Australian housing supply and demand simplified

There was some very interesting commentary this week on the state of the property market. Firstly, Ric Battellino the Deputy Governer of the Reserve Bank gave a speech on myriad of issues including dwelling supply at the national Housing Supply Conference in Melbourne this week.

His comments were in line with the overwhelming consensus that Australia hasn’t built enough dwellings. However, Ric’s analysis suggests that this is not due to a cutback in dwelling investment, dwelling investment continues to increase. He gives four reasons:

First, Australians are on average spending a lot more on each new dwelling. Real expenditure on each new dwelling built is now 60 per cent higher than it was around 15 years ago.
Clearly we can all agree to this, the cost of residential dwellings has increased over the last 15 years, as has the cost of virtually everything.

Second, a high proportion of dwelling investment is in the form of alterations and additions – i.e. upgrading existing houses rather than building new ones. Almost half of all dwelling investment has been accounted for by alterations and additions in recent years.
So, residents are choosing to renovate and extend rather than invest in new dwellings. I think most people can agree with this. Why give up the house you have to move to the outskirts of the city where public amenity is poor and the cost of constructing a new property is significant. Why not just alter your current property?

Third, a higher proportion of the new houses built are simply replacing existing houses that have been demolished. The RBA estimate that between 2001 and 2006, around 15 per cent of new houses built replaced houses that had been demolished; 10–15 years earlier, that figure was less than 10 per cent.
This comment suggests that only 85 per cent of new dwelling commencements actually add to supply, the other 15 per cent is simply there to replace those properties which have been demolished.


Fourth, a significant proportion of dwelling investment appears to have gone into holiday homes or second homes. Census data show that the number of dwellings built has exceeded the increase in the number of households by a large margin. As a result, the ratio of the number of dwellings to the number of households has been rising over time; as at 2006, there were 8 per cent more dwellings in Australia than there were households. Presumably, most of this surplus reflects holiday houses and second houses.
With economic prosperity comes demand for second homes and holiday homes. It can therefore also be assumed that 8 per cent of new dwelling additions are going to be ‘consumed’ for want of a better word by those who already have somewhere to live. This leaves us in an interesting position, only around 77 percent of dwelling commencements in this country are actually catering to population growth, no wonder we can’t build enough stock.

Speaking at the same conference as the Deputy Governor was the National Housing Supply Council chairman Dr. Owen Donald. He raised significant concerns about the impact that land supply, finance, planning reforms and local governments will have on the supply of new homes. He stated that the country would fall short of providing the 153,000 dwellings required each year until 2028.

He also raised concerns about local area activism which was constricting supply, particularly in inner city areas which were ripe for infill development. These groups are commonly referred to as NIMBY’s the Not In My Back Yard crusaders.

Undoubtedly this is a tough situation to manage, in order to cater for additional demand higher densities and in particularly higher densities in inner city areas are important. However, inner city areas are where land costs are greatest, where people have forked out a greater amount of their hard earned cash to live and where there is a greater supply of our character homes. What makes Australia unique is that you can still buy a house just minutes from a major city. Around the world most cities have gone the other way and your only option for housing close to the city is a unit.

The results of the recently released Housing Mobility and Conditions Survey show that the second greatest reason for people moving house (after buying their own property) is because they wanted a bigger or better home. The survey also found that a common theme throughout the study was that when people were dissatisfied with their property, size and in particular not enough size, was a commonly recurring theme.

It would appear that Australian’s still long for the large block of land with the large houses yet we continue to push for inner city densification. There is undoubtedly demand for this type of development and it is certainly appealing when you’re young and single but speaking from experience, I think many reach a point in their life where they want a property of their own. One which they don’t share with a variety of common owners and in my opinion, many want the freedom to do what they choose and not to be governed by Body Corporate by-laws. This being the reason why you see such a high proportion of single person and couple household within inner city suburbs which are dominated by units.

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