I have discussed this idea before in other threads, and here is another report suggesting that a construction-led property boom could shortly develop in Australia.
Consider our recent property boom. This was characterised primarily by the exchange of existing stock, rather than the development of new stock. It was not a construction-led boom, unlike the recent US boom. This means we now have a shortage of stock in many areas as we toward the next property cycle, during a time of record population growth, record low vacancy rates, and rising rents. As interest rates continue to fall, credit conditions ease, and house prices begin to rise again, I expect a new construction-led boom to kick off in Australia, probably around 2010-2011.
Unfortunately, in the process, we may sow the seeds for our eventual property crash. House prices in Australia may be quite high already, but so far there has never been any trigger for a real crash. However, there is a fair chance that we will make the same mistake as the US... we may build too many houses during our forthcoming construction boom, creating a massive glut of property late next decade, just as the baby boomers start to die off, which will further increase supply and reduce demand. This is what may finally trigger the inevitable crash.
Previous threads on this topic...
We will have a property crash, but this isn’t it!
We're building towards a home construction boom
Population growth exacerbates housing crisis
Cheers,
Shadow.
Consider our recent property boom. This was characterised primarily by the exchange of existing stock, rather than the development of new stock. It was not a construction-led boom, unlike the recent US boom. This means we now have a shortage of stock in many areas as we toward the next property cycle, during a time of record population growth, record low vacancy rates, and rising rents. As interest rates continue to fall, credit conditions ease, and house prices begin to rise again, I expect a new construction-led boom to kick off in Australia, probably around 2010-2011.
Unfortunately, in the process, we may sow the seeds for our eventual property crash. House prices in Australia may be quite high already, but so far there has never been any trigger for a real crash. However, there is a fair chance that we will make the same mistake as the US... we may build too many houses during our forthcoming construction boom, creating a massive glut of property late next decade, just as the baby boomers start to die off, which will further increase supply and reduce demand. This is what may finally trigger the inevitable crash.
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Housing; supply deficit
The main driver for the Australian building materials sector is housing construction. In this context the domestic housing market peaked in FY04 and since that time housing starts have declined from 175k to 152k currently. NSW is the worst effected with dwelling commencements down 40% from the peak and currently at 20-year lows.
Despite the fall in the supply of new homes, the underlying demand for housing is estimated by the Housing Industry Association (HIA) at 180k. However it is worth noting that in the Federal Budget, the official estimate is 190k. As a result, the supply of homes compared to underlying demand, is expected to result in a shortfall of nearly 40k next year. But recent figures from ANZ are even more bearish with the shortage of homes expected to be 200k by 2010. We find this forecast both amazing and difficult to reconcile.
Although the expected housing supply deficit is bewildering, it is clearly unsustainable over the long term. In this regard the HIA recently issued a severe warning on residential supply, predicting that Australia will need 1m new homes to cope with a rapidly growing population over the next 5 years. The definition of economics is the study of how the forces of supply and demand interact in the allocation of scarce resources; however the domestic housing market appears to contradict this basic economic theory.
While it is clear that new houses have become a scarce resource in Australia, it is simply unbelievable that new capital has not found its way into the housing market. The overwhelmingly view is the decline in housing affordability. While we think this remains an important issue, we believe public policy is a similarly crucial issue, which we think helps to explain this apparent economic anomaly when the demand/supply fundamentals remain undeniably positive. However we genuinely believe housing construction is about to soar, but first it is important to review the drivers of the demand for housing construction.
The two traditional underlying drivers of housing demand have always been affordability and demographic trends. While the recent rising trend in population growth has been particularly supportive, there is little doubt that national housing affordability has declined significantly over the last few years. However we believe the key factors driving the decline in affordability are easing and we believe the outlook for the housing market has turned positive for the first time since 2004
Housing affordability
The housing industry experts and the building material analysts point to the decline in affordability as the single biggest impediment to an increase in housing construction and the supply of new dwellings. While this remains true to some degree, it is not necessarily that simple. We believe there are other forces at work which are just as important to housing demand.
