25 Oct 2013
Words Tim Admin

"Babies Don't Buy Houses"

Reports of residential housing under-supply in Queensland have echoed through the market since 2004. Eight years on, the primary factors driving demand for residential property in Queensland have shifted dramatically, yet many reports suggest a current shortage of dwellings. The last three years of population movement in Queensland have recorded a significant decline in migration levels. Additionally, the 2011 census data released on June 21st reports the average household size for Queensland has remained stable at 2.6 persons per household. These changes to the core drivers of residential housing demand indicate suggestions of a current housing shortage are in need of review. Evidently, there is no denying Queensland faces long-term supply concerns due to the projected recovery of population growth, however at present there is limited cause for concern. Population growth is the primary driver of the residential market comprising migration (both overseas and interstate) and natural increase. These two components are used to compute demand for residential housing. The first component of population growth is migration. When the issue of dwelling under-supply was promoted circa 2004, migration to Queensland was booming and showed no signs of slowing. In 2008, total migration to Queensland had peaked at roughly 84,000 new residents. This level of migration was a 35% increase from two years prior and is believed to be in direct response to additional employment opportunities in Queensland and a then, more livable and affordable State. Three years later, both interstate and international migration have plummeted by 54% and 47% respectively. Whilst it may appear population growth has returned to long term trends, if the natural increase component is removed, the decline in migration is apparent and illustrates the real level of demand for residential housing. Migration is arguably the most significant contributor to demand for housing in Queensland and the declining migration levels from 2009 to 2010 have significantly eroded demand. Unfortunately for Queensland, increasing migration is a slow process that only comes from a strong economy, affordable housing and a lower cost of living. Apart from mining employment, external market forces have, at present, removed these advantages. The second component of housing demand is natural population increase which is comprised from the equation; births less deaths. It is understood that some estimates compute dwelling demand based on total population growth (migration and natural increase). This calculation is fundamentally incorrect, as birth rates do not constitute demand for additional housing. Simply put, babies don’t buy houses. They do however contribute to household size. Changes in household size are an important element in determining demand for residential housing. The 2006 census recorded average household size in Queensland had fallen from 2.7 persons per household in 2001, to 2.6 persons per household. Since this period, forecasts indicate that as at the 2010/2011 financial year, average household size has fallen to approximately 2.56 persons per household. Additional forecasts indicate average household size will fall to 2.45 persons per household by 2031. This declining household size has been a strong catalyst in assuming a significant increase in demand for housing and therefore suggestions of a current under-supply of residential housing in Queensland. The first release of the 2011 ABS census data notes average household size has remained stable at 2.6 persons per household. Based on current affordability pressures, increasing household costs and the general low level of consumer sentiment, LandMark White is not surprised by this result. Current record high saving patterns and struggling retail trade figures suggest Queensland residents are cutting costs. This environment is resulting in an aversion to commit to a mortgage, and possibly a move to shared accommodation to reduce rental costs. In Brisbane, there is a strong argument that current high rents indicate a housing shortage. Median rental rates provided by the Rental Tenancy Authority show three bedroom homes located in the inner Brisbane suburbs have increased by an average of 8.2% over the past two years. Conversely, the outer suburb median rents have increased by a lesser and arguably stable rate of 3.9%. This presents a clear market segmentation of rents throughout Brisbane with increased demand for Brisbane’s inner city residential properties, not a current under-supply of overall stock. The static household size suggests more people are living together and sharing household costs in return for the convenience of living closer to the CBD with increased levels of amenity and serviceability. Based on the stable household size and stalled migration figures, LandMark White has calculated virtually no under-supply of residential housing on a State basis. Based on our estimates, the four years from 2007 to 2010 indicate a combined demand of approximately 154,000 homes with supply totaling 150,000 homes. This results in an under-supply of 4,000 dwellings. Given average demand over this four year period equates to circa 38,500 homes per annum, this level of under-supply equates to just over 1 month of demand. We therefore sit at equilibrium. As migration continues to stall and household size remains stable, there appears to be no short term concerns of a residential housing shortage. The stagnant economy, rising unemployment rate and concerns regarding overseas economies continue to plague Australians and are predicted to undermine all sectors of the residential market in the coming 12 months. An encouraging sign however is that migration levels increased slightly for 2011, off their lows in 2010. Perhaps this indicates we may have passed the bottom of the cycle. If population growth recovers to long term expected trends, and the construction industry remains static, Queensland is sure to face an under-supply of residential housing. Increasing the Queensland population will be driven by a strong economic recovery. When this recovery comes, the Queensland market will move to an under-supply with the inherent upward pressure on prices that brings.