‘Won’t somebody think of the Renters?’
Following from my previous post on 29th Aug showing that housing supply growth has managed to outstrip population growth for the past 40 years, doesn’t explain the current rental shortages and why supply-side policies are being deployed by all levels of government.
How can we reconcile data showing that supply growth is greater than population growth with the current rental market and low vacancy rates?
Is there a disconnect in the market? The renters will be asking, quite rightly, ‘Ok then, where are all these houses supposed to be?’. Are they looking in the wrong places? Well, technically, Yes. However, we need to view this in terms of where the demand actually is located.
Current vacancy rates fell to 1.2% in July nationally and the queues to see properties in the most desired areas are not happy places for prospective tenants. July data for Brisbane, Perth, Adelaide, Hobart and Darwin all have vacancies below 1%, balanced somewhat by Sydney and Canberra at 1.5%, and Melbourne the highest at 1.8%. Melbourne was the only capital to have had a material easing over the past 12 months (YoY 1.5%-1.8%) – because we build the most. Capital city rents are also up on average 5% for houses and 3.5% for units which leaves renters under continued pressure.
The rental market is ‘tight’ as it’s well below where economists consider an optimum vacancy rate for a healthy market at around 2.5%-3% - we are a long way from renters being flushed with choice and negotiating with real estate agents and landlords. Commentators’ opinions and government policy is directed towards the supply-side, where ‘Build baby, build!’ is the catchcry.
A quick note on the composition of immigration. Most of our immigration in recent years are uni students. They’re adults requiring housing. I've seen housing data heat maps related to student immigration. They reside primarily around the universities, in red hot concentrated clusters. Makes perfect sense when you see the data. Studio apartments, share housing, or living with friends and family are their main accommodations. We only have a few universities, so it's a stretch to think that demand for this type of housing around these specific locations is a major contributor to the national numbers and shortages.
Are the rental queues in inner-city Brunswick, Fitzroy and Hawthorn, as long as they are in Beveridge, Donnybrook or Rockbank? No, and we have good reasons for this. The strongest demand for housing and rentals is in the inner to middle rings around the CBDs of our cities. Unfortunately, this is where the dwelling construction has been the least, so renters face enormous competition from others, sometimes 100s at a time, trying to secure properties to live. Within 5km to 15 km from the CBD is the hotspot. There is not enough medium density housing in these high demand areas, as we haven't built enough. Why not? Primarily due to legacy non-favourable planning restrictions and high costs for developers and builders.
The Grattan Institute calls it the 'Missing Middle' – properties that are between the detached house on a 1/4 acre block and high-density apartment towers above 6 stories. Traditionally, Australians have an aversion to living in high rises compared to the overseas experience. Industry commentators say medium density housing, mostly comprising of townhouses and low-rise developments, are what is demanded in the inner to middle suburbs. More on this below.
‘Won’t somebody please think about the Builders?’
It seems strange at first, since the pandemic, why so many builders are going bankrupt? We’ve had a construction boom, and the macro numbers show we’re building dwellings at a faster rate than the population has been growing. However, it has been labelled a ‘profitless boom’ for builders, and they have continued to fall. Many it seems were caught out by extreme and constant building materials’ cost increases that their fixed priced contracts could not handle. Additionally, the high land costs has meant that most builders resort to providing well equipped ‘luxury’ housing (that our lifestyles demand) as the only way to build in premium prices to generate enough profit. This hasn’t