We’re still not building enough

 

One of the main drivers of the Australian property market over the past 20 years or so has been a shortage of housing.

For whatever reason, we just haven’t been all that good at building enough houses.

And if a market is under-supplied, then prices will grow. That’s economics 101.

But has that story been changing?

We hear a lot these days about how apartment construction is booming. How each year we’re building a record number of apartments. How our capital cities are exploding with them.

So does all this change the story?

I mean, if we had an undersupply, do we now have an oversupply? And if there’s an oversupply, doesn’t economics 101 tell us that prices will fall?

The short answer to this is no. No there isn’t an over supply now, and no prices are not going to fall.

Why?

Population growth.

While we have been building apartments like it’s nobody’s business, our population has also been growing exceptionally quickly. Very fast actually.

In fact, at the same time as we’re building apartments in record numbers, we’re actually welcoming new Australians to the fold in record numbers as well.

Take a look at this chart here. This tracks building approvals and completions, and compares it with population growth in Australia.

Population growth is in green. As you can see, population surged ahead of construction between 2005 and 2013.

That means 8 years of under-supply. That created a huge shortage in the market, and prices boomed.

But then construction picked up. From around 2012, construction soared to record heights, almost entirely on new apartment building.

Through 2015, as population growth fell and apartment construction continued to boom, it did look as if maybe the shortage would be unwound, and price pressures would be reduced.

But then came 2016. At the same time as apartment construction began to stall, population growth started accelerating.

Fast forward to today, and you’ve got construction falling just as population growth is getting back to record highs.

If this story doesn’t change soon, we’re heading back towards shortage again…

… and more pressure on prices.

And so I’m looking at all of this and it’s hard to see any scenario where prices fall for any protracted period of time.

Remember its over-supply, and only over-supply that brings prices down and keeps them down.

Sometimes prices will fall when there’s a contraction in credit – when lending standards tighten or interest rates rise.

But credit cycles tend to be temporary. They don’t last long. And once they ‘normalise’ and come back to ordinary levels, it’s the supply and demand balance that determines where prices will be.

And right now, the fundamental, underlying balance is still one of shortage. It’s still one that supports price growth in the medium term.

All the apartments in Melbourne aren’t going to change that.

What’s your sense of where the market balance is at?

Spiro Kladis
Managing Director, Cashflow Capital

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  1. Thomas
    4 weeks ago

    OHi!. Guys and girls, would like to kno more abo