Debating the “housing shortage”

ScreenHunter_01 Jan. 27 23.41

By Catherine Cashmore, a market analyst and journalist with extensive experience in all aspects relating to property acquisition. Follow Catherine on Twitter or via here Blog.

Do we have a housing shortage?

It’s a well spruiked ‘fact’ that Australia has a ‘housing shortage.’ I frame the word in italics because of the general misunderstanding that surrounds the concept.

People imagine a shortage of housing at an aggregate level, to mean not enough homes to meet the demands of an active buying market, and whilst this may be evident in various tightly held localities – in popular schools zones for example – the evidence used to substantiate a national housing ‘shortage’ means nothing of the sort.

Last week the ABS released its dwelling approvals data for the month of November 2013, showing modest fall of 1.5%, which follows a similar decline of 1.6% in October.

On a ‘trend’ basis, the overall direction of dwelling investments is positive – some 22% higher over the year – the highest level since September 1994. However, as Callam Pickering correctly asserts in Business Spectator, on a population-adjusted basis, approvals are at best, weak.

For example, between 1947 and 1961, housing stock increased by 50% -compared to a 41% increase in Australia’s population, and between 1961 and 1976 there was a further increase of 46%, compared to a 33% increase in Australia’s population.

This was a continuing pattern until the early 1990s, after which the growth in dwellings started to slow, and since 2007; the former has outpaced the later.

Did a shortage cause the rise in house/land prices?

1996 was the point at which land prices started to rise, and from 2001 onwards they skyrocketed. Whilst it’s hard to draw an exact correlation between the fall in stock and a rise in prices, supply, when produced must be suited to need – being both affordable and well serviced with infrastructure. Get the ingredients wrong and a surplus can quickly amass. Therefore, it would be wrong to assume a shortage of effective supply means a shortage of ‘roof space’ – it doesn’t.

However, when evidence shows a gradual reduction of demand for new dwellings, during a period in which population growth and a resilient economy should have dictated otherwise, coupled with land values that have grown from 3 times median income in the early 1990s, to their current 6-9 times median income in 2013 – (dependent on location of course,) alarm bells should be ringing in the offices of our housing ministers.

So what does the term ‘housing shortage’ mean and can it prevent a housing bubble?

Obviously there cannot be more households than homes, and whilst in the private sector, homes can only be constructed if there is demand from the consumer market, it is important to understand what a housing ‘shortage’ means.

Firstly, it covers the total housing system, both private and public, therefore, it should not be used – as it so often is – as evidence Australia can’t suffer a significant downfall in prices, or produce a ‘bubble.’ It certainly can.

In fact, it should be fairly obvious that the effects of a housing crash are far more severe in areas where high levels of private debt have been used to service inflated home values, due to a shortage of affordable home buyer supply, coupled with heightened speculative activity – as is the case in the most populated areas of Australia.

To be clear – it’s not a shortage of homes that prevents a housing crash, but a shortage of buyers – buyers unwilling, or unable to service high household debt due to broader economic conditions.

There are plenty of international examples of this – most recently in the USA, in states such as California and Los Angeles.

Both areas had a ‘critical housing shortage’ in the early 2000s, with speculative demand and lack of affordable supply disproportionately inflating values in the lead up to the sub-prime crisis.

When the (unforeseen) bubble burst, rapidly falling prices quickly eroded any equity homebuyers had achieved, and for those with non-recourse loans, where the mortgage balance greatly exceed value, there was little incentive to avoid foreclosure.

On the other hand, states such as Texas where – despite rapid population growth, – had structured housing and supply policy to maintain prices at no more than 3 times median income. Values fell by only -2.5% (from the peak of 2007 to the trough of 2011,) and the state suffered far fewer foreclosures.

What was the role of the National Housing Supply Council and was it needed?

When Rudd established the National Housing Supply Council in May of 2008, just prior to the last Senate enquiry into housing affordability in June of the same year, it should have been a step in the right direction, however the council’s role was broadly mis-understood by many main stream commentators who often failed to read the reports in full.

