Room for debate: Is Australia's housing market under or oversupplied?

Angie Zigomanis, senior manager of BIS Shrapnel: 

There have been several reports on the number of households as reported by the Australian Bureau of Statistics 2011 census in relation to estimating the number of households nationwide. The most commonly reported number of households reported is 7.8 million.

Researchers and analysts have been using this number as a justification or otherwise of claims that the housing market is in undersuply are legitimate. However, a pure count of households or occupied dwellings in itself doesn't say much at all. A count of households and occupied dwellings just tells you that one equals the other. Therefore it doesn’t measure whether there is any underlying undersupply. However, an oversupply can be measured if there are a rising number of unoccupied dwellings.

Some analysts compare their count of the number of households with the National Housing Supply Council estimate of the underlying level of households to provide evidence that the market is in oversupply. The 7.8 million households at the census normally bandied about by commentators compares with the National Housing Supply Council underlying figure of 8.8 million households to imply the NHSC overstated households at 2011 by 1 million, and therefore its estimate of undersupply was actually an excess.

However, a closer look at the 7.8 million households quoted by most industry commentators shows that this figure is just plain wrong. This is the result of these commentators plucking a headline figure from the census data without taking a closer look at the numbers behind the numbers.

When looking at household numbers to determine demand, the number of households will equate to the number of occupied dwellings – i.e. when a household is created it needs to occupy a dwelling. However, the figure that most commentators refer to for the number of households falls well short of the number of occupied dwellings on census night. To find this figure, we need to examine the census data based on place of enumeration.

The place of enumeration count is the physical count of all households in the dwellings where they were counted on census night. This shows that there were 7.8 million households nationally. However, this actually only refers to the households for which they have obtained household structure information. There are two other categories of households occupying dwellings that have not been accounted for. These are "not stated" households and "visitor only" households.

“Not stated” households are dwellings where the census collector has confirmed that someone was present, but was not able to get a completed census form to confirm the household structure. This happens across all dwelling types but is most prevalent in high-rise apartment buildings, where it is difficult to access the dwellings to drop off and pick up the forms (which is why the internet was introduced as a means of filling out the forms). While the type of household has not been confirmed, there is nevertheless a household in the dwelling. There were 279,000 “not stated” households on census night across Australia.

“Visitor only” households are households where all the occupants are not at their usual place of dwelling. This could be overseas visitor households (but not necessarily short- term holiday households), dwellings where the occupant might be away for work, households that were at their holiday house on census night, etc. While not permanently living at the dwelling, they nevertheless reflect demand for dwellings as there will always be a component of the population occupying and requiring a dwelling on this basis. There were 143,000 “visitor only” households on census night.

When comparing households over time, a further adjustment can be made in 2011 for persons who were overseas on holidays. The high Australian dollar has meant that a greater proportion of Australians were overseas on census night. At the 2001 and 2006 census, around 1.7% of Australians were recorded as being temporarily overseas on census night. However, on the 2011 census night, around 2.1% of residents were temporarily overseas. Based on the 2011 population, this reflects an extra 100,000 or so persons, or around 40,000 additional households that weren't counted. Remember that the household count reflects the physical count of occupied dwellings on census night, so the dwelling would have been recorded as empty. Conversely, subtracting these households from the unoccupied dwelling count reduces the unoccupied dwellings from equivalent to 11.4% of households to 10.8% of households, which is below the 11% of households at the 2006 census – another indicator of a tightening market over the last five years.

Adding all of these components – 7.76 million households counted, 279,000 “not stated” households, 143,000 “visitor only” households, and an allowance for an extra 40,000 households being on an overseas holiday on census night than there would normally be – provides a total houshold count, and therefore occupied dwelling count, of 8.22 million occupied dwellings.

This is still well below the NHSC underlying household count of 8.8 million households in its most recent State of Supply report (although closer to BIS Shrapnel’s pre-census figure of 8.3 million that was used to calculate the underlying stock deficiency in the June 2012 editions of our Residential Property Prospects and Building in Australia reports). However, it should be remembered that the NHSC figure (and BIS Shrapnel’s) is not an estimate of actual households, but an estimate of the underlying requirement for households, which is the number of households that would normally be expected in an unconstrained environment – i.e. under normal dwelling supply and affordability circumstances.

BIS Shrapnel’s forecasts of households used in calculating underlying demand are based on trends over time in household formation rates across different age groups, which accounts for changes in demographic trends as well as the likely impact of housing affordability constraints on household formation. In many states it is assumed that the reduction in household formation between 2006 and 2011 due to a deterioration of affordability (both owning and renting) has now become permanent and is unlikely to recover in the foreseeable future. This then places most of the states at, or close to balance, in most states.

