Is there really a housing shortage in Australia? Certainly affordability factors in the big cites of Sydney, Brisbane and Melbourne suggest that prices are still in the hard-to-afford range. And recent reports indicate a rental squeeze in Sydney has resulted in rents increasing substantially over the past 18 months. Fundamentals however are playing their hand in the property market as boom conditions are not present.

The Housing Industry Association, in its recently released edition of the National Outlook, Australia’s most comprehensive update regarding the housing industry, highlights a continuing deterioration in new home building conditions in 2011/12, with the growing risk of a return to GFC-like levels. Following a 5.8 per cent fall in 2010/11 HIA is forecasting a 10.3 per cent decline in new housing starts in 2011/12 to a level of just over 140,000, which would mark the sixth decline in eight years.

HIA Chief Economist, Dr Harley Dale, said new housing is the second most heavily taxed of the 27 large industrial sectors in the Australian economy. He said “Many of the taxes on new housing are highly inefficient and inequitable. They therefore heavily restrict the supply of a basic necessity of Australian life – shelter.”

“A combination of stimulus and taxation reform could turnaround once and for all one of the biggest issues the Australian economy faces – the lack of affordable roofs over peoples’ heads,” added Harley Dale.

Whichever way one does the numbers, there is a large and increasing shortage of dwellings in Australia, despite some ignorant and miscalculated claims to the contrary. New South Wales lies at the heart of the problem, where over the last five years only 20 per cent of the nation’s new housing stock was added in the Premier State despite it having 33 per cent of the population.

In Sydney, it takes 8.1 times the average annual income to afford the median house, up from 5.6 times in 2001,   and increased prices cause first-time buyers to stay in the rental market for longer, competing for properties and pushing up rental prices. Since 2005, rents in Australian cities have risen at twice the rate of inflation and in some areas, up to 50 per cent of low-income home owners are in mortgage stress.

In NSW, with its expensive and restrictive development laws, both at a state and local government level,  housing construction in terms of new home starts had plummeted and in fact was worse than the 16.3 per cent recorded by flood-hit Queensland

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Extracts from a recent UBS Research report: 26 February 2010

We have been arguing since 2008 that the combination of a long-standing structural under-supply of housing, coupled with a cyclical improvement in affordability – via falling prices in 2008/early 2009, government stimulus & lower rates in 08/09 – would see activity rise strongly in 2H09 and 2010. Indeed, the very strong 10%+ rise of house prices in 2009 – and the 59% leap in building approvals since January – is symptomatic of rising demand.

For house prices, after correctly forecasting the 5% peak-to-trough decline through Q109, our forecast for a 3% rise through 2009 was well short of the actual 11% gain. Looking ahead, while we continue to expect a moderation beyond 2009, we take this opportunity to formalise our forecast for 2010 and 2011 price growth at around 6% (broadly in line with the economy’s trend income growth), up from 3% previously. This also partly reflects the likelihood that bottom-end prices should be softer given the expiry of the FHOB.
We have also updated our forecasts of underlying demand from 180k-185k to 200k over the next few years – incorporating the record pace of population growth over the year to Q209, as well as the Government’s upgrade to population forecasts contained in IGR3. This in turn, highlights the chronic undersupply of physical housing in Australia.

Our estimate of the ‘cumulative gap’ of under-building is currently a shortfall of around 75k, doubling to a record 150k by end-2011. As an aside, these estimates are more conservative than the National Housing Supply Council’s (medium scenario) estimate of the cumulative gap being 85k as at Q208, rising to 155k in 2011 (and then continuing to deteriorate to 203k in 2013 and 316k in 2018).

RBA Gov Stevens also recently noted the ‘under-hang’ of housing construction. One obvious solution is the creation of higher-density housing, both in terms of urban density (ie more units compared to houses), and more persons per household.

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