Australian house prices – still up?
Posted on 06 August 2010
The ABS released its Eight Cities House Price index yesterday (here) – according to the ABS:
- Preliminary estimates show that the price index for established houses for the weighted average of the eight capital cities increased 18.4% in the year to June quarter 2010.
- Annually, house prices rose in Melbourne (+24.3%), Sydney (+21.4%), Canberra (+19.6%), Darwin (+14.6%), Perth (+13.0%), Adelaide (+11.6%), Hobart (+10.8%) and Brisbane (+8.5%).
Going to the chart, we can see the volatility in established house prices – they declined 5.5% from a peak in March 2008 to their low in March 2009, and have now gained some 23% from this level. Australia’s GFC was a benign affair.
As we have discussed previously (here), it’s reasonable to assume that growth in national income is the ultimate (ie. long run) arbiter of house price growth. If prices have accelerated beyond the 3.2% annual growth in GDP (or, if you prefer, Gross National Income) that Australia has enjoyed since 1986, then it has been a function of debt (ie. bringing forward that GDP). Without the assistance of further increases in debt, the liklihood is that house prices will gravitate towards the long run trend in our country’s income growth. A drop of 25% to 35% tomorrow would do it – more likely prices flatline for a year or five.
The oft quoted rationale for the maintenance of current house price levels is the forecast excess of demand over supply. Consider, for example, the following chart from the National Housing Supply Council (or more specifically Saul Eslake, Economist at ANZ):
What does it mean to have a housing shortage? Clearly, the suggestion is not that there will be 400,000 households living al fresco. Rather this is a model of what the cumulative demand and supply balance would look like if current trends persisted. It’s one of those non-sensical extrapolations. Apart from the actual homeless in our number, the rest of us are by definition going to be living in a dwelling of some sort.
Consider the major variables for housing demand and supply:
Demand = underlying population growth divided by the persons per dwelling
Supply = new additions to housing stock (net of demolitions) less vacant dwellings
If the population is growing at a given rate then housing stock must increase at a commensurate rate, or housing density will increase to compensate. It’s notable then that housing density has recently turned from a century long trend to fewer people sharing the same dwelling:
As house prices climb relative to income there are ever fewer of us that can afford the hacienda of our dreams. We modify our expectations – stay at home longer, move in together – in short, we share our houses. Demand for housing changes to meet supply.
This is not to say that changing demographics in households will undermine prices. Rather that the argument that house prices will keep going up because of excess demand is deeply flawed. In other words, demand for housing is sensitive to prices.
If you subscribe to the theory that our living standards are likely to pullback in the absence of access to more credit cards, then it makes sense that housing density will creep higher – particularly in an environment where house prices are historically high relative to income. This is a major variable that is generally assumed away by our housing market forecasters.
Conclusion
On current numbers I figure that Australia’s housing market is pretty close to a demand and supply balance. Net migration for this year will be well short of last years record – I’m assuming net population growth closer to 400,000, or roughly 150,000 in new dwellings as a baseline demand number. The current run rate on housing approvals is around 170,000, which after allowing for demolitions and vacancy, will deliver around that exact number. I reckon that the top is in for house prices – just a matter of time before the ABS agrees.
3 responses to Australian house prices – still up?
Leave a Response
Click on icon to subscribe
Copyright
DataDiary is published under the Creative Commons license regime
Most balanced article I have read regarding house prices in Australia. Thank you.
Thanks Lawrence.
[...] before, ~170,000 new dwellings a year should be sufficient to meet demand (for background start here). It’s hard to believe the RBA will raise rates then, with momentum seemingly heading [...]