Review of the Australian housing market

 

Matthew Peter, Chief Economist 

In last week’s Brief, we began an examination of the Australian housing market in the light of surprisingly strong building approvals data for November (Good news or not for the Australian housing market). This week, we take a deeper dive in to the underlying demand and supply conditions in the Australian housing market featuring preliminary results from research undertaken by QIC Economist, Nathan Cotton.

We begin by tracing the post-GFC housing market cycle. In the immediate aftermath of the GFC (2009/10), we estimate that the Australian housing market was undersupplied by around 50K dwellings. The years leading into the GFC, which had seen the first boom in mining capex, saw strong growth in population as international migration ramped up in support of increasing demand for labour.

However, before developers could respond to the increase in the demand for housing, the onset of the GFC led to a collapse in housing construction and an undersupply of dwellings. The undersupply was exacerbated in following years as the second boom in mining capex, driven by fiscal stimulus in China, led to another surge in migration and population growth, and therefore underlying demand, and as high costs for residential construction (as the mining industry bid up wages for construction workers) inhibited developers from expanding supply.

Our estimates suggest that undersupply of dwellings almost doubled from 2009/10 to 2013/14 from around 50K to 100K. However, 2013/14 proved to be a turning point in the housing cycle as Chinese authorities began to reverse the post GFC stimulus measures and in response, the prices of Australia’s bulk commodity exports fell sharply bringing the mining boom to an abrupt halt.

As mining investment collapsed, the Australian economy went into decline prompting the Reserve Bank of Australia to move monetary policy into an easing cycle, eventually cutting the cut the cash rate to its current historically low level of 1.5%. In addition, wage growth collapsed as construction workers were released from the mining industry and sought jobs in other segments of the construction industry including in residential construction.

The changes to interest rates and construction costs prompted a boom in residential construction and annual supply rose steadily from under 150K in 2013 to around 200K in 2017. With the rate of population growth and household formation steady over the period from 2013 to 2017, the annual rate of increase in demand remained at around 150K.

We estimate that undersupply in the Australian housing market was eliminated sometime in 2016/17. However, based on building approvals data, allowing for approvals that don’t go ahead and demolitions of existing housing stock to make way for new developments, supply should remain at around 200K over 2017/18, while underlying demand remains at around 150K. Allowing for unoccupied dwellings (e.g., holiday homes and foreign-owned non-rented homes) of around 20K, we estimate that the housing market will be oversupplied by around 30K by the end of the current financial year.

Although the time from approvals to completion for houses is around six months, the gestation lag for apartments is around 12 months. Hence, current building approvals data can be used to project supply of apartments into 2018/19.

Projecting the supply of apartments based on building approvals data, and assuming a static supply of houses (consistent with the stable trend in the supply of houses), we estimate supply of 170K in 2018/19. With underlying annual demand projected to remain at 150K, consistent with 1.6% population growth, and assuming 17K supply of unoccupied dwellings, oversupply will remain at around 30K in 2018/19.

Our preliminary analysis of demand and supply conditions in the Australian housing market suggests a current oversupply of around 30K. Based on building approvals data and current rates of growth in population and household formation, we expect oversupply of 30K to persist beyond the current financial year into 2018/19. An extended period of excess supply will place downward pressure on prices, which we expect to fall by 5% over 2017/18 and 2018/19.

 

Table 1: Financial market movements, 11 - 18 January 2018

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,798.0

1.1%

US

2.63%

8.9 bps

US Dollar Index (DXY)

90.50

-1.5%

Nikkei 225

23,763.4

0.2%

Japan

0.08%

1.2 bps

USD-JPY

111.11

-0.1%

FTSE 100

7,701.0

-0.8%

UK

1.33%

2.1 bps

GBP-USD

1.389

2.6%

DAX

13,281.4

0.6%

Germany

0.57%

-0.8 bps

EUR-USD

1.224

1.7%

S&P/ASX 200

6,014.6

-0.9%

Australia

2.81%

8.0 bps

AUD-USD

0.800

1.4%

Source: Bloomberg

 

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