Rising construction rates aren’t doing anything to dampen the boom in prices? Why is that? Is it because we’re obsessed with building the ‘slums of the future?’ rather than real houses?
Here’s a riddle for those folk who like your who-dunnit, murder mystery type things.
New housing supply is coming on-line at a rapid rate. Construction is booming, but prices are still growing strongly.
Oh, and we found a dead guy down near Johnson street with no i.d and his fingerprints burnt off…
What’s going on here? Our basic economic model seems to be broken. Prices start rising (the boom phase) and that encourages suppliers to supply more (builders to build more houses). Houses become more plentiful, bidding wars go cold, and prices start to cool.
That how it works in any market (the entire capitalist system is built on the belief that the market will sort itself out in this way). It’s how it should be working in housing, right now, but it’s not.
It’s a riddle wrapped in mystery.
So let’s pick it apart. First up, we’re in the middle of one of the best construction booms in history. Total housing construction has jumped to the highest level in 25 years! (That’s the blue line in this chart here.)
So far, so good. This is what you’d expect. The housing market (in general and overall) is moving into a boom phase and prices are growing strongly. 10% on average across the country.
As prices rise, more supply should start coming on line. And that’s what we’re seeing. Construction rates have spiked.
But for some reason it’s not taking the heat out of prices. Most analysts still expect prices to keep growing strongly over the foreseeable future.
The key to understanding it I reckon is the breakdown of housing construction between houses and units.
Houses (the gold line) have picked up in recent months, especially in the last couple, but they’re no where near record levels. They’re still quite aways lower than they were back in the 2009 boom. In fact, they’re lower than they were back in 1995.
Yep. You heard right. In the middle of a construction boom we’re still building less houses than we did in 1995, despite our cities bursting at the seams. There’s that constipated planning system for you.
So what’s really driving the current spike in construction is apartments. Apartment construction’s been driving higher for several years now, and has really accelerated in the past couple of months.
And while house construction is below historical levels, apartment construction is some 30% above historical peaks.
This is where the boom is.
In the most recent data, apartments accounted for a record 42.3% of total construction. That’s up from around 30% in the years leading up to the GFC.
But that’s the national figure. In NSW it’s more than half. In the ACT its 68%! What’s going on there?
Anyway, this is the changing shape of national housing construction. More and more apartments.
But how does this help solve our riddle. New housing is new housing, and surely it should all help take the edge of prices.
Well, that’s only partly true. It’d be more true if the shift to apartments purely reflected people’s changing preferences. That they just liked living in apartments more than houses.
There is some of that. Retirees looking for lower-maintenance pads, and young trendies wanting to be close to the action. But I reckon the main driver of the shift to apartments is pure economics – they’re just cheaper.
So I reckon a lot of people living in apartments would be living in houses if they could afford to. So that means we can end up with a two-tier market. And a boom in apartment construction can have a direct impact on apartment prices, but a much less direct impact on house prices, and the housing market over all (since the market is still dominated by houses.)
The other point to note is that the data suggest that apartments are getting smaller. Instead of family town-houses we’re getting shoe-boxes fit for students but not much more.
According to the AFR, the average size of a new apartment has shrunk from 60 square metres five years ago to between 42 and 45 square metres today. That’s a big drop. And a recent report from the Melbourne City Council said that 40% of Melbourne’s newest apartments are smaller than 40 square metres!
That’s tiny. Melbourne has had to introduce new building standards, including minimum floor size restrictions, to stop developers filling the sky line with “the slums of the future.”
I think a big part of the story here is that right now, a great bulk of new apartment construction is being marketed directly to foreign investors. Many of these buyers come from nations where there’s a more common apartment culture (think Hong Kong).
I wonder if these buyers understand that, in the Australian context, 40m2 is little better than a kennel, and the resale possibilities are very limited..? They might be in for a shock.
Anyway, so while they might count the same in the construction statistics, a 4-bedroom family home is not the same as a 40m2 shoebox.
And people aren’t students forever. After a few years, they’re looking for an apartment that offers a bit more space and a bit more lifestyle. A few years after that, they’re starting a family. And ‘in family’ is where we spend the bulk of our lives.
So a boom in shoe-box construction might take the edge of the price of a shoebox, but it will do nothing to dampen prices for ‘real’ dwellings.
And that’s my best guess at why the recent construction boom is not and will not take the edge of rising prices in Australia.
And the take home for investors? Keep a close eye on that apartment market. Looks like some segments are becoming over-supplied. Right now, the long supply-deprived detached housing market looks like a better bet.
