Can housing supply keep up with population growth?

Can housing supply keep up with population growth?
Can housing supply keep up with population growth?

Debates on housing affordability typically centre on demand factors but the Reserve Bank of Australia (RBA) has urged government to give due attention to housing supply in any policy responses to the challenge.

The call comes amid record building approval levels and high auction clearance rates, but low numbers of residential properties for sale.

RBA assistant governor Malcolm Edey told the Senate inquiry into housing affordability last week that while demand factors such as household incomes and the cost and availability of finance had the biggest influence on house prices in the short to medium term, the supply of homes was critical to long-term prices and affordability.

"The reason for that is that the supply side of the market is dominated by a large existing stock of dwellings, and new supply takes time to come on stream... It is the supply response that determines the extent to which additional demand results in higher prices over time," Edey says.

The total number of dwellings approved for construction rose in trend terms by 1.2% in August compared with the previous month, Australian Bureau of Statistics (ABS) data shows. At 16,273 dwellings, the number of approvals was a 6.8% higher than in August 2013, according to the ABS.

Housing Industry Association economist Geordan Murray says 197,571 new homes were approved for construction in the 12 months to August, a record high in any 12 month period.

The strong result shows that low interest rates are helping to create a sustained recovery in new home building, Murray says. However, residential construction levels have been too low over the past decade, which has lead to an accumulated deficit of housing that will take time to rectify.

"Having one year of strong building is not going to eradicate that undersupply ... Looking forward we would need to see that level of building sustained for a number of years. We estimate 180,000 to 185,000 [new homes built] on average per year through to 2020 is likely to justmeet population growth," Murray says.

He adds some approvals are for sites where an existing home will be demolished and replaced by a new building, which does not add to the total number of homes. Other newly built residences will be used as second homes or holiday houses by wealthier Australians, which will also not add to the number of available properties.

Edey told the Senate inquiry that challenges to lifting the supply of housing included regulatory and zoning constraints, inherent geographical barriers and the cost structure of the building industry.

"There are also obstacles to affordable housing created by Australia's unusually low-density urban structure, though this is gradually changing," he says.

The RBA did not put forward any suggestions on what actions should be taken to boost housing supply.

"The general point I would make is that we can't improve housing affordability simply by adding to demand," Edey said.

"Targeted assistance can certainly help particular groups such as first home buyers, but without a supply-side response, any generalised increase in demand will just be capitalised into prices."

Property prices in Sydney and Melbourne in particular have been skyrocketing and auction clearance rates have consistently been above 70%, RP Data's figures show.

House prices in Sydney jumped by 14.9% in the year to September 30 and unit prices rose by 11.5%, according to the RP Data CoreLogic Daily Home Value Index.

Melbourne house prices gained 8.5% and unit prices rose by 5.2% in that period, the Index indicates.

But while prices have been rising, the number of properties on the market has reduced.

The number of properties listed for sale around the country was 5.4% lower in the week ending September 28, 2014 than at the same time last year, according to RP Data. In Sydney, the total number of listings was down by 16.6% compared with the previous year. In Melbourne listing numbers were down 7.8%.

New building approval rates were also weaker in Sydney and Melbourne than elsewhere in the country.

In NSW the total number of units approved rose by 0.4% in August in trend terms after falling for seven months, ABS data shows. Approvals for houses rose by 1.8% following four months of increases.

ABS data shows unit approvals in Victoria rose 0.6% in August after being flat in July, while the number of houses approved fell 0.5%, following five months of declines.

Queensland has been the strongest state for new building with the ABS reporting a 2.7% rise in approvals for units in August following four months of increases, and a 0.8% lift in approvals for houses after 19 months of rises.

Murray says each capital city has a plan to increase its supply of housing to meet population growth.

"It's just when it comes to implementing those plans that the industry runs into problems," he says.

 

Zoe Fielding

Zoe Fielding

I am a freelance journalist and editor with more than 15 years experience specialising in personal finance, property, financial services and financial technology. A skilled writer and researcher, I have extensive experience producing high quality content for corporate and media clients. I am used to working to tight deadlines and tailoring the pieces I produce to suit a variety of audiences and formats.

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Housing Affordability

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