(For those interested, thanks to the Brown Couch blog, here’s a link to the archived website)

The council was given the role to assess the difference between supply and ‘underlying demand’ – in other words, the amount of extra housing needed per annum over the past decade, ‘if’ (using ABS data,) Australia had continued to produce enough homes for a rapidly growing population of home buyers and renters, based on existing household composition figures.

Whilst the findings showed a dramatic shortfall of 228,000 dwellings (as of 30 June 2011) the figure was hotly debated and in many cases, concerns were justified. However, in the council’s defence, it should be noted that planning for population growth is not an easy task, it’s predictive in nature and makes many assumptions along the way.

Whether you agree or disagree with the methodology or the resulting recommendations contained within the report, it’s essential we undertake some type of detailed analysis, if only to chart demographic changes and readdress growing community needs.

This is no different to studies conducted in other countries suffering similar concerns. For example – the latest UK data shows 221,000 additional households are formed in England annually, yet only 108,000 homes were built in the year to September 2013.

If the goal is affordability – a vital part of which is supply side policy – we must address the reasons ‘why?’ Only in doing so, can we have a valid base for discussion on housing policy initiatives within the political arena.

However, supply wasn’t the NHSC’s only area of concern, it also instructed to produce a comprehensive evaluation of Australia’s affordability problems which included the status of those impacted most – homeless, renters, first homebuyers, low wage families, and tenants in the public and social housing system.

For example, reports showed utility costs such as electricity, gas, water, and sewerage, have been increasing at more than 10 per cent per annum. They gave a good statistical overview to show a dramatic shortfall of affordable rental accommodation for low-income families – (details of which I’ll examine in another column) and clear evidence that our housing crisis is embedded within the fact that we don’t produce enough affordable and feasible options for low-income households across the sector – both public and private.

Despite this, the Abbot government – with the rather weak excuse that its role is ‘no longer needed’ – recently disbanded the NHSC along with their website and archived findings, and in doing so, have made it quite clear that affordable housing is not part of their political agenda.

Why do we have a shortage of affordable supply?

Issues surrounding housing affordability are at a peak predominantly because town planners, along with state and federal governments, have failed to adequately cater to the demands and needs of a rapidly increasing population.

If you didn’t know better, you’d be forgiven thinking there’s been a “vested” conspiracy to keep inner-city inflation high, with everything possible done to prevent a fall in established house prices by way of generous tax incentives for investors favouring old over new – or intermittent policies to inflate the prices of new housing by way of Mickey Mouse incentives.

Infrastructure sparse fringe land prices are inflated due to ‘false scarcity’ imposed by constrictive urban zoning policy.

However, it hasn’t always been this way – in the post-war population boom, the Commonwealth ‘State Housing agreement’ was concentrated on building rental accommodation and affordable housing for low-income families.

Under the Whitlam Government, land commissions were set up in each state and territory, and in agreement with the commonwealth, were instructed to ensure land and housing was ‘readily available at fair prices,’ with commonwealth funding provided for essential infrastructure.

However, in the 1990’s (the point at which demand for new housing started to diminish and prices began to balloon,) the game plan changed, key infrastructure agencies once corporatised were required to show “a return on investment.”

Stricter zoning regulations were imposed in the name of, ‘urban consolidation,’ land values increased, and larger developers needing to maximise profit, carefully controlled the timing of newly released plots in response to consumer demand (land banking.)

I know sprawl is not a popular word with many Australian’s – however it should be understood, that to create affordable supply in inner city brownfield land, is extremely difficult when land values – already high – prompt the chase of profit over community need.

Hence why we have so many poorly constructed high-rise monstrosities, with 2 bedroom apartments, offering little more than 60sqm in floor area, with high vacancy rates (in excess of 10% in some cases) and banks unwilling to take a gamble and provide first home buyers with finance due to fears of oversupply. This is why they are generally marketed to investors fooled (by rental guarantees) into thinking they can get a positive yield.

