We often hear that Australia is facing a housing shortage that is driving up property prices, but what is the best way out of this predicament?
In the final days of last year, National Housing Supply Council released its third State of Supply report, estimating a housing supply shortage of 214,700 dwellings. It predicted that this shortage will reach 328,800 dwellings by 2015 and 640,200 dwellings by 2030.
ANZ has been also reporting and forecasting this shortage for a long time. According to the December issue of the bank’s Australian Property Outlook, the housing shortage in 2011 was about 240,000 dwellings and it will reach 440,000 by 2015.
Knowing that houses are built by the construction industry, and this industry is the final stage of housing supply pipeline, it is worth examining how it has been responding to demand. Australian Bureau of Statistics (ABS) publishes quarterly data of the number of dwellings under construction, indicating the amount of work that industry is conducting at any point of time. It basically shows how busy the whole industry is and how much workload it bears. The most recent data was released in last September, I have drawn its trend for past 25 years in the chart below.
As can be seen, every time that there was a surge in demand, the industry reacted by taking on board jobs and working under pressure.
This was seen before the introduction of the GST in 2000. The number of dwellings under construction was 62,625 in 1996 and it reached 99,150 in 2000. This is an almost 60% increase in workload during five years.
A more significant increase occurred in the past decade. Since 2001, there has been a tremendous increase in housing demand, and consequently, the number of dwellings under construction.
So, if the industry has been responding to demand, why there is concern about housing shortage?
This because dwellings under construction are not considered as housing supply until they are completed and ready to be occupied. Therefore, we must look at the number of completed houses to uncover the actual number of dwellings that have entered the housing market.
The trend of this number is demonstrated in the next chart. The quarterly number of “completions” and the number of “under-constructions” are drawn to illustrate the difference between how the industry reacts to the demand and what the actual change in output of housing supply. I have added linear trend lines to both graphs to emphasise this inconsistency.
As we can see, the actual output of the industry has not changed significantly during last 25 years, while the number of dwellings under construction has had a significant increase.
The historical data of the number of dwellings under construction also shows that there were cyclic dynamics in the industry until 2000. Every time that the workload of the industry increased there was a time that it went back to its underlying level above 60,000 dwellings.
The examples of these cycles are 1986-1991, 1991-1996 and 1996-2000. In all these periods the number of dwellings under construction has reached around 100,000 at its peak. However, in the past ten years, it has reached 130,000 and has not gone down. This makes the current situation different from the past.
The inconsistency between the trend of number of dwellings under construction and number of completions shows that the house building industry has responded to the higher demands by signing more contracts and accepting more work. However, it could not produce higher number of houses and its output remained constant.
This phenomenon indicates a situation in which limitation of production capacity does not allow a system to produce more. The past ten years show that the industry has reached its capacity and with its current structure, it cannot produce more dwellings than this.
Knowing that there is already a shortage in supply and demand will probably increase due to population growth, the need for an increase in housing supply will be inevitable. This cannot be achieved with the current production capacity and limited resources. Thus, the only remaining way to improve the capacity would be through innovation and finding better ways of using the same level of resources for producing more dwellings.
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Comments (6)
Graeme Harrison
Management Consultant (logged in via email @post.harvard.edu)
But with houses taking longer on average between decision to build and completion, one really needs to work out if it really is 'only' a limit of productivity of those doing the construction, or greater red-tape being placed upon the industry.
If you ask a builder, they will say that the public oversight has grown significantly, with delays far more endemic. We need some form of local government, but its 'reach' certainly needs to be kept in check. People rate councils as doing their best work…
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Jim Wright
Retired Civil/Structural Engineer, IT Consultant/Contractor (logged in via email @acslink.net.au)
With increasing population, the traditional format for houses (single-leaf brick walls, timber floors and framework, etc.) will not be capable of responding to future demands, as it is even lagging behind demand today. We need a lot more innovative thinking in how we construct our houses and additionally, how we can design them to be more adaptable to differing family demands. I have suggested elsewhere ("Urban landscape for a new era" in my blog reengineeringaustralia.com) that we should consider…
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Iain Wicking
Director (logged in via email @gmail.com)
There is a not a shortage of supply in Australia we will find as the bubble deflates. Prices are driven by more land release issues and more importantly by the availability of debt and lax lending standards.
Australia has had 8 or so housing booms since the late 19 century and they all collapsed with price drops of 10% to nearly 40%. Classical and Neo-Classical economics (simplistic supply and demand model) cannot adequately explain bubble formation and their collapse - it is an inflationary event.
Dick Clarke
Building Designer, Director Sustainability (logged in via email @envirotecture.com.au)
While I get where the author is going with this, there are a number of untested and unexplained assumptions in this article.
1. What methodology is used to determine Australia is short by 214,000 dwellings? That would indicate prima face that we have about 550,000~680,000 effectively homeless people. The number of homeless is not quite that high, and the vast majority will not be able to afford a dwelling with a mean price of $380k, regardless of how many are built. This oft-quoted number requires…
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Ehsan Gharaie
(Lecturer in Construction Project Management at RMIT University)
Thanks Dick for your comment. Here is a bit of explanation:
1. The housing shortage calculation methodology is articulated in the NHSC report. This article only refers to the outcome of that report.
2. "Pressure" mentioned in the article does not mean the social and economical pressure on the people involved in house building process. I just meant the workload pressure.
3. 120,000 is not the number of starts. It is the number of houses under construction. in other terms, it is the accumulated number of houses that have been started but have not been completed yet.
Dick Clarke
Building Designer, Director Sustainability (logged in via email @envirotecture.com.au)
Thanks Ehsan, but some remnant questions remain...
1. Can we be a bit more critical of the figures in this report? I have seen them quoted time and again, but no critique of the methodology (that I know of), so how do we know it's right? A lot of policy weight hangs off it, it needs to be tested openly.
2. Agreed, but that's sort of what I meant - the pressure may be negative. When the figures were high, the industry may have been at or only slightly optimal full capacity. When the figures dropped, the industry was in negative capacity.
3. Correction accepted, thanks.