WHY THE AUSTRALIAN AND US HOUSING OUTLOOKS ARE TOTALLY DIFFERENT

The following chart shows that Australian dwelling approvals (and therefore commencements) generally sit between 10,000 and 16,000 per month.  However, approvals have been steadily falling for most of this century and  are now running at the level that has marked the bottom of the residential construction cycle for each of the last four cycles.

In direct contrast, US housing approvals (prior to the recent crash) had not been falling for most of this century.  Instead, they had been rising strongly since the early 1990s.  This led to massive oversupply, and the inevitable price falls that triggered the subprime crisis.  Only after the crash started did housing approvals start to fall.

The Australian situation is the opposite to that in the US because we have massive undersupply of housing (more in some regions than others). Moreover, the following chart from Commonwealth Treasury shows the undersupply of Australian dwellings is forecast to continue increasing for some years.  Where oversupply leads to price falls (as in the US), undersupply inevitably leads to price increases to draw out the required supply.

One way of putting the extent of the undersupply into context, is to calculate how many  months of production it would take for the undersupply to be corrected (assuming no new demand).  This is shown in the following chart, from ABS and ANZ.  It is clear that the greatest undersupply is in NSW, at more than four years production!  NSW is also the state that has shown the weakest capital gains in recent years.

We are now in a situation where oversupply in the US housing market has led to negative sentiment in the Australian housing market, even though Australian economic fundamentals are the opposite, with huge undersupply of housing especially in NSW. 

This misalignment between sentiment and economic fundamentals, presents attractive buying opportunities for astute investors.