Further more, they do nothing to produce affordable accommodation for our largest demographic of buyers, families with children who require 3 bedrooms and some resemblance of a private outdoor area. If anything, this is an appalling and inappropriate waste of valuable inner city land.

In the NHSC’s final report in 2012/2013 it stressed “Underpinning much of this work will be the understanding that tackling the housing shortage is not simply about increasing the number of homes being built; it is also important to build a diverse range of dwellings. Producing the right mix of homes contributes to developing sustainable communities that work for the population at large.”

As I’ve said previously – it’s not about creating endless sprawl, it’s about building communities and this can only be achieved with investment into infrastructure supported by long term funding measures, which include consideration of bond financing and a more equitable tax system that assists the cause.

The subject deserves deeper analysis, but the above touches on some of the issues that should be debated and acted upon. And it can only be hoped, that any future senate enquiry into housing affordability, endeavours to do so.

Catherine Cashmore

36 Responses to “ “Debating the “housing shortage””

  1. hex says:

    Land prices are far too high.
    If land was cheaper people would be more able to buy it and build on it..simples…

    • Ino says:

      Land restrictions are too high – if there were looser, the land itself would be cheaper, and people … well – you know the rest…

    • Powermonger says:

      The problem though is the quality of the land being released, seems pointless doing mass land releases of 300sqm blocks, only providing ghetto like suburbs with non-existent aesthetics or community feel.

      Nothing is more frustrating then seeing land releases developed to the lowest common denominator, where the only concern is profit and minimizing livability.

      A rethink is required not just on the quantity of land released but also on how they are planned.

      • Excessive planning is the problem. The structured planning process is the primary cause of the tiny blocks (to save on space), cookie cutter homes touching each other and without roof eves, lack of footpaths and nature strips, etc.

        These types of suburbs weren’t a major issue prior to the heavy handed planning that came into effect in the 1990s.

        It has nothing to do with the quality of the raw land being released.

    • Chester says:

      You need to understand that the machine (trades ratios, planning processes, societal structures) has built up over many decades to house ourselves at a particular population growth rate (%)

      In fact if the RBA’s requirement to keep the inflation rate at between 2 to 3 % has an importance rating of 10 say, then the immigration departments mandate to keep immigration at the long term average plus or minus 10% would have an importance rating of 12.

      It’s just common sense.

  2. aj. says:

    What surprises me is that some regional towns haven’t twigged that they could become the next Texas by managing land supply well.

    The race should be on for regions to have the most affordable land in Australia – yet all i ever hear from regional small business is ‘more population ponzi please’.

    • flawse says:

      aj.
      January 14, 2014 at 7:03 am

      “What surprises me is that some regional towns haven’t twigged ”
      But aj…what would people ‘DO’ there? What work is there?
      While I applaud Catherine’s attempt to get some sense going I still feel we are missing an essential point. If we look at what we have done over recent decades we have rapidly expanded the population through immigration and created a very few employment oppurtunities in far-flung isolated mining enterprises. Even the miners live in the cities and FIFO.
      I’m sorry I’m not a full time economisst and cannot puilll charts and numbers from everywhere however I read some numbers recently on where employment has been created. Government features large. Government is centred in cities. The people of government are rather vehemently opposed to having to live anywhere else. Further Govt, and its ancillary lawyers etc, all seem to want, for one reason and another to occupy the inner city spaces.

      So we have created much larger populations with more economic emphasis on employment in the centre of cities. Hence the pressure on inner city prices and a reluctance to build the traditional family home(as outlined by Catherine) which, by necessity and definition has to be ‘somewhere out in the sticks’ impossibly far away from the centres of employment which is, generally, the central city. Yes, there is some employment in the suburbs. However increasingly this is in retail, restaurants, coffee shops, etc. It is part of an economy centred on government and its modes of enforcement.