We believe the concept of housing affordability is driven by two factors: the level of house prices and interest rates, and importantly we believe both factors are turning positive for potential new home buyers and investors.
There is no doubt that house prices have risen strongly last year with the Australian Property Monitors (APM) figures showing a national rise of 12.2% in 2007. However the rises were not uniform with Melbourne the strongest with the median house price up 25.2% to $463,488, compared with a 20.1% rise in Brisbane, 20% in Adelaide, a rise of 11.3% in Hobart, a 4.8% jump in Sydney and just 1.7% in Perth.
However, exacerbating the rise in house prices, the Reserve Bank has raised interest rates by 25bpt no less than 12 times since 2002. In fact in the last 9 months mortgage rates have risen 75bp in line with the increase in the cash rate, while the commercial banks have raised variable mortgage rates by an additional 40bp due to the rise in wholesale funding costs.
As a result, official figures reveal national housing affordability has trended down for 8 consecutive quarters to currently be at 25 year-lows. However despite the multi-decade lows for affordability, Melbourne house prices rose 25% in 2007. In this regard, clearly it is important to distinguish between high house prices and population growth in terms of the affordability issue.
In the meantime however, the consensus view expects the RBA to cut the cash rate by 50bp by the end of this year while the Bank Bill futures currently predict another 50 bp fall in 2008. In addition, the latest APM figures reveal that national house prices fell in the March quarter for the first time in 3 years followed by another 2.2% decline in the June quarter. As a result the APM is now predicting that prices in some cities like Melbourne could fall up to 10% in the next 12 months.
Consequently we believe with the prospect of 10% house price falls in some cities next year, and the expectation of at least 100bp cuts in interest rates over the next 12 months, house price affordability is set to improve significantly over the course of the next year.
Demographic trends
There is no denying that strong population growth has been a very positive long term driver of housing affordability. In this regard Government statistics reveal that last year, Australia’s population grew by 1.6% representing the fastest rate in the Nation’s history with birth rates and migration intakes soaring. In 2007 Australia added 180k migrants to our population compared to the long term average of 110k. In addition with a further 10% increase expected over the next few years, this trend is not slowing anytime soon. It is worth noting that at the peak of the last recession in 1992 Australia attracted just 52k migrants.
We believe the strong performance of residential property over the last few years confirms our view that while high house prices remain an important affordability issue, they are not sole driver of the low levels of housing activity as some analysts would believe. Consequently we strongly expect the historic highs for population growth, driven by record migrant intake levels, will be a strong driver of a massive surge in housing construction over the next few years.
Rents rising, vacancy rates falling
However we believe there are other significant drivers supporting an expected rise in housing construction which remain equally important and similarly strong,
The chronic housing supply shortage has lowered rental vacancy rate to crisis levels in some capital cities. The recent figures from the Real Estate Institute (REI) of Vic reveal that the vacancy rate across Melbourne is 0.9% which is the lowest since records began in the early 1980s. Within 4kms of the CBD it has fallen to 0.5% in July down from 0.6% in June. We believe this dynamic explains the explosion in Mel house prices despite the record lows of house price affordability.
The situation remains equally dire in NSW, where according to the Sydney REI, vacancy rates have fallen to an historic low of 1.0%, compared to the record low national vacancy rate of 2%. We believe the lag in Sydney house price growth compared to Melbourne reflects the policies of the NSW Government and not a reflection of any weak fundamentals. However we believe this is about to change.
As a result, national rents are skyrocketing. ABS June statistics show rents rose 1.6% in the June quarter. In addition APM figures reveal a median weekly rise of 11.6% for houses, and 10.8% for units, over the last 12 months. However forecasting agency BIS Shrapnel believes the Sydney rental market could rise by as much as 11% a year for the next 3 years, while Melbourne rents could rise by 8% pa for the same period.
Consequently yields are beginning to rise significantly from very depressed levels. Recent figures from APM reveal that gross yields for houses were 4.5%, while units had increased to 5.1%. However according to Global Property Guide research gross rental yields for Sydney apartments are now around 7% for very small units (50 sq. m.), and average around 5.6%.
