Our previous paper showed that there is very likely to be oversupply of homes in Australia. Now we want to see where all that oversupply is located. We will make comparison between different states in Australia and add comparison with some of the states in USA that are well known for their housing bubbles followed by oversupply. This way we may get a feel about different supply/demand values compared to other areas with similar demographics.
We used data is available for all selected states and territories. Population growth and new dwelling construction data is used. There is no data available with detailed breakdown of new resident population for each state or territory. We also compared Australian states and territories with a couple of USA states that had large housing bubbles followed by price collapse and huge oversupplies of homes. We also included Texas, high population growth state that didn’t experienced housing bubble in last two decades, as an opposite reference.
USA is selected for comparison because of very similar demographics to Australia. Main supply/demand demographic measures such are household size and change in household size, median age, population over 65 and under 14, birth rate, dependency ratio, percentage of one person households, urban population growth etc) are very similar. For new construction data in Australia we used ABS New Dwelling Unit Commencements data. For new construction data in USA we used New Private Housing Units Authorized by Building Permit provided by Federal Reserve Bank of St. Louis. Number of newly constructed dwellings for US is likely to be slightly lower because not all approvals are commenced. We used data for the most recent period from June 2000 to June 2010.
We calculated two simple measures that we call: Rate of Construction and Rate of Occupancy. Rate of Construction is a number that shows how many new housing units are constructed per every new resident. Rate of Occupancy is the inverse number that shows number of new residents per each newly constructed housing unit. After calculation we got a few surprising results:
Table 1. Rate of Construction and Occupancy
Chart 1. Rate of Construction (new dwellings per new resident)
Contrary to widespread belief, Queensland is the state with the lowest Rate of Construction in Australia (NT has even lower rate). South Australia, on the other hand, is the state with the highest Rate of Construction. Expectedly, high Rate of Construction is recorded in Victoria and ACT but surprisingly WA is ranked in lower half, followed by NSW, QLD and NT that had very low construction rate.
Even more surprising is comparison with housing bubble states in USA. South Australia has significantly higher Rate of Construction than any of the famous bubble states in USA. Victoria had very similar rate to hugely oversupplied Florida. NSW has higher Rate of Construction than Arizona, Nevada and almost 20% higher than California, state that is currently dealing with hundreds of thousands of empty homes. On the other hand, all Australian states have significantly lower rate than Texas, state with the large population growth but stable house prices with no housing reported shortage.
All this suggests that widespread beliefs about shortage/oversupply in Australia are wrong. Queensland is the state with the lowest Rate of Construction because its population grew much faster. Almost all Australian States built more dwellings than bubble states in USA that are currently dealing with huge numbers of empty homes. It is also important to notice that at the peak of the price bubble, almost all of these USA states were considered to have a shortage. That was proven to be wrong after bubble bursted and speculative demand fell.
It is very unlikely that there is any housing shortage (on state level) in Australia, but if there was one Queensland and NT were the most likely to have it. This is very surprising because Queensland is the state that will be pointed out as oversupplied state by most of Australians.
Recent data shows that low construction state’s (Queensland and Western Australia) housing markets are falling, with unsold stock growing and oversupply becoming apparent. If these states with relatively low Rate of Construction are facing oversupply problem, we may expect to be followed by even more oversupplied states like Victoria, South Australia, Tasmania and New South Wales.
References:
- ABS 3101.0 - Australian Demographic Statistics, Jun 2000, June 2010
- ABS 8750.0 Dwelling Unit Commencements, Australia, Preliminary Dec 2010
- United States Census Bureau - Census Data 2000 and 2010
- Federal Reserve Bank of St. Louis – New Private Housing Units Authorized By Building Permit
Nice work Raveswei. This is turning into a very nice blog. I conducted a similar analysis back in July last year.
ReplyDeleteI have always considered the shortage argument to be a furphy. What is important is the cost and responsiveness of housing supply to changes in demand. If regulatory barriers are in place that prevents new housing from being added quickly and cheaply, then you are more likely to experience housing bubbles/busts. But if supply is able to quickly respond to changes in demand, as is the case in Texas, then increases (decreases) in demand are more likely to result in increases (decreases) in new construction, rather than increases (decreases) in prices.
It is no coincidence that the states in the US that experienced bubbles were also the ones that had in place strict regulatory restrictions on land-use (as explained here.
Cheers Leith
From my reading it appears that Texas built the fewest new dwellings per person. Which is contrary to the theory that supply side factors have an influence on price.
