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Sunday 18 June 2017

How many apartments are we building?


Another day, another property bust article from me old mucker Roger Montgomery, this time in Professional Planner:

Usually when writing financial articles or documents there's an internal checking process that goes something like this: "Does this make sense? No, this does not make sense." - but for some reason this doesn't seem to apply when Monty writes about dwelling supply.

The only reason I can think of is to cause people to panic, sell their home, and invest in a managed fund (happy to stand corrected, though).

Have we been producing 230,000 apartments annually, or indeed anywhere close to that level?

Let's take a look at some numbers...

How many?

2016 was by some margin the greatest calendar year on record for dwelling construction in Australia.

In total just under 114,000 houses were completed, and fewer than 95,000 attached dwellings (including all townhouses, 'plexes, units, and apartments).

It was a a monster year for dwelling construction with the industry operating close to full capacity, as evidenced by price inflation in materials and labour prices, and a shortage of qualified project managers. 

These completion figures are before accounting for stock obsolescence or demolitions, and therefore the net additions were considerably lower.

The ABS preliminary estimates puts the annual net increase in the total number of dwellings at +172,800, but these are of course subject to revision, and in any case these are quite muddy waters at the best of times.

It's certainly true that over time we have been building fewer houses per capita and shifting towards apartments.

In reality what happened was that by 2009 Sydney completions had crashed to their lowest level since 1953, while there was also the uncertainty of the financial crisis to contend with.

Since 2013, through a combination of record low interest rates, very strong dwelling price growth, and an unprecedented demand for new apartments from investors in China, developers have pumped out a record supply response.

But even still, we're not near 230,000 apartments annually.

Even lobbing in everything that isn't a house we've got nowhere near producing 230,000 units per annum.

Housing Industry Association (HIA) numbers have shown that while the number of semi-detached commencements has continued to rise, high-rise apartment starts have already fallen away quite sharply in Victoria and Queensland.

This means that peak commencements took place back in the 2016 financial year at a total of 116,300 multi-units.

One key dynamic through this property market cycle - given that it takes on average at least three times as long on average for an apartment to be completed versus a house - is that the pipeline of apartments still to be delivered remains huge in 2017.


One other point, the population increase over the year to September 2016 was 1.5 per cent, or +348,700, not 1.3 per cent as claimed in Monty's latest op-ed:

The rate of population growth also now appears to be accelerating, certainly to above 350,000 per annum, and possibly towards 400,000.

To put that in context, remember last year when Australia's population hit 24 million? This week, the population clock will fizz past 24,500,000. Next year, we'll pass 25 million.

As I noted 13 months ago - when Monty argued that there was already 18 months worth of oversupply - any way you spun the numbers back then you couldn't get to an oversupply of 200,000 dwellings.

For that reason, Monty's claim that rents are falling around the country is also not correct.

I noted here this week that "Sydney rental crisis" could be the next big story as investors are clubbed out of the market, and the latest figures from Domain Group suggest that this could follow hard upon.

For as long as the present rate of immigration and population growth continues, you can more or less forget any oversupply in Melbourne, but the usual regional caveats apply.

There could be some challenges on the outer-Sydney fringe, for high rise apartments in Blacktown and Parramatta, while inner city Brisbane apartments have been a hot topic for at least a couple of years now.