In my last article I noted how housing supply seems to be falling further and further behind demand.
Each year we build fewer and fewer houses. And over the last ten years, growth in the housing stock failed to keep pace with population growth. This is the first time this has happened since WW2!
This has a few really important implications.
The first is that all this talk of a bubble is completely over-blown. (hey? How’s that for a pun? Put that in a Christmas bon-bon.)
Because unless there’s a glut, then there can’t be a bubble, and unless there’s a bubble, then there can’t be a bust. This is one of the most important differences between the Australian story and what happened in America.
We also know that if supply is falling further and further behind demand, then there must be upward pressure on prices. This is as true of housing as it is of any market.
And so this supply shortfall goes a long way to explaining the trend increase in house prices we’ve seen over the past 50 years or so. Not the full story, but a fair bit of it.
And supply doesn’t look like it’s going to come bouncing back anytime soon. This means we can expect to see continued upward pressure on prices.
And all that is true for a given level of demand. But the truth is that there are major structural and demographic changes happening on the demand side that mean the supply and demand gap is getting even bigger.
Which of course means we’ll see bigger and bigger price increases.
So what’s happening on the demand side?
Well, in a nut shell, we’ve seen a bunch of changes that means we need more houses for the same number of people. That means that actual demand for housing is actually growing even faster than population growth, which itself is already growing faster than supply.
Over the past 50 years there have been significant changes in the way we live. Take average family sizes for example. As fertility rates dropped, average family size has been on a steady downward decline for decades now. That means we need more houses to accommodate the same number of people.
At the same time, family breakdowns have split many families in two, effectively doubling that family’s need for housing.
And what’s more, a steadily ageing population has resulted in more people living alone, again meaning we need more dwellings to house the same number of people.
And according to the 2011 census data, of the homeowners aged 70 and over who live alone, 62 percent have a house with three or more bedrooms. That adds up to 238,078 houses with at least three bedrooms occupied by just one person.
Among houses owned by older couples (with at least one partner aged over 70), 82 percent – or 332,752 houses – have at least three bedrooms.
And the Australian population is only getting older, so we’re going to need more and more housing. Some older people might downsize into something more practical, but people are generally reluctant to leave their communities and the family home.
Together, these structural and demographic factors – smaller families, more split families, more older single-person families – mean that the average number of people per dwelling has been on a long-run downward trend for over a hundred years!
That’s what this chart here shows:
What’s interesting here though is notice the small pick up between the 2006 and 2011 census. That’s the first rise in at least 100 years!
How do we explain that? Well, I don’t think there’s been any change in Australian preferences. What I think it reflects is tighter economic conditions through the GFC.
As money became tighter, people started share-housing, kids moved back in with their parents, or delayed starting out on their own.
If that’s true, what it points to is even more pent up demand. As economic conditions continue to solidify around the country, people will look to head back out on their own, and the average household size should return to trend.
And ultimately what the downward trend in household size means is that actual housing demand is growing faster than population growth. So if we know that population growth is growing faster than supply, then we know that actual housing demand is growing even faster than supply.
Of course, the other important factor here is the expansion of investor demand over the past 30 years or so. I’m planning to write a bit more about that later.
And so looking back at the past 30 years, it’s not hard to see demand for housing to live in, combined with demand for housing to invest in, running far, far ahead of supply.
And so when I look at the prices rises we’ve seen, I just don’t see a bubble. The price rises we’ve seen make perfect sense.
And I see these dynamic continuing to drive the market going forward. Unless there’s a slow down in the rate of population growth (unlikely) or an increase in the average household size (very hard to see where that would come from) OR there is suddenly a lot more supply brought to market (how?), then undersupply and growing prices will be the norm for many years to come.
Add to that the lowest interest rates in 50 years and a cyclical upswing out of a prolonged soft patch, and you’ve got all the ingredients of a boom.
Simple as that.