Sow says
Guilty as charged. I’m building a 35m2 granny flat and I thought that it was small, but these new 40m2 apartment makes me feel better about building this shoebox.
I couldn’t live in it myself. But in Blacktown, there are alot that would do it. Have you seen the ruts around..?
kenny nguyen says
thank for the news. Keeping on working hard we make bigger units for you guys. cheers. (GM) Kenny Nguyen.
Ken. says
I think that anyone who benefits out of a unit is the PARASITICAL body corporates. Hate them like a hole in the head.
Broc winten says
Toowoomba is the hottest property market in Aus and hadn’t even got into 1st gear yet!
Nathan Ellery says
Banks wouldn’t lend on any unit less than 50m2. I just recently had to adjust a part wall to make the min. Maybe their financing comes from overseas or maybe it’s just cash.
Ken. says
I know banks won’t lend for a studio unit. It must have a separate bedroom.
Tom says
Transport ‘times’ & ‘costs’ are big influences in making decisions about ‘location’. Proximity to public transport is becoming more and more significant in most people’s ‘quality of life’ decisions. Logically, medium density housing is generally located conveniently close to services and amenities.
Obviously, down-sizing Boomers, singles and young couples are gravitating to the well located units.
Many youngsters are staying longer with parents, while they finance their first investment property. This latter is often a unit, because of the lower deposit and repayments compared with a suburban house. With the high cost of ‘family homes’, many of the younger set, singles & couples, are deliberately starting small, in anticipation of later up-sizing to a location where suitable schooling and sporting facilities will be available. Paid maternity leave and provision of child care centres enable them to now anticipate an extended period in their relatively cheap unit, while they build more equity, before up-sizing.
The ROI on such a unit may be less than on a ‘proper house’, but there will always be a ‘next generation’ following them in this system of achieving the great Australian dream. There will always be a market, even though it may fluctuate. It seems reasonable to expect that in the longer term which they envisage, the sale price should more or less keep up with the ‘house’ market, while their equity increases. Some, with diligent saving, may even be able to keep their unit as an investment and source of income.
Also, the smaller deposit and repayments required for units, together with an anticipated high occupancy rate in well serviced areas, makes these most attractive to SMSF investors. This latter group of participants are in it for the long haul, so their properties will permanently be locked out of the market. Fluctuations in the market will have very little effect on such investors, except in the way that rental income, often with long-term leases, may plateau or increase in fits and starts.
Overseas buyers, as I understand, are more likely to be investing in their properties long term, rather than for trading. They know from their home country experience that the proportion of renters, compared with owner occupants is always going to increase, partly because the poor often have larger families, to provide some security in old age. Moreover, they know that market forces will in the long term drive society more and more towards a two-tier structure of ‘Haves’ & ‘Have-nots’, drastically reducing the size of the middle class – as has been happening in USA. But everybody still needs somewhere to live. Where will our future slums be? Probably in areas where public services are proportionately less readily available – where density is high while amenity is low. Try to avoid building or buying in those areas. Also, if you are anticipating a long-term investment, try to avoid buying in lower-lying areas!
Inevitably, climate change is going to raise sea levels dramatically. The millions of tons of coal, (carbon locked away since the high atmospheric CO2 period of the Carboniferous Age), which we are allowing to be extracted and exported to China and India will accelerate the process dramatically. There is no point in worrying about the effect of dredging & dumping of spoil at Point Henry and elsewhere. Burning all the coal that is going to be shipped through the ports will inevitably cause the water temperatures to rise, killing ALL the coral, regardless of the water quality on The Reef!!! Any good intentioned intervention can only be a stop-gap measure, delaying the inevitable catastrophe for a few months or a few years.
Our greedy, short-sighted businessmen and their puppet politicians are making money in the process of completely destroying Nature, then they will tax us further to try to ameliorate the damage they have caused. Thus the rich will continue to get richer and the poor will get poorer. Humanity is doing a ‘lemming’. Actually the ‘lemming’ phenomenon is a completely fictitious myth!!! But we are definitely stampeding towards that proverbial cliff, doing a ‘Homo sapiens’, though without any sapientium!!! What a misnomer in our species’ scientific Linnean nomenclature. It should be ‘Homo stupidus’ or ‘Homo greedius’ or ‘Homo self-destructus’!!!
dean says
well written. Thankyou. I thought Homo Idioticus also fits…perhaps these are all sub species. Maybe house boats are the answer.
Mark says
Continued growth in Aus resi house prices is being purely driven by rampant speculation.
