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Wednesday 28 June 2017

Bedlam in Melbourne

Construction BOOM

The third in the traditional trifecta of population growth posts concerns the rate of new dwelling supply.

At the end of 2016 there were nearly 217,000 dwellings under construction in Australia, including some ~152,6000 attached dwellings, leading to intensified interest in how the housing market might cope with the deluge.

The property market downturns in resources towns since 2012 have been spectacular, but from a policy maker's perspective housing markets in regional areas are of little interest.

Sydney and Melbourne, on the other hand, have joined the major banks in the "too big to fail" category, absorbing by far the greatest share of net overseas migration over the past five years, and together accounting for the bulk of growth in the economy. 

Bedlam in Melbourne

Yesterday's demographic figures derived from the 2016 Census showed that Greater Melbourne's population was growing at a truly extraordinary pace in 2016, probably somewhere in the region of ~128,000 based on the state level data. 

I'm not too sure how useful the concept of an oversupply actually is while the population growth is tracking at that rate, since even a construction industry operating at full capacity will have a heck of a job keeping pace. 

One thing we do know from international experience, however, is that as and when the local market or economy suffers a downturn then population growth tends to follow south.

For what it's worth, dwelling completions in Victoria rose to nearly 60,000 in 2016, although only 56 per cent of completions were detached houses, suggesting that the average number of persons per dwelling housed in the newly-completed stock may be a notch lower than in decades past. 

Plotted against record high state population growth for this data series of ~146,600 and the ratio of population growth to completions remained elevated at 2.44, despite record rates of construction. 

After accounting for dilapidation and demolitions, the net increase in the dwelling stock in Victoria was likely closer to ~52,000 in 2016, at least according to preliminary ABS estimates. 

Lights not on, anyone home?

The Census normally shows that about one in every ten dwellings is vacant at the time of the count. 

Indeed, I was overseas in London myself for the now-famous 'Census fail', while there are holiday homes and city crash pads to account for.

This time around the Census figures showed that a thumping 17 per cent of dwellings built over the four years to 2016 were vacant. 

This is a point to be debated another time, but anyone that has driven around the capital cities at night and looked at the apartment towers can scarcely be all that surprised by this statistic. 

Sydney swamped

Skating across the Australian Alps to Sydney, and we find different dynamics at play. 

Sydney is still attracting the most migrants from overseas, but is also losing residents interstate to Brisbane, Gold Coast, and Sunshine Coast, as well as to parts of regional New South Wales as retirees take their equity to Bowral or Bermagui (or statistically most likely, the temperate South Coast or the Hunter Valley). 

Sydney's population therefore grew by ~91,000 last year.

At the state level there were an unprecedented ~82,750 dwellings under construction in New South Wales at the end of 2016, including ~62,000 attached dwellings, tracking against population growth of ~116,400.

Furthermore, New South Wales also saw the completion of ~60,000 dwellings in 2016,  although only ~25,500 of the finished dwellings were houses. 

The Sydney story is therefore one of a record apartment construction boom, and after a prolonged period of underbuilding since 2007, the ratio of population growth to completions has now sunk to under 2. 

Generally I try not to get drawn into arguments about oversupply or undersupply, since these concepts are nebulous at the best of times.

Like most people, I look at what's happening in my local area. For example, I can see that the supply of rentals is very tight in the inner suburbs of Sydney, yet clearly a different dynamic is emerging on parts of the south-western fringe. 

Sometimes it's just easier to deal with hard data, and Sydney's rental price inflation (56 per cent) has outpaced the city's CPI basket (28 per cent) by a ratio of 2:1 since the beginning of 2007.

Most neutral observers would probably call that an undersupply that is now swinging back towards equilibrium, but with more than 1,000,000 vacant dwellings around Australia these days at any given point in time I reckon the best thing you can do is use your eyes and ears!