An explosive new chart shows just why Terry Ryder and I disagree about whether Australia has a housing shortage or not….
… and why I’m right.
I’ve been saying for a while now that Australia has a housing shortage.
It’s one of the things that explains the nature of the Aussie market. It’s one of the key factors underpinning long run capital growth, and why the post-GFC housing correction was relatively mild by global standards.
In part it’s due to stronger population growth than was envisioned 10 years ago. But in large part it’s because we just don’t build enough houses.
We were building about 160,000 homes a year a decade ago. Now that figure’s down to about 70,000 a year.
I’m still not clear on the reason why that is. I think restrictive zoning regulations and a reluctance on the part of banks to lend to developers post GFC is part of the problem.
However, whatever the balance is right now, it’s clear that the balance has been tipping steadily further and further towards a shortage for almost 20 years. So unless there, was some massive oversupply 20 years ago, it’s pretty clear we’ve got a shortage right now.
So that’s why it was interesting last week when Terry Ryder came out in the over-supply camp. (It’s actually a very small camp. Just him and a tent as far as I can see.)
Now normally, I’d stick him in the too-hard-in-the-head basket, but this is Terry Ryder. He’s got quite a name around town and he’s been in the property game a long time. So I thought I’d take a closer look at what he’s saying.
This is the money-shot from his blog in propertyobserver.com.au:
Most market outcomes in recent times have made nonsense of the shortage claims. The fact that four of the past six years have been periods in which prices on average have fallen is inconsistent with the idea of a chronic shortage so bad it has been often called a crisis.
So too has the lack of rental growth in most of our major cities. In the past couple of years only Darwin and Perth have delivered major rental growth…
… Where there is no rental growth, you can safely conclude that there is no dwelling shortage.
This is economics 101. When there’s a shortage of something the price goes up. A shortage of properties to buy, prices go up. A shortage of properties to rent, and rents go up.
No argument there.
But in truth, that logic only applies in a market where goods are more less the same. Like oranges. Oranges are cheaper. You buy more of them.
But the housing market is not one of those markets. House are vastly different. And if houses become cheaper, you don’t buy more. You buy a better one.
And so it starts to get a little complicated.
The other thing is that most people in the media and so on, when they talk about a shortage, they’re talking absolute numbers. But “demand” is not just about numbers. Demand always has to be thought of relative to price.
Think about it this way. Say, under present conditions, your budget allows you to have demand for about $500,000 worth of house. Then conditions change. Say you have to take a bit of pay cut. Maybe now you only have demand for about $400,000 worth of house.
The shortage / oversupply balance hasn’t changed. But the level of demand has. And you could then witness downward pressure on prices even though there’s been no change to the supply demand balance.
And that’s why in a market like houses, prices don’t give you a completely clean read on the level of under or over supply.
And I could think of a number of factors that would put a bit of downward pressure on prices that are independent of the supply shortage. Banks have been cutting back on the amounts they’re willing to lend, and LVRs they’re willing to accept.
Likewise, households became pretty nervous after the GFC. They were worried about the global outlook and about their own job security. They started cutting back on debt.
And there was a lot of fear in the housing market in those days. People were watching the shake out in the US with terror. What if it happened here??
All of these things would have put downward pressure on prices.
Prices reflect any number of interconnected factors. And through the time Ryder is talking about, it just so happened that the forces putting downward pressure on prices, like miserly banks, offset the factors putting upward pressure on prices – like the shortage.
So it’s a neat argument that Ryder makes, but too simplistic for a market like housing.
And to look at it another way, have a look at this chart here. This is one of the most explosive charts I’ve seen in a while.
It tracks rental prices (in the inflation data) against population growth. You can see the correlation’s pretty tight.
But what jumps out at you is the disconnect that’s opened up in recent years. The population’s been growing strongly, but rents have been slowing.
This is exactly the conundrum we’re talking about. On one hand the population is growing strongly, exacerbating the shortage, which means rents should be picking up speed.
But they’re not. They’re slowing – suggesting to folks like Ryder that the market is soft.
But the question then is, what’s going to bring these two back into line?
Will it be a fall in the population growth rate (with mother and immigrants somehow responding to market signals)?
Or will it be a pick up in rents?
You know where I sit.