ReplyDeleteCameron
As an answer to Cameron and replay to Leith I will copy my comment on http://macrobusiness.com.au/2011/03/the-economist-bricks-and-slaughter-2/
ReplyDeleteIt seems to me that there was no problems on the supply side quantities. We were building for decades much more than we actually need. Housing bubble in Australia is not caused by limited supply, because we already have huge oversupply. It is caused by supply side manipulators (local councils and big developers). In Texas, place that you like to use as an example, less new homes was built (1.05m homes between 2001-2006 on 2.4 million new residents) than in Australia (940k new homes 2001-2006 on population increase of 1.3m new residents) or California (1.06m new homes on 2.1m new homes during the same period), still prices in Texas remained steady during this period compared to huge gains in Australia or California. Why? Well, I think that the reason is not how many new homes are built or how much of the new land was developed, but the way how it is done. In Texas almost everybody can buy agricultural land, develop it and build a house. None can sell a new home with large profit because there is alternative for everybody to do it by themselves. That’s why new home prices are just slightly higher that cost of development. In Australia and California regulation is different and residential development business is highly manipulated and done by privileged business in cooperation with the local councils. People are forced to pay price they ask because it is almost impossible to do it yourself. Price of a new home is significantly higher that cost of development. That’s why lend developers and local councils are earning huge profits from new housing developments.
Another excellent blog Rav, I cross posted it on the Aus Proeprty Forum, hope you dont mind ?
ReplyDeletehttp://australianpropertyforum.com/topic/8524224
When are you coming back to the forum !
The figures show Texas built the fewest extra dwellings per extra people. If we ignore the serious flaw that this study ignores the demand of the existing population, we can still easily explain that.
ReplyDeleteSince Texas housing supply is responsive it makes housing cheaper. Big families with a single income are attracted to the cheaper housing. Contrast this with an expensive place where only a double-income no kids couple can afford to buy.
I notice in an earlier comment that Cameron has completely missed this factor and misinterpreted the data.
@ David
ReplyDeleteThis study ignores demand of the existing population because it compares relative construction supply in states with very similar demography. In other words it almost equally ignores demand of the existing population in all analysed states/territories so as a consequence it does not affects comparison.
My previous study was looking at the demand of the existing and new population
Thanks Mahamed,
ReplyDeleteThere are few comments that question Australian construction numbers because of “high replacement and demolition rate”.
As I pointed out in my previous blog, replacement and demolition rate in Brisbane City LGA is measured to be 0.2% a year of the total housing stock (2001-2006). In other LGAs in SE QLD that rate is much lower (0.01% or less). 0.2% replacement rate is equivalent to 10-13% of new supply. Other parts of Australia do not have much different rates. In inner areas of big cities, more houses are demolished for new construction but they are often replaced with multi-unit buildings that keep replacement rate down. We may say that replacement rate does not affects relative comparison between states because all of them have small and similar rates. This still makes QLD state with the lowest Rate of Construction in Australia. If there is an oversupply in QLD than other states have much bigger oversupply, because they were building more relative to the needs.
In the USA, construction methods are different, building lifespan shorter, population more mobile and according to some sources replacement rate is around 650k to 750k units a year 0.5-0.6%. This makes my comparison of Australian states with US states even slightly biased toward higher than actual supply in USA.
ReplyDeleteTo sum up: replacement rate does not significantly affect my comparison between Australian states and it is likely to be biased toward smaller than actual oversupply in Australia relative to USA states.
One of the questions I received was whether multifamily units are included into new construction numbers in USA. The numbers I used include all housing units ("1-Unit Structures" - houses plus apartment units in multifamily buildings). The ratio of apartment units slightly differs among the states (20-25% of total new dwellings).
ReplyDeleteOther question was related to low US construction since 2007. Main goal of this analysis was to determine how the oversupply is distributed among the Australian states and how it compares with the well known oversupply in places where housing bubble is over and actual oversupply numbers are available. The fact that construction activities were not constant over this period doesn’t change the result - those states currently have huge oversupply of homes (12-18% of total housing stock). There was, maybe, even a larger number of empty homes in Nevada in 2007 but that does not affects comparison with current numbers. Even if all construction in Nevada was done in 2000 alone, that would not change the result - huge oversupply of homes in 2010. There was slightly higher relative residential construction activity in NSW in last 10 years than in Nevada. After 10 years Nevada has huge oversupply of homes ~14% of housing stock. What we should expect in NSW?
ReplyDeletenice post. I would have mentioned however that instead of a restriction in supply of new houses being the cause of high prices, it is in fact lax credit standards at the banks (ie too much demand), willing to extend 100% mortgages to investors for 4 properties etc, use of housing equity as deposit for other loans...
ReplyDelete...something im sure you've mentioned in other posts but it is worthwhile repeating this because people just dont get that if a bank wont lend you 500k to buy a house, then you cant pay 500k for a house!
To Anonymous
ReplyDeleteYou are so right. I am absolutely horrified and to an extent disgusted with the amount I have been offered b the banks. (I am talking in the past few months when really you would think they might have tightened standards. The banks carry the blame for this aspect of the bubble.
Interesting and sound analysis. An additional layer would be to add the completions to this analysis
ReplyDeleteWell you've certainly made me think twice about touting the commonly held argument that Oz housing is in undersupply.
ReplyDeleteGuess I've been spending too much time with property spruikers!
just linked this article on my facebook account. it’s a very interesting article for all.
ReplyDeleteHouse Australia
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