Supply Trumps Demand

Supply, demand, and sentiment: these are the three pistons which drive the engine of every property market. A large of proportion of the material which property investors research relates to the Demand side of the equation. But, in this current era, the Supply side of the equation has fast become just as important; in some cases, more important!

Fact #1: Australia is building (significantly) more new dwellings than ever before! During the seven year period ending 2012, building approval volumes (housing supply) averaged 156,847 per annum. The following three years (2013 to 2015, inclusive) produced average annual volumes of 206,729.

As the mining construction boom wound down, many of the skilled labour who had been working on large mining projects returned home (mostly to capital cities), put the tool belt on, and went back to building new houses and apartments. And they’ve received plenty of encouragement from federal, state and local governments, each whom have budgets under increasing pressure – nothing generates more tax revenue than property.

Fact #2: During the seven year period ending 2012, Australia’s population (housing demand) increased by an average of 364,487 per annum. Over the following three years (2013 to 2015, inclusive), Australia’s population growth averaged 349,841 per annum.

While our population is still growing at an impressive rate, the average annual rate of growth over the last three years is 14,646 people per annum fewer than the average across the previous seven years (364,487 minus 349,841). Census says that an average of 2.6 people reside in Australian households. Basic mathematics suggests that Australia’s demand for housing has reduced by 5,633 dwellings per year. Yet, building approval volumes for this same three year period are 49,882 per annum higher (206,729 minus 156,847).

If that’s not a gross imbalance then Donald Trump’s hair is fashionable!

Much of the increased building approval volume relates to attached dwellings (apartments and townhouses). Pre-GFC, approximately three out of every ten new dwellings approved in Australia were apartments. Over the last couple of years, the ratio of detached dwellings (houses) to apartments has become one-to-one.

Of the 206,475 new apartments approved in Australia during the last two calendar years, 185,492 (ninety per cent) were in our capital cities. Ninety per cent!

There is a significant increase in demand for apartments. The unit phenomenon is partly driven by a generational change wherein many Gen Y’s prefer ‘convenience’ ahead of a backyard and some baby boomers are electing to downsize to more affordable digs. Overseas migration will continue to be a contributing factor for apartment demand because Asian and European cultures are already accustomed to density levels much higher than Australia. Many property investors (foreign and domestic) also favour apartments because of the lower entry price and higher rental yields.

In some respects, it doesn’t greatly matter whether new dwellings are in the form of apartments or houses – it still equates to extra accommodation options.

Bottom line, Australia is currently building significantly more new dwellings than demand requires and our biggest cities (where the biggest proportion of our construction industry live and work) are the biggest culprits.

Back in 2009, Victoria was the first state to lead the charge of unprecedented levels of residential construction and it has maintained the high volumes during the subsequent seven years.

In March this year, Propertyology released a detailed market research report focusing on Melbourne’s property market, which included a housing supply heat map. In that report we stated that “…contrary to what’s been broadly reported over the last few years, Melbourne’s over-supply concerns are not contained to its well documented CBD apartment market. Recent average annual rates of supply have more than doubled the long-term average in the LGA’s of Darebin, Glen Eira, Manningham, Maribyrnong, Stonnington and Yarra. And, between 50% and 100% increases in building approvals are unfolding in the LGA’s of Banyule, Bayside, Boroondara, Greater-Dandenong, Hume, Knox, Maroondah, Moonee Valley, Moreland and Port Phillip.”

Plenty of Sydney residents seem to confuse traffic congestion and the high cost of housing with ‘under-supply’. While Sydney has had supply concerns in the past, the latest data very clearly shows a sharp rise in the new supply pipeline while demand (population growth) isn’t out of the ordinary of historical levels.

Greater-Brisbane definitely has gone overboard with new apartment construction. Historically, Brisbane has built approximately 6,000 apartments per year however, 42,000 new apartments have been approved over the last three calendar years (average of 14,000 per year).

Our research suggests that six out of eight Australian capital cities currently are (or soon will be) over-supplied. Adelaide and Hobart are the only two capital cities with building approval volumes under control.

Supply is a growth suppressant. The rate of supply is determined by the collective actions of state and local governments and the construction industry.

It is one thing to form a view about housing supply based on what is observed on the ground but that’s not always an accurate reflection of what is just around the corner.

One of the most valuable research resources which Propertyology has developed is a data file which tracks building approval volumes of each of Australia’s 550 local government authorities dating back to the year 2000. This enables us to measure supply pipeline volumes of any chosen market against the historical norm of that market. In this current era of mass construction, this information is gold!

Over the last couple of years, as we’ve observed building approval volumes reach record volumes in many high profile cities, we’ve made a conscious decision to focus our attention on alternative markets across Australia. We just can’t see capital city property markets doing much at all and there’s a real risk of price declines in some cases.

The most frustrating and totally uncontrollable aspect of housing supply is that any market can become over-supplied at some point in the future; there are no guarantees with investing! While there is information available to help form an objective opinion about current supply levels and what’s in the pipeline, it is impossible to forecast further than (say) two years ahead.

Simon Pressley is Managing Director of Propertyology, a REIA Hall Of Fame Inductee, property market analyst, accredited property investment adviser, and Buyer’s Agent. Propertyology works exclusively with property investors to purchase properties in strategically chosen locations all over Australia.