      We cannot separate out the housing problems from the problems of the economy as a whole. Yes there are town planning problems as well outlined by the likes of Catherine, UE, Phil et al here. There are ‘financial’ problems because of the activities of Banks etc. However the problem of ever-increasing prices, far out of the reach of families, within a reasonable distance of where people work, will not be solved without addressing the fundamnetal economic distortions.
      Frankly it’s all too late. The answers lie back in time. As others, less pessimistic than I, point out it’s better to still make an attempt.

      • Mining Bogan says:

        Model villages.

        http://en.wikipedia.org/wiki/Model_village

        Ahhh…back when community made sense to everyone.

      • Mining Bogan says:

        Ha! Read further and history repeats.

        The original industries that these towns were built around have long gone. A couple of them put up the idea of development with both industry and housing in mind.

        Residents didn’t want the amenity of their suburb ruined. Where’s the rolls eyes emoticon?

      • migtronix says:

        I have a wacky theory on this flawse, if we break up the states into smaller states the new ones will need capital cities and there you get people moving. Think Canberra.

        If you create a new state in NSW/North VIC with Albury/Wodonga as it’s capital you can create credit facilities for the new government that attracts development and inhabitants – plus it brings you Senators closer to home, and increase the pool to boot!

      • The Claw says:

        The one-giant-city-per-state problem.

        If we can’t explain it and solve it, the next best thing is to divide each state into two. That would buy some more time to solve the problem.

    • ponzoid says:

      Yes aj. That is a vision of a sane future.
      For it to work though would require an almost blanket ban on speculators. No investor syndicates, no foreign students, no temp visa holders, just buyers looking for community without the trappings of super-sized debt dumped from above by TBTF lenders.
      Regional areas are bound by the ATO rules so they would need to come up with some way to sell land to honest to goodness home buyers without calls of ‘anti-business’ or ‘xenophobes’ being trotted out by ponzi rent-a-crowd.
      The upside with this kind of idea is that a subset of the population, intent on setting up their own business, could demonstrate that the viability of a community is not based on high land prices.

    • China-Bob says:

      AJ, I commented on this issue yesterday wrt Coffs Harbour.

      I mentioned that the median land rates was $2100 pa, for a country town. This high council cost was the result of a hugely expanded Water/sewerage system put in place over the last 10 years. Several people mentioned that our new environmental regulations were so incredibly tight that it was impossible to create a new sewer system that didnt cost this much. AND its not just infrastructure development cost the operational costs for the filtration systems are insanely high (due in large part to the power needed to achieve the regulated filtration requirement)

      The article I read also mentioned that the median Land valuations (upon which rates are based) was over $180K, for a @#$%en country town.

      As Coffs releases more land for development it is motivated to maintain a land cost above $180K to keep the city rates high enough to continue to pay the operational cost of the sewer/water systems.

      Maybe, just maybe, someone other than a Greenie needs to vet our environmental regulations with an eye towards making them economically sustainable rather than just environmentally sustainable.

      • Opinion8red says:

        The financialisation of … everything.

        https://vimeo.com/43398910

        Ban Usury. Problem Solved.

      • Explorer says:

        Maybe, just maybe, the sewer works were long overdue to reduce pollution of creeks and beaches in the area, and reduce seepage into low lying areas.

        Maybe, just maybe, the problems caused by lack of sewer in places like Narrabeen Lagoon and Sydney Beaches (including Harbour and River beaches near overflows) ought be prevented from arising in Coffs.

        Are you too young to remember turds floating on Sydney’s suburban beaches?

      • The Claw says:

        Septic tanks require no electricity and work for decades without maintenance. All they need is a 1/4 acre or 1/2 block of land.

        A decent bit of sprawl with septic tanks is more environmentally friendly (in my opinion) than high rise and greenhouse gas belching fancy treatment works.

        Get rid of faux-environmentalists and bring back sprawl.