Our current valuations are absurd, and are rapidly becoming a real “hand brake” on the economy.
It is absolutely assured that prices will at some point revert to the mean, and the speculators will be burnt.
What most people seem to forget is that normal supply and demand models do not apply to housing.
That is because one of the basic assumptions in the S/D model, is that supply and demand need to be independent.
In the housing market, this is clearly not the case.
Also, when modelling price discovery for say, hamburgers, whether you already have a hamburger or not, doesn’t affect your ability to buy another hamburger.
In housing, if you already own a house, your ability to buy another one is vastly different to someone who doesn’t have one already…..So we probably need at least 2 demand curves……
Another example of conventional S&D modeling breaking down comprehensively when it comes to houses….
Housing and its impact on the economy is so poorly understood, but so absolutely critical to the economy in the long run…..
Sigh…..
Mark
ian says
Tom – your comments on climate change are ill informed – you are believing all the political spin and bullshit around this – but the discussion is about property. Before I move on however your other comment about “Our greedy, short-sighted businessmen and their puppet politicians are making money in the process of completely destroying Nature, then they will tax us further to try to ameliorate the damage they have caused” – these comments show you are a wanker and probably a loser – all because of your negative attitude. Get your facts right before you criticize others and “tar all businesss people with the same brush”.
.While we have population growth of over 450,000 people per annum the demand/ supply curve will always be out of balance – and prices will remain high. I read a report with this heading today “1 out of 7 of the 10 million wealthiest families in China intend to migrate to Australia”. If this is the case demand will continue for a long time and there will continue to be price growth in quality property.
anotherwanker says
Ian..such vitriol. and ill disguised aggression.. Phew….some counterpoints….Yes, you are probably right : to call Tom a wanker is probably scientifically correct. just as you yourself and I am too. Dont tell me your conservative/ religious upbringing managed to deny you the odd good feeling fondle of your package occassionally.? Damn sad for you if it did.. Still…i bet ya might deny this too. But, to call Tom a loser?. Just because Tom perceives …understands and accepts scientific data…not the spin that pro business lobbies and short sighted pollies ‘spin”, in direct contradiction to the overwhelming majority of scientific research on climate change, and sees how this can impact housing, is, well, sad.
To be in denial of climate change, AND the role that big business and its powerful lobby groups have on politics,locally, nationally and internationally’ , and how these issues can impact so many things, including the housing market, is to have ones head firmly stuck up ones…whoops…i mean in the sand…
Steve Weingarth says
If you want to live in a World City like Sydney with limited land for urban growth,unlike Melbourne,expect to pay for the privilege. There are still suburban areas offering good value for money as I’ll mention.
In the mid 70s you paid about about 6 times a teachers salary to buy a 2br unit in the inner ring -now about the same-maybe 7 times. A big 2 br unit in Lane Cove was mid 250K 20 years ago now 3 times that for the same unit, as I know. A teachers salary rose 2.5 times in that 20 year period.
You can still buy a 4 br new house in the Nepean/Penrith area for around 600K-affordable and value,with a 400sq.m block or pay this for a dog box 1 bedder in the inner suburbs.So there are different markets.
I like Lane Cove but there is nothing wrong with living in new suburban estates in Glenmore Park or Mulgoa near Penrith especially if you have a family and don’t have to commute to work in the CBD. I rent a house to a family in Glenmore Park after buying land and having a house built after checking out this part of Sydney. Its a great community with virtually no social problems.
All the amenities,schools,hospitals,shops and cultural facilities most people want are around Penrith.Its a quick no toll trip down the M4 to the CBD,Parramatta etc. and in the future will be 15km to the new airport at Badgery’s Creek. This is going to help a further boom in the housing market out West.
Sydney is not one housing market. Where is the best value for money and rental returns? I believe it’s in Western Sydney in the areas mentioned. If you want to live within 10Km of the City centre expect no value for money and life in a sub 80 sq m dog box for the same price as a 200 sq m house and land out West. Nearly every immigrant wants to come to Sydney including wealthy international business people so Sydney prices will continue to soar as demand exceeds housing supply and money floods in from China and other sources.
Steve W (Geography teacher/filmmaker)
garyandbobbi says
Can you tell me why the bloke in your first comments name is Sow and I find him on another site and about something totally different and his name is Sam, maybe he is schizophrenic and not quite sure about his name eh!!!
Sow says
I wasn’t aware your such a keen stalker of me. Yes, since people don’t remember ‘Sow’ then my other ‘english name’ is Sam. Besides, what does that have to do with the article?