It’s hard to pick exactly how big the housing shortage is right now, but looking ahead, it’s only going one direction – and that means rising prices as far as the eye can see.
I’ve been saying for a while that Australia just hasn’t been building enough houses. Because new supply’s been falling each year over the past decade, a housing shortage has opened up, and this is perhaps the dominant factor driving the current boom in prices.
Not enough houses = people bidding up the prices of those that exists. Economics 101.
It’s on full display in Sydney and also in Melbourne. It’s not as stark in the other capitals, but mostly because immigration hasn’t boomed the way it has in Sydney and Melbourne.
And that’s been one of the key drivers – an unexpected surge in immigration has helped pump the population numbers. Prior to the GFC, annual immigration averaged less than 150,000 a year. Following the GFC it jumped to over 200,000 a year.
That’s a big difference.
Economics drives migration. When our economy is out-performing the rest of the world, Aussies stay home rather than work overseas, and more foreigners come to live here – driven along by a demand for skilled labour.
And the vast majority of immigrants tend to land and settle in either Sydney or Melbourne. And that’s why I reckon we’re looking at major housing booms in Sydney and Melbourne right now, with less evidence of heat in the other capitals.
So the question then is, how big is the housing shortage, and how long will it last?
Unfortunately, there’s no clear way to pin this down, and there are a lot of fungible factors.
Before it was disbanded, the National Housing Supply Council argued that there was a major shortage in Australia. They were basing this off a measure that ANZ used to use to gauge the demand/supply balance.
It was useful in the sense that it tracked population inflows and new housing supply, but it picked the year 2000 as an arbitrary reference point. As a result, you could only say whether the shortage was bigger or smaller than it was in the year 2000. You still couldn’t get a feel for how out of whack the market was.
In fact, I’d probably argue that there was already a shortage building in Sydney in the year 2000. Since then, as the numbers show, it’s only gotten worse.
And from here, it’s only getting worse still.
Sydney and Melbourne are growing rapidly. Melbourne is pipped to get close to 8 million by the middle of the century. Sydney is looking for 7 million.
That’s pretty solid growth.
And all those people will need somewhere to live.
The NSW government has done its sums. Over the medium term, they reckon there’ll be an extra 2 million people by 2031. 2 million in just 16 years.
They also reckon they’ll need an extra 660,000 homes to house all these people.
Well, let’s put that in perspective. What they’re saying is that they’ll need about 40,000 new homes a year.
But how likely’s that? In recent years, home building rates have dipped as low as 10-15,000 a year. 20-25,0000 is considered a good year.
This chart here tracks House and Unit completions in NSW. Since 1984, we’ve averaged about 15,000 new homes a year. But we’ve been below even that meagre average since the start of 2005.
So 40,000 a year would be bumper, almost off the charts.
To do it even once before the decade is out would be noteworthy, almost incredible. But to do it every year for the next 16 years…
Just to show what that might look like, and just to make the point….
If that were a realistic scenario, I’d be bailing out of property itself and sinking everything I had into the stocks of builders and brick manufacturers.
But it’s never going to happen.
And part of the reason is that just as there’s more and more demand for new housing, it’s going to be more and more difficult to bring new houses to the market. Greenfield land on the city fringes is already starting to dry up, and NIMBY resistance to urban consolidation and greater use of apartments in the inner cities is going to block that avenue too.
The recently released Plan Melbourne pledged to build 1.6 million new homes by 2051, and two-thirds of them apartments. That’s an admirable target, but I haven’t seen a politician yet that’s been able to convince vocal and well-resourced inner-city residents to give up their quiet leafy lifestyles in return for more apartment blocks and town houses in their neighbourhood.
The Sydney plan for example, is asking the inner city LGA of Leichardt to build 75 new homes a year. Given Leichardt is pretty much built out, that means converting say, about 20 free standing homes a year into a block of units, say.
It won’t be long before that starts to ire the locals.
But the irony is that a lot of people argue that even 75 a year doesn’t go far enough, and we’ll need a lot more from our inner cities.
For my money, unless there’s some radical seismic shift in housing and land policy, or in our attitudes to housing, I can’t see how we’re going to build enough homes to house everybody.
And so that, pretty much locks in a shortage as far as the eye can see.
And as long as there’s a shortage, there’s rising prices