Based on the 2011 census data, BIS Shrapnel’s estimate of the deficiency at June 2011 is 37,000 dwellings, concentrated in New South Wales, where the number of households appears lower than it otherwise would be (than explained by prevailing trends in household formation rates) due to people being forced to squeeze into the existing dwelling stock.

A national deficiency of 37,000 dwellings at 2011 was insufficient to drive any upturn in dwelling construction in 2011-12. However, declining new dwelling completions, even at the lower level of new household formation rates derived from the 2011 census, have fallen below underlying demand in 2011-12, and a rising deficiency is now emerging. As the deficiency continues to rise, it will first be seen in vacancy rates (already evident in Brisbane and Perth), before flowing through to rental growth, construction, and some level of price growth.

Angie Zigomanis is senior manager of BIS Shrapnel.

Michael Matusik, founder of Matusik Property Insights:

So, does Australia have too few, too many, or is the situation just about right?

I am talking about new dwellings.

I have been arguing for some time that one of the biggest real estate myths in this country is that the new housing market is undersupplied; and often this situation is described with words such as “massive”, “chronic” or “enormous”.

But is it true?  As followers of the Matusik Missive know, I have tried to prove that it is false and with, for mine, with quite a degree of finesse.  Yeah, like a bull in a china shop.

Anyway, each year I like to go back and check the numbers.  And last week’s annual check-up has found that Australia continues to build more dwellings than we need.  A few years back – in 2008-09 – not enough new homes were being built, but in recent years, and despite the constant calls from the building industry for stimulus to help create even more new dwellings, we have been building too many.

In the 2009 financial year, Australia needed to build 167,000 new dwellings, yet only 131,000 or thereabouts were commenced.  However, in 2010 (all years in this post are financial ones), the supply-demand balance reversed, with just 121,000 new homes needed, yet 167,000 actually commenced construction.  During 2011 the industry continued to build far more homes than what was actually needed, to the tune of about 47,650 too many.

The good news is that the rate of overbuilding has slowed down over the last 12 months, with 137,000 new dwellings needed during 2011-12 and with 139,000 actually supplied.

However, dwelling supply (we are talking about actual commencements here and not approvals) is cumulative and since the GFC, Australia has built about 60,000 more new dwellings than it really needed.

Nationwide, we are currently oversupplied with new digs to the tune of about five months, based on current underlying demand.  In short, we could, as a nation, stop building for several months and still have enough new homes to fulfil our needs.

But of course, there are always swings and roundabouts.

Several states and territories are undersupplied, some are chronically oversupplied – I just had to get that in – while others have way too much stock.

Major oversupplies now exist in Victoria; South Australia, Tasmania and the ACT.

Since 2009, Victoria has created 69,000 (yes 69,000 – that’s five digits with a six at the front!) too many new dwellings.  This represents about a two-year oversupply based on the current annual underlying demand for 34,000 new dwellings across the state.

South Australia has built 18,000 too many new homes, but with a need to just build about 6,000 new dwellings per year, South Australia really shouldn’t need to build a new home for years, well close to three, in fact.

There are 6,000 too many dwellings built or being built in Canberra.  This equates to 30 months of supply.  And poor Tassie has also overbuilt, and also in the high 4,000 range.  But Tasmania’s situation is further exacerbated by its declining population growth.  Based on a continuation of last year’s paltry population increase of 1,000 people, Tassie’s 4,800 overbuild represents close to nine years of demand.  Now might be a good time to steal a new property on the Apple Isle.

The Northern Territory is now also oversupplied, with 350 too many dwellings created in recent years.  The demand for new homes in the territory is limited (at about 800 per annum), so this paltry 350 over-hang represents six month’s demand.

In stark contrast, New South Wales hasn’t been building enough new stock – no surprise there – but the undersupply is to the tune of 13,000 or about five months of current demand.

Western Australia is also undersupplied by about 23,000 dwellings at present, which equates to about a nine-month demand.

Finally, Queensland has a new dwelling short-fall of 2,800 or two weeks of undersupply.

Last year’s statistics, however, suggest that Queensland is now heading towards a massive undersupply, with 33,000 new dwellings needed during 2012, yet just 26,000 supplied – an undersupply in the tune of about 20%.

Let’s hope the Newman government’s recent $15,000 first-home buyers' grant for new construction kicks some arse.  But for mine, it will not deliver the spanking it was intended to.

Michael Matusik is the founder of Matusik Property Insights, which has helped over 550 new residential projects come to fruition.  Read Michael's blog or follow him on Twitter or connect via LinkedIn.