      • China-Bob says:

        @Explorer
        There is such a thing as a happy medium, and it seems to me that most environmentalists are their own worst enemies because their extreme view points are the force that creates opposition….after all what’s the point of a solution that is fundamentally uneconomic it’s still a failure because it just forces people to find their own bypass solutions and avoid participating in the “best” environmentally approved solution.

        What insanity has taken hold of a community that demands the output of the sewer treatment plant have an order of magnitude less particulate pollutants than the stream it feeds. Rural runoff from farms contributes several orders of magnitude far more bacteria to the Coffs streams than results from the sewer works yet eco-greensness demands we upgrade our sewer filtration systems AND burn the green-house gases needed to power these monstrosities.

  3. Lef-tee says:

    “Despite this, the Abbot government – with the rather weak excuse that its role is ‘no longer needed’ – recently disbanded the NHSC along with their website and archived findings, and in doing so, have made it quite clear that affordable housing is not part of their political agenda.”

    You would think that Abbot would realise that affordable housing is a crucial part of the agenda of having housing construction take over and fill the void left as mining construction jobs continue to wind down over the remainder of his term in office. Truly affordable housing would almost certainly create greater demand for new builds, therefore more building industry jobs as mining construction jobs wane.

    • Ino says:

      Well, it’s the typical reaction of a child who by closing their eyes makes the bad news go away!

      I would wager that not 12 months from the disbanding of NHSC (which “needed a killin’, yer’onor” – seeing that it was established by Krudd/Labor), The Mad Monk will announce the establishment of a very similar commission by a different name, and of course lead by some vested interest bankster or mortgage merchant, which of course will find that “theres nothing wrong with the current situation, now shut up and take a mortgage – loser”

      • Powermonger says:

        NHSC was really only created by Rudd at the time for appearances only, he had no intention of doing anything.

        Rudd and Labor released a policy report prior to the 2007 election, they acted on hardly anything in it and just made affordability worse with there big Australia agenda and other meddling with FHBGs.

        Depressing as things are now in the poor direction Australia has moved in over the last 15 years, we just have to face it, only thing that will bring change is a crisis that napalms the market. Nothing positive will happen until then.

      • Andy! says:

        Rudd and Plibersek (minister for housing unaffordability) wasted the best crisis in living memory. Epic fail.

      • Mining Bogan says:

        Andy, yep. Shoulda collapsed five years ago.

        Don’t worry though, there’s another opportunity coming.

  4. China-Bob says:

    Off Topic: Is anyone else getting sick of managing this sites tracking cookies/widgets?

    • Dave_Comments says:

      That newsletter pop-up is a little on the aggressive side

    • Explorer says:

      Please explain re cookies and widgets.

      Re newsletter pop-ups, I agree they are annoying, particularly on mobiles. Would be better if they were not there, or if they only came up if you didn’t log in in say 3 minutes, or if it was only a small popup that merely had an invitation to click to subscribe.

      • China-Bob says:

        Macrobusiness enables the following tracking sites
        Double Click
        Facebook Connect
        Google Adsense
        Google analytics
        Gravtar
        Statcounter
        Twitter Bridge

        There may be more but they are probably prevented by my whitelisting /blacklisting scripts.

        These sites all try to follow users around the internet and connect the dots where have you been how often where did you go to upon leaving MB
        Ideas Such as:
        Macrobusiness readers also go to the following sites…..
        Macrobusiness readers use the following aliases elsewhere

        etc etc

        Basically these sites collect data on the readers web surfing habits, As for what what data they collect and what they do with it you’d need to go to the individual sites and read their policies…maybe they’ll tell you the truth and maybe they wont…who knows?

  5. Explorer says:

    Don’t forget that the high growth in houses per population of the past was helped by divorce after the Family Law Act of 1975(?) which preceded dramatic increases in the rate of divorce which in turn necesitated an increase in housing stock.

    PS there can be multiple households in one dwelling. just look at the number of houses with in-law accommodation, conversions of garages to living space, separation of upstairs into a different dwelling for a child’s family. Sure there might be some family connection, but that doesn’t mean that they aren’t separate households in fact.

  6. Hugh Pavletich says:

    Well done Catherine !

    • Bubbley says:

      But how many main stream people or journo’s will read her work?

      Until the punters are in the street with placards about affordable housing, nothing will change.

      • Hugh Pavletich says:

        Bubbley … With all due respects, I think that’s a defeatist attitude.

        Catherine is part of the critically important “public conversation” nationally and internationally. I think she is doing a grand job.

        It was back in late 2004 when I initiated and got underway with my American colleague Wendell Cox, the Annual Demographia Housing Affordability Surveys ( http://www.demographia.com ). The local property academics told me at the time I was talking rubbish … so I knew I was on the right track !

        It is very heartening to see the shifts in thinking that have occurred here in the Antipodes … and importantly … the political progress in New Zealand (note who contributed the Introduction to this years Demographia Survey).

        Internationally too, I’m seeing increasing discussion about housing markets in structural terms … in particular house prices in relation to incomes. And too … a far greater understanding of the sheer destructiveness of unnecessary housing bubbles.

        The 07/08 events are of recent history … which helps. I doubt for example that they are in any hurry to repeat the experience in Ireland.

        You will find going forward that the pressure will grow in Australia, forcing politicians to deal with these issues. Its the only language politicians understand.

        Hugh Pavletich
        http://www.PerformanceUrbanPlanning.org

  7. speculator says:

    “For example, between 1947 and 1961, housing stock increased by 50% -compared to a 41% increase in Australia’s population, and between 1961 and 1976 there was a further increase of 46%, compared to a 33% increase in Australia’s population.”

    First of all data given here is wrong:

    population:
    1947: 7,580,000 | 1961: 10,508,000 | 1976: 13,915,000

    dwellings
    1947: 1,907,000 | 1961: 2,817,000 | 1976: 4,117,000

    unoccupied dwellings
    1947: 47,000 | 1961: 194,000 | 1976: 430,000

    average household size:
    1947: 3.7 | 1961: 3.5 | 1976: 3.1

    In addition to population growth, during 50s – 90s average household size was falling sharply (at times) creating large additional demand for new homes.

    During the same period, we were overbuilding – between 1947 and 1976 number of unoccupied dwellings increased 8150% (more than 8 times) while population increased less than twice.

    Since late 90s household size is almost steady (at around 2.6). Population growth is the only remaining demand driver so current rate of construction is more than adequate to meet the demand.

    between 2001 amd 2011 number of households increased by less than 10% while number of dwellings increased by 12%.

    we are still overbuilding – Number of unoccupied dwellings increased by 30% between 2001 and 2011 (from 720,000 to 935,000) – 20,000 empty homes built every year

    • Neville Gearless says:

      “we are still overbuilding – Number of unoccupied dwellings increased by 30% between 2001 and 2011 (from 720,000 to 935,000) – 20,000 empty homes built every year”

      How do you know empty homes are a result of “overbuilding”? Huge numbers of dwellings are withheld from the rental market because investors are paid to by the ATO. Remember the ATO cuts their losses.

      But I’d say it is the case for luxury condos around here as most are empty, because they are outside of most people’s price range for rent and were built because, well, this is what a distorted market place does – supplies what people don’t want. Of the pitifully small percentage of NG investor who actually build, it’s these rather useless off the plan condos/ghost buildings.

      So I’m not surprised, unoccupied homes soared, during a rental crisis in the 2000′s. Its what negative gearing does.

      • speculator says:

        it doesn’t matter what the reason for overbuilding is, what matters is that we built more than people need.

        I agree that we are building more homes people don’t want (but still somebody buys them). This means we do not have “housing market”. what we have is speculative housing bubble where people are buying homes that nobody needs – this is issue of speculative demand, not limited supply

    • The Patrician says:

      spec,

      Where do you get your “unoccupied dwellings” data?