A world wide housing shortage
A consistent story reported in the media from countries that experienced high house prices is a "housing shortage".
According to economics, price in a free market is set by the interaction between supply and demand. If supply is greater than demand, prices fall, if demand is greater than supply, prices rise. Prices have risen at drastic, unprecedented rates in many locations around the world - so self evidently demand exceeded supply. When demand exceeds supply this is called a shortage.
Demand is measured in dollars and can increase in a number of ways:
Increased number of buyers - due to immigration, births, changing demographics etc.
Increased borrowing capacity - from lower interest rates, financial innovations in the mortgage industry, or asset price gains leveraged from existing property. New lending products like subprime or low-doc loans mean that some people who may not have previously qualified for a mortgage add demand to the marketplace.
Speculative demand - buying a house because "it is a good investment" or "house prices always go up". People buying because of high prices cause a feedback effect - called a speculative bubble - which can often lead to a financial mania where prices become completely disconnected from underlying yields or value on the belief that there will always be capital gain.
Fear - Some first home buyers may feel pressured to buy now to "get on the ladder" or "before they miss the boat" causing future demand to be brought forward.
As you can see, demand is measured in dollars and is just a number in a banks computer. Thus it can change almost instantly when rates are cut or someone qualifies for a new type of loan. Supply however involves real life physical houses that have to be constructed on appropriate land.
A question to ask when seeing prices rise so dramatically is whether the "shortage" in supply and demand is due to a fundamental population to housing stock shortage or rather artificial or temporarily high demand? For if it is the latter, the shortage can disappear almost instantly with credit conditions and become a glut.
Interestingly enough, it seems that during a house price bubble, almost everyone from the media to the government to the people believe that it is due to a fundamental lack of houses. This theory is put forth by housing industry groups who ask for concessions for their industry or increased government assistance.
Media and industry commentary from around the world
USA
Public Policy Institute of California (2004)
Facts from the California Building Industry Association (2006)
Los Angeles Times Sunday magazine cover in November 2003.
Australia
ANZ April 2008 housing snapshot
HIA: Housing shortage to 2010
New Zealand
http://www.andrewking.co.nz/pm/don-t-buy-coffee-and-cars-if-you-want-a-house/
Houses and People: The facts
So how do we know if we actually have enough houses for everyone? Did every country around the world seeing record high real estate prices just not build enough houses?
How come the USA thought they had a shortage, but then when the artificial demand from the housing bubble disappeared, they suddenly had a glut? Is this likely to happen elsewhere? How can we tell?
Below is a comparison of housing and population growth for Australia and the USA using their respective census data:
USA
2001 census 2006 census
2001 US population: 285,226,284 2006 US population: 299,398,484
2001 US dwellings: 117,858,349 2006 US dwellings: 126,316,181
Population growth 01-06 : 4.97% Dwelling growth 01-06 : 7.18%
We can therefore calculate the percentage overbuilding as (Dwelling Stock Growth - Population Growth)/Population Growth. This gives an overbuilding figure of 44%
Australia
2001 census 2006 census
2001 AU population: 18,769,249 2006 AU population: 19,855,288
2001 AU dwellings: 7,790,079 2006 AU dwellings: 8,426,559
Population: 5.78% Houses: 8.17%
We can therefore calculate the percentage overbuilding as (Dwelling Stock Growth - Population Growth)/Population Growth. This gives an overbuilding figure of 41%
Australia has never had so many houses or bedrooms per person in our history. Nor has there ever been as many empty bedrooms or vacant houses (830,000 or almost 10% of the housing stock according to ABS 2006). We have constantly built houses faster than population growth.
Another question to ask is, if there really was a shortage of houses, why have building approvals suddenly dropped?
Why have new home sales dropped? Why are property developers sitting on so much unsold inventory? Why isn't the market responding with supply for this demand?
Why do these actions sound so familiar to the top of the bubble in the US market?
It is thus obvious that we don't have a supply problem, rather one of artificially high demand from easy credit and people wanting houses not just to live in, but speculative mania in a ponzi scheme.
The current state of the Australian housing market
As of Q1 2008 the collapse of securitised mortgage lending markets due to the credit crunch, tighter lending standards, higher interest rates and a drop in consumer confidence have caused a drop in the amount of money borrowed for house purchases.
Remember that demand is measured in dollars, this has reduced demand. Accordingly, the number of houses for sale continues to outpace the number sold causing inventory to rise. Instead of the shortage and rising prices we are used to, the increase in inventory shows that demand is less than supply at current prices - a glut.
A glut means one thing - if sellers want to meet the market and sell their house, they will have to lower their prices.
A consistent story reported in the media from countries that experienced high house prices is a "housing shortage".
According to economics, price in a free market is set by the interaction between supply and demand. If supply is greater than demand, prices fall, if demand is greater than supply, prices rise. Prices have risen at drastic, unprecedented rates in many locations around the world - so self evidently demand exceeded supply. When demand exceeds supply this is called a shortage.
Demand is measured in dollars and can increase in a number of ways:
Increased number of buyers - due to immigration, births, changing demographics etc.
Increased borrowing capacity - from lower interest rates, financial innovations in the mortgage industry, or asset price gains leveraged from existing property. New lending products like subprime or low-doc loans mean that some people who may not have previously qualified for a mortgage add demand to the marketplace.
Speculative demand - buying a house because "it is a good investment" or "house prices always go up". People buying because of high prices cause a feedback effect - called a speculative bubble - which can often lead to a financial mania where prices become completely disconnected from underlying yields or value on the belief that there will always be capital gain.
Fear - Some first home buyers may feel pressured to buy now to "get on the ladder" or "before they miss the boat" causing future demand to be brought forward.
As you can see, demand is measured in dollars and is just a number in a banks computer. Thus it can change almost instantly when rates are cut or someone qualifies for a new type of loan. Supply however involves real life physical houses that have to be constructed on appropriate land.
A question to ask when seeing prices rise so dramatically is whether the "shortage" in supply and demand is due to a fundamental population to housing stock shortage or rather artificial or temporarily high demand? For if it is the latter, the shortage can disappear almost instantly with credit conditions and become a glut.
Interestingly enough, it seems that during a house price bubble, almost everyone from the media to the government to the people believe that it is due to a fundamental lack of houses. This theory is put forth by housing industry groups who ask for concessions for their industry or increased government assistance.
Media and industry commentary from around the world
USA
High housing prices, low vacancy rates, and low levels of new construction have convinced many observers that California is experiencing a critical housing shortage, especially in the state’s largest metropolitan areas.
Public Policy Institute of California (2004)
California has a housing shortage. Since the late 1980s, the number of new homes and apartments constructed has been far below what is needed to keep pace with the state's job and population growth.
Consider these facts from the California Building Industry Association:
The Department of Housing and Community Development estimates that California must build an excess of 200,000 homes each year through the year 2020 in order to accommodate the population growth and remain "reasonably affordable." The California Building Industry Association estimates the state's housing deficit total to be nearing 1 million homes and apartments in 2003.
Facts from the California Building Industry Association (2006)
Will L.A.'s Real Estate Bubble Burst? No, Because There Isn't One. There's Just Too Much Demand, Not Enough Supply and No Room to Build. None of That Will Change."
Los Angeles Times Sunday magazine cover in November 2003.
President George Bush (2003)We also must work in close partnership to dispel the myth that our nation is experiencing a ‘housing bubble.’ Although the United States is the best-housed nation in the world, we as a country still face a housing shortage.
Australia
Chronic market imbalance will support prices.
The looming crisis in housing has left recent and aspiring entrants in to the residential market in despair. The dream of home ownership that is enshrined in Australian culture may be slipping out of reach of generations to come as affordability deteriorates to almost record levels.
.....
Underlying demand for homes will exceed 180,000 in 2007-2008 while supply will be restricted to 145,000 and by 2009 the shortfall in the housing market will approach an unprecedented 200,000 dwellings
ANZ April 2008 housing snapshot
The Housing Industry Association's (HIA) National Outlook shows a shortfall between the number of new dwellings being built this financial year and the "underlying requirement" of almost 20,000 dwellings.
Over 2004/2005 to 2009/2010, demand will have exceeded supply by 77,600 dwellings.
HIA: Housing shortage to 2010
New Zealand
Housing Minister Chris Carter after two new reports revealed that New Zealand’s most populous region faces a severe housing shortage and must accommodate growing numbers of people who may rent all their lives.
http://www.andrewking.co.nz/pm/don-t-buy-coffee-and-cars-if-you-want-a-house/
Houses and People: The facts
So how do we know if we actually have enough houses for everyone? Did every country around the world seeing record high real estate prices just not build enough houses?
How come the USA thought they had a shortage, but then when the artificial demand from the housing bubble disappeared, they suddenly had a glut? Is this likely to happen elsewhere? How can we tell?
Below is a comparison of housing and population growth for Australia and the USA using their respective census data:
USA
2001 census 2006 census
2001 US population: 285,226,284 2006 US population: 299,398,484
2001 US dwellings: 117,858,349 2006 US dwellings: 126,316,181
Population growth 01-06 : 4.97% Dwelling growth 01-06 : 7.18%
We can therefore calculate the percentage overbuilding as (Dwelling Stock Growth - Population Growth)/Population Growth. This gives an overbuilding figure of 44%
Australia
2001 census 2006 census
2001 AU population: 18,769,249 2006 AU population: 19,855,288
2001 AU dwellings: 7,790,079 2006 AU dwellings: 8,426,559
Population: 5.78% Houses: 8.17%
We can therefore calculate the percentage overbuilding as (Dwelling Stock Growth - Population Growth)/Population Growth. This gives an overbuilding figure of 41%
Australia has never had so many houses or bedrooms per person in our history. Nor has there ever been as many empty bedrooms or vacant houses (830,000 or almost 10% of the housing stock according to ABS 2006). We have constantly built houses faster than population growth.
Another question to ask is, if there really was a shortage of houses, why have building approvals suddenly dropped?
Why have new home sales dropped? Why are property developers sitting on so much unsold inventory? Why isn't the market responding with supply for this demand?
Why do these actions sound so familiar to the top of the bubble in the US market?
It is thus obvious that we don't have a supply problem, rather one of artificially high demand from easy credit and people wanting houses not just to live in, but speculative mania in a ponzi scheme.
The current state of the Australian housing market
As of Q1 2008 the collapse of securitised mortgage lending markets due to the credit crunch, tighter lending standards, higher interest rates and a drop in consumer confidence have caused a drop in the amount of money borrowed for house purchases.
Remember that demand is measured in dollars, this has reduced demand. Accordingly, the number of houses for sale continues to outpace the number sold causing inventory to rise. Instead of the shortage and rising prices we are used to, the increase in inventory shows that demand is less than supply at current prices - a glut.
A glut means one thing - if sellers want to meet the market and sell their house, they will have to lower their prices.