The Department of Infrastructure and Transport released a fascinating report late yesterday looking at the last 150 years or so of population and housing stock development. The report is mostly quite balanced and is well worth your time. It begins with a long term view of current population versus housing stock ratios:
Australia’s recent levels of housing supply have been lower than population growth levels for the most sustained period in a century (Figure 2-24). The four previous periods over the past 150 years when population growth levels were significantly greater than increases in dwelling stocks were the 1890s Depression, World War I, the Great Depression and World War II.
Then canvasses occupancy rates:
Household occupancy rates rose steeply from 1860 to 1889 as cities struggled to cope with population growth rates up to four times higher than those of today (Frost and Dingle 1995). Occupancy rates fell just as quickly after the 1890 crash before stabilising. There was a further fall during World War I with troops in Europe and the Middle East and a virtual
cessation in migration.
From 1920, occupancy rates again started to fall, punctuated only by World War II. They stopped falling in the mid-2000s and have even begun to rise slightly, reflecting the growing gap between population growth and dwelling supply (Figure 2-25). Somewhat paradoxically, Australia finds itself in a position of also having an increasing number of unoccupied houses. Reasons for this increase are not fully understood, particularly considering the shifting trend in occupancy rates since the mid-2000s.
And the reasons for the compressed rate:
From 1996 to 2011, households with one or two people (couples without children, lone person households) grew as a proportion of households by three per cent. In the same period, the proportion of couple families with children declined by around four per cent, while the proportion of one-parent families grew slightly (Figure 2-27).
If household occupancy rates are increasing at the same time as the proportion of smaller households is rising, the increase in occupancy rates must be occurring in family households.
The study also notes that:
Occupancy rates respond to the relationship between the number of additional dwellings required by population increase and the number of these new dwellings actually built. Small shifts in occupancy rates can significantly alter the number of dwellings required to house a population. As an example, Sydney’s current population of 4.6 million occupies 1.6 million dwellings, resulting in an occupancy rate around 2.8 persons per household. Theoretically, if the occupancy rate rose to 2.9 persons per household then more than 50,000 dwellings would no longer be required. Sydney’s current population growth rate demands roughly 20,000 new dwellings per year, so one impact of a theoretical increase of just 0.1 in Sydney’s occupancy rate would be that no additional dwellings would need to be constructed for two and a half years.
And it concludes:
The current gap between housing supply and the population increase we are experiencing is the largest and most sustained in a century and this is the only significant period of undersupply relative to population growth that has occurred outside the Depressions or World Wars since at least 1860.
Since 1996, we have seen the most acute and sustained increases in house prices in at least 130 years, although there has been some moderation since the Global Financial Crisis. Outright home ownership has decreased from 60 to 46 per cent, between 1996 and 2011.
Rising house prices appear to be closely related to rising land prices, driven by declining lot production per capita, falling lot sizes and sharply rising costs per square metre. Also associated with price rises is an increasing premium for living near city centres. Dwelling construction costs is not the largest contributor to price increases.
In response to the gap between population growth and housing supply since the mid-2000s, occupancy rates have stopped falling and have begun to rise again, mainly in households comprising families with children. With government housing having declined proportionally, demand for rental properties remains high. Rental income has continued to increase, weekly rents have redistributed towards higher prices and rental vacancy rates have remained low across all capitals.
My summary has not done the report justice. It is an excellent piece of work that describes pretty fully the cross-currents at work in housing. The report may strike you as bullish for housing and indeed it is in some measure. But my own view is that although some pick-up in construction can be reasonably expected in the post-mining boom economy, it will be unable to sustain the income and credit growth needed to satiate our desire to live in ever smaller households. Although global authorities have done a good job of preventing a rerun of the Great Depression, the dynamics of an epochal develeraging are the same. We are no different, especially since we rely on global funding for our high house prices. In this context, the ‘housing shortage’ will more likely be resolved by some new construction but mostly by the occupancy rate rising as asset prices continue to fall over the long term.