We believe a real key driver for an increase in housing construction is the return of private investors back into the property market and the improving trend in gross yields is the first sign. In addition we believe the Fed Government has to show some real leadership with genuine incentives to developers and investors to increase the supply of new dwellings to ease the rental crisis.
Government initiatives
In this regard, following the seeding of $20b Building Australia Fund, the Rudd Government recently revealed the second stage of the National Rental Affordability Fund. The second stage is aimed at providing tax incentives for investors to build 100k low-rent properties, double the target of the first stage, over 10 years in a bid to fix the chronic undersupply of houses. A further $30m is to be allocated to streamline, and move online, the development application approvals processes.
In addition the Government expects the $500 million Housing Affordability Fund will help local governments subsidize infrastructure costs such as water, sewerage, roads and parklands for new developments. The Government has also agreed to consider a housing industry plea for special visas for migrant builders to help find an extra 20,000 skilled tradespeople. Again we believe this highlights the importance of rising migration levels.
In releasing the second stage the PM stated, "There are now 1.1 million low- to middle-income households spending more than 30 per cent of their income on housing. This is a stunning statistic. And it is a disturbing statistic." We believe these comments highlight the Government’s strong commitment to increase housing supply and affordability, and the importance of these initiatives should not be underestimated.
The HIA has "strongly endorsed" the new policies while Australia REI said the changes would increase the supply and reduce development costs and provide long-term support to both renters and first-home buyers. In response the Property Council of Australia reveals that infrastructure charges add more than $68,000 to the national cost of a new home. We believe this comment highlights a very important factor driving the chronic housing supply shortage and exacerbating the affordability issue.
Stamp Duty
There is little doubt that the Property Council of Australia figures confirm that the significant increase in Government housing taxes have become a genuine burden for new home owners. However the issue has never been more acutely highlighted than in NSW where Government taxes and charges are now estimated to be close to $120k on a new home. This is a National disgrace and an urgent change of policy is required by the NSW and Federal Labor Governments.
The NSW housing starts for 2008 are estimated to be 30k while demand is forecast at 39k. However, more importantly, the NSW supply imbalance is set to increase further considering underlying demand is forecast to rise to approx 45k by 2010. It is worth noting that the NSW housing market still remains the nation’s largest and represents the key to the recovery in the Australian market.
In this regard our sources reveal that the Federal Government is pushing for abolishing stamp duty for home buyers with a revenue trade-off for State Governments. We believe the significance of such an initiative would be profound for housing activity. It is worth remembering the very positive volume impact on the Australian equity market with the elimination of stamp duty on share purchases. We believe the same result would be achieved for housing construction. Reducing transaction costs is absolutely crucial to break the current inertia in the housing market. I think the Rudd Government is highly aware of this and I wouldn’t be surprised to see stamp duty abolished or reduced by the states over the next 12 months.
Positive fundamentals
We believe the negative housing price and mortgage rate affordability headwinds for the domestic housing construction are abating. In addition there is absolutely no doubt that the long term fundamentals for residential housing construction, and therefore the domestic building materials industry, remains very positive.
The current and future population growth trends remain extremely strong. The record low vacancy rates are supporting a significant rise in gross rental yields which we believe will encourage investors back to the housing market. We believe this expectation will be supported by Government initiatives such as the Building Australia Fund, the National Rental Affordability Fund and the potential abolition of stamp duty on housing. In addition low affordability issues are diminishing with an expected 100bpt easing in interest rates, a forecast fall in house prices, an easing in petrol prices and the continuing strength in wages growth and employment.
We genuinely believe all the signs point to a significant recovery in domestic residential housing activity with the exception of investor sentiment. In the current “glass half empty” climate, negative sentiment remains the dominant driver of domestic equities. As a result we think investors are missing the emergence of genuine long term value within the industrial sector.
Previous threads on this topic...
We will have a property crash, but this isn’t it!
We're building towards a home construction boom
Population growth exacerbates housing crisis
Cheers,
Shadow.
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