling continually for over a decade, and lagging way behind what our growing cities actually need, leaving a housing market in severe shortage.
Alexander also reckons foreign buying is also having a major impact on the NZ market. It looks like foreign buyers are about 10% of the market, with the Chinese presence now as big as Australia’s.
But we know that the Chinese have been big players in Australia and Canada.
This chart tracks cumulative Chinese buying since 2005.
Australia is right up there with the US (which when you consider the relative size of our housing markets gives you a feel for what impact they’re having here.) But Canada’s not far behind.
So this is what’s driving the long-term boom in Australia, NZ and Canada. A supply shortage and a surge in foreign buying.
So are we due for a bust? Hardly. Our supply shortages will take decades to correct, and that will keep prices on the up and up. They will make sure we remain attractive to foreigners, again driving prices higher and higher.
Looks like we’re in good company.