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Australia's double housing trouble
Karen Maley
Published 5:00 PM, 17 Sep 2010
The Australian housing market has most people scratching their heads. On the one hand there are those such as veteran US funds manager, Jeremy Grantham, who are convinced that our market is an unmistakable housing bubble.
On the other hand, many analysts claim that high house prices are a direct result of a crippling shortage of supply, caused by restrictions on the rezoning of land on the edges of major cities, and policies that force property developers to foot the bill for the cost of delivering water, sewage, road and electricity to new housing estates.
The issue has aroused even greater attention in recent weeks, as a number of hedge funds have amassed short positions on the Australian banks, expecting that an eventual steep drop in house prices will leave banks nursing heavy losses.
Goldman Sachs’ chief economist Tim Toohey has made an extremely valuable contribution to the debate, in a comprehensive 70-page report, A Study On Australian Housing: Uniquely Positioned Or A Bubble?, that takes a close look at the different forces driving the Australian housing market.
Toohey’s conclusions offer something for those on both sides of the debate. He argues Australia does indeed face a looming and acute housing shortage. At the same time, he estimates that Australian housing prices are currently between 25-35 per cent overvalued. As a result, he says, we run the risk that Australia’s house prices could drop sharply if a sharp decline in Chinese growth prompted a steep drop in our export earnings.
The report points out that Australia’s population is currently growing at its fastest clip since 1969, rising by 2.1 per cent year on year. As he notes, this rate “is more reflective of a developing nation than of comparable wealthy developed nations”.
This faster population growth partly reflects a spike in the birth rate. But rising net migration is even more important, accounting for two-thirds of population growth.
The trouble is that over the past six years, Australia has not been building homes at a fast enough rate to meet the needs of its surging population.
As the report points out, in the 20 years between 1985 and 2005, Australia built an average of 150,000 homes each year for every 240,000 increase in population. That translates to 60 per cent of a new home constructed for each new person.
But in the past six years, this trend has changed. By mid-2009, the population had to rise by 480,000 in order to achieve the 150,000 new homes constructed in a year. For each new person, only 30 per cent of a home was constructed. It’s even worse in NSW, where only 20 per cent is constructed for each new person.
At the same time, there’s a huge change in the demand for housing, as the children of the Baby Boomers are now hitting the key household formation age.
Over the past five years, there’s been a surge in the growth rate of the 25-29 age group – which has been rising by an average 3.7 per cent each year. This will result in an average 2.7 per cent annual growth rate in the 30-34 year age group in the five years to 2016. This is a dramatic increase, considering these two age groups averaged growth rates of less than 0.3 per cent per annum for the 15 years up to 2006.
The combination of these two factors – the increasing population, and the growing number of people in the key household formation age – is setting the state for a chronic housing shortage.
Karen Maley
Published 5:00 PM, 17 Sep 2010
The Australian housing market has most people scratching their heads. On the one hand there are those such as veteran US funds manager, Jeremy Grantham, who are convinced that our market is an unmistakable housing bubble.
On the other hand, many analysts claim that high house prices are a direct result of a crippling shortage of supply, caused by restrictions on the rezoning of land on the edges of major cities, and policies that force property developers to foot the bill for the cost of delivering water, sewage, road and electricity to new housing estates.
The issue has aroused even greater attention in recent weeks, as a number of hedge funds have amassed short positions on the Australian banks, expecting that an eventual steep drop in house prices will leave banks nursing heavy losses.
Goldman Sachs’ chief economist Tim Toohey has made an extremely valuable contribution to the debate, in a comprehensive 70-page report, A Study On Australian Housing: Uniquely Positioned Or A Bubble?, that takes a close look at the different forces driving the Australian housing market.
Toohey’s conclusions offer something for those on both sides of the debate. He argues Australia does indeed face a looming and acute housing shortage. At the same time, he estimates that Australian housing prices are currently between 25-35 per cent overvalued. As a result, he says, we run the risk that Australia’s house prices could drop sharply if a sharp decline in Chinese growth prompted a steep drop in our export earnings.
The report points out that Australia’s population is currently growing at its fastest clip since 1969, rising by 2.1 per cent year on year. As he notes, this rate “is more reflective of a developing nation than of comparable wealthy developed nations”.
This faster population growth partly reflects a spike in the birth rate. But rising net migration is even more important, accounting for two-thirds of population growth.
The trouble is that over the past six years, Australia has not been building homes at a fast enough rate to meet the needs of its surging population.
As the report points out, in the 20 years between 1985 and 2005, Australia built an average of 150,000 homes each year for every 240,000 increase in population. That translates to 60 per cent of a new home constructed for each new person.
But in the past six years, this trend has changed. By mid-2009, the population had to rise by 480,000 in order to achieve the 150,000 new homes constructed in a year. For each new person, only 30 per cent of a home was constructed. It’s even worse in NSW, where only 20 per cent is constructed for each new person.
At the same time, there’s a huge change in the demand for housing, as the children of the Baby Boomers are now hitting the key household formation age.
Over the past five years, there’s been a surge in the growth rate of the 25-29 age group – which has been rising by an average 3.7 per cent each year. This will result in an average 2.7 per cent annual growth rate in the 30-34 year age group in the five years to 2016. This is a dramatic increase, considering these two age groups averaged growth rates of less than 0.3 per cent per annum for the 15 years up to 2006.
The combination of these two factors – the increasing population, and the growing number of people in the key household formation age – is setting the state for a chronic housing shortage.
[Mod: for copyright reasons, best not post entire articles.]
Of course.
