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Thursday, 2 August 2018

Shock and ORR!

This time it's (a bit) different

Another day, another housing front page headline, today's special from someone I've literally never heard of being quoted in the media before.

A slightly quieter piece caught my eye in The Australian, quoting BIS Oxford Economics, citing a deficiency in stock in Sydney:

'The difference in Sydney this time is that the downturn comes while there is still a significant deficiency of residential stock. 

That means if the conditions are favourable, the next upswing may come sooner. 

But it still will take its own sweet time.'

Hang on, say what? 

That's right: a stock deficiency! 

Which marks this cycle out as a bit different from those that went before.

End of the boom

BIS noted that Sydney's property booms have tended to end with a period of dwelling price stagnation rather than significant declines, until the market eventually becomes undersupplied again - with site values falling by about half in the intervening period - and this time around will likely be the same, they say.

BIS also pointed out that in this cycle the undersupply will probably come about more quickly as dwelling commencements fall over the next few years, because the Sydney population is growing quicker today than it used to, now at about 100,000 per annum.

There are many ways to measures supply, of course, and I look at them all here each month, so there's no need to re-post all the charts again: rental vacancies, new listings, total properties for sale (stock on market), new land release, and the absolute number of apartments and houses, for example.

With all the cranes on the skyline right now it seems counter-intuitive to even be talking about a stock deficiency or future undersupply, but contrarian calls must always be thus (when I warned on Property Observer in 2013 about potential overbuilding hotspots in Sydney I was met with a similarly muted response, for example). 

The Greater London Authority (GLA) recently ran a report showing how Sydney's population growth rate at 2 per cent has outpaced the rate of increase in the housing stock over the past five years, although there are still many apartment developments to complete.

London has experienced the same dynamic. 

Source: GLA

I have recently heard Brendan Coates of the Grattan Institute making a very similar point.

Don't get me wrong, I can certainly envisage many failed apartment projects and settlement defaults over the next few years, and a surge of apartment completions leading to a temporary spike in rental vacancies - that's generally what happens at the peak of a cycle. 

All of this is also before we consider how some areas have been far more built out than others. 

However, because apartment projects can take years to complete, our eyes can deceive us on the oversupply front.

Say for the sake of argument that the market has built 10,000 apartments 'too many' (however that's measured) in Greater Sydney through this cycle.

The delivery of 10,000 new apartments is noisy, disruptive, and leaves a huge blight on the landscape for a very long period of time. 

At the current rate of population growth that level of supply is being absorbed in about a dozen weeks as new migrants continue to choose Sydney ahead of all other Australian cities.