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.