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FORCES ON RESIDENTIAL DWELLING PRICES – SHORT & LONG TERM
The Government has recently released a report from the National Housing Supply Council titled “State of Supply Report”.
The report makes projections of dwelling demand and supply over the 20 years from 2008 to 2028.
The report is very comprehensive, at 193 pages, and was produced by the following panel of distinguished experts:
The following extract from the report indicates not only that Australia has a current shortage of dwellings (even on “conservative” estimates) but that this dwelling shortage is forecast to get much, much worse unless something changes:
That is, on the best projections available, dwelling prices will increase in order to bring forth the supply needed to meet Australia’s enormous excess demand for dwellings.
In the face of this strong and growing excess demand, can anything prevent dwelling prices from rising?
Some commentators argue that housing is unaffordable in Australia. This is a simplistic approach. A careful analysis has been undertaken by Residex, one of Australia’s foremost property research groups. The Residex analysis makes the following points:
• 35% of people live in homes owned outright by their occupiers – so affordability is not an issue for them
• 35% are paying off their home – so affordability is not an issue for them, especially at current interest rates
• 5% of people are in gaols, dormitories, nursing homes, barracks etc – so affordability is not an issue
• 25% of people rent – for this group is affordability an issue.
There is another small group, not separately identified, which is those people that never rent, but move directly from living with parents to a purchased home. For this group, and for the renters, there are two affordability barriers: (a) getting a deposit, and (b) making the repayments.
Saving a deposit has always been difficult, and this has not stopped dwelling prices rising. The First Home Owners Grant assists, as often do relatives who have considerable equity in their own homes.
Repayments are a key issue, because a potential home owner must weigh up the cost of renting versus buying. Residex has constructed the following table that shows that the cost of renting and buying is about the same (assuming an average two income family, buying a median priced unit, borrowing 80% of the property value, and making principal and interest repayments at 5% interest over 25 years).
That is, dwellings are not unaffordable compared to renting, especially if the buyer is prepared to purchase below the median price used in this table. The proposition to buy is compelling, because the same dollar payment can either (a) pay for rent, or (b) repay principle and interest on a dwelling over 25 years. Moreover, the time to buy is now, because the worsening dwelling shortage will lead to both rents and dwelling prices rising.
It is fair to ask why, in the face of excess demand, we read reports that dwelling prices are falling.
For example, the recent ABS report on house prices received headlines, and showed (for example) a fall of 2.9% in Sydney during the March quarter. However, again a sensible analysis requires more consideration than the headlines suggest. For example, the ABS measure does not include any apartments, semis or terraces, and therefore is biased by the more expensive dwellings, which all analysts agree have fallen in value.
For a more accurate picture, we should rely not just on what the press sensationalise, but look also at the calculations undertaken by the professional dwelling research houses. These provide the opposite picture for Sydney for the March quarter:
• Australian Property Monitors - houses flat at -0.2%; units rising by +0.9%
• Residex - houses rising by +0.8%; units rising by +2.9%
• RPData Rismark – houses rising by +2.4%; units rising by +2.5%
There are two opposing forces at the moment:
• On the one hand, sentiment remains generally weak, and this is made worse when elements of the press continue to focus on negative, sensationalist output
• On the other hand, the medium and long term fundamentals for residential dwellings are very positive
When there is a lack of alignment between economic fundamentals and sentiment, there are great opportunities.
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