The Australian property market is subject to the forces of supply and demand, just like any other market. At the base level, demand remains exceptionally high for Australian property while supply additions are trending downwards. This imbalance will inevitably place upwards pressure on property values over the medium to long term.
In recent times there has been much conjecture and speculation about where Australian property values are heading. The nations economists and commentators are divided with some predicting large falls in values and others predicting impressive gains. Predictions of this nature are often based on opinion and observations rather than an empirical examination of the market fundamentals. This week’s Property Pulse goes back to basics to examine the fundamental determinants of price growth: the relationship between supply and demand.
Demand for housing Demand for housing is mainly determined through demographic changes. The primary determinant is population growth: an increasing population implies an increasing demand for housing. There are other demographic factors that need to be considered also, such as changes in household size, rates of divorce and patterns of household formation.
Australia is currently undergoing a population boom with population growth of more than 330,000 last year. In raw numbers, Australia’s population growth has never been higher. Over the 2007 calendar year almost 180,000 net migrants arrived in Australia. Migration will be boosted even further this year with the Federal Government approving a 30% boost to the skilled migrant intake for 2008/09.
At the same time the rate of natural increase is also ramping up. Last year there were just over 140,000 more births than deaths. The rate of natural increase hasn’t been this high in six years.
Compounding the level of demand is changing family characteristics which are causing the average size of the Australian household to diminish. Higher rates of divorce, more single person households and couples delaying having children are all contributing to the smaller average household size. According to the 2006 Census there is currently an average of 2.6 persons per household and this figure is forecast to fall to between 2.2 and 2.3 people per household by 2026.
Supply of housing Housing supply additions can be measured simply by counting the number of new homes being developed. New home additions can be affected by economic factors such as the availability and cost of labour and raw materials. According to Australian Bureau of Statistics figures, dwelling completions have been trending downwards since September 2005. In a time of record population growth, there are simply too few new dwellings being built to house the growing population.
In addition, land availability can also constrain supply. While there are vast tracts of land throughout Australia that is capable of being developed, strategically located land that is within close proximity to quality infrastructure and amenity is becoming very scarce. Land scarcity becomes tighter the closer one gets to the capital cities and major regional centres, which is why inner city areas tend to outperform outer suburbs in the value growth stakes.
A recent analysis prepared by the Commonwealth Treasury provides an excellent insight into the demand supply imbalance that is becoming increasingly evident in Australia. The Treasury estimates that demand for housing will increase to over 200,000 homes per annum by 2010 due mostly to high rates of migration and natural population growth. In contrast, the forecast for new supply is hovering around 150,000 to 160,000 dwellings per annum. This demonstrated imbalance between supply and demand will be the fundamental driver placing upwards pressure on Australian property values.
The current low levels of consumer and business confidence have caused a lull in consumer demand, however at the base level demand for Australian dwellings remains strong. When viewed in light of the ongoing shortfall in dwelling supply, Australian property values can only go one way, and that is up. The real question is not will price growth return to the market, but when. This is a harder question to answer, as it largely depends on a large scale return of home buyers and investors to the market, which in turn, is dependent on an improvement in confidence. Recent economic data, as well as statements from the Reserve Bank, indicate that the cycle of interest rate rises is over and we will shortly start to see official rate cuts. This news will no doubt have a positive effect on consumer and business confidence, with a gradual flow on affect being higher levels of activity in the property market. Potentially, the window of buying opportunity could be closing by the end of 2009.
Source: RP Data Property Pulse
Thursday August 7, 2008
You should not rely upon the opinions expressed in this report for any investment decision. RP Data will not be held responsible for any loss or damage suffered as a result of relying upon the opinions and information contained in this report. You should always take specific advice from a professional advisor so that your particular circumstances can be assessed and an investment decision appropriate to your circumstances can be determined.
