Melbourne and Sydney are in housing oversupply

by Lindsay David

If I were an Australian central banker, politician, bank economist, or even a negatively geared property investor, I’d be telling you Australia has a chronic housing shortage, which is responsible for our sky-high housing prices. But as an independent macro researcher, the data tells me otherwise.

The best method to determine whether a surplus or deficit of housing exists is to compare the flow of new net dwellings to new net households. This has given rise to the LF Economics Dwelling Supply Index, which tracks the supply and demand trends since June 1996.

Using the most conservative estimates to err on the side of caution by biasing downward the number of dwellings while biasing upward the number of new households, the data tells us the following:

▪ In September 2014, Australia had a net cumulative excess supply of at least 165,000 dwellings.

▪ This surplus is equivalent to more than one year’s supply at current population growth rates nationwide, and about three years for the most oversupplied state, Victoria.

▪ Australia’s dwelling oversupply peaked in June 2006 at 349,000 dwellings.

Western Australia, Queensland and Northern Territory are the only states undersupplied, given the rapid influx of population to service the mining sector. This is reflected in both the continuing net deficit of dwellings relative to households and strong rental price growth. These metrics are now reversing as the mining boom unwinds.

This illustrates the classic case of supply and demand: when the index shows a persistent surplus, rental prices remained subdued. During the global financial crisis, however, rental prices surged as a genuine shortage occurred because of a moderation in construction and heightened population growth via net overseas migration. Unlike capital prices, rents cannot be leveraged, so they demonstrate the true supply and demand situation.

diepuppenstubensammlerin via Compfight

If there were such a dire shortage of housing as the housing cheerleaders suggest, property investors en masse would not be negatively geared in a record low interest rate environment. This tells us leveraged speculation has generated “artificial” demand that has absorbed a wealth of the supply.

Sydney and Melbourne are today’s prime examples. Unfortunately, it is only when the tide rolls out that the masses realise no such housing shortage exists. Miami and Dublin are excellent examples.

The numerous global housing price booms of the 2000s were written off by government, industry and the economics profession as a failure of inadequate housing supply and a rapidly growing population. The facts later demonstrated these booms were actually gigantic asset bubbles, spectacularly crashing and revealing mass overbuilding.

A tiny fraction of the 15,000 professional economists in the United States managed to correctly identify that their housing price boom represented a bubble and was not the result of a dwelling shortage. Relative to scale, Ireland was no different. And it appears Australia’s economists are following suit by falling into the same trap of illogic.

It is easy to see why Australia’s housing lobby places the blame for high prices on government regulations and dwelling shortages: it’s an easy and a much safer explanation than admitting the real cause to be debt-financed speculation – a bubble. Indeed, as of September 2014, Australia has the world’s third-most indebted household sector relative to GDP, edging closer to Denmark (1st) and Switzerland (2nd).

Unfortunately, the faulty narrative is maintained by government and industry, whose experts have numerous unresolved conflicts of interest.

Lindsay David is the author of Australia: Boom to Bust and Print: The Central Bankers Bubble. David holds an MBA from IMD Business School and recently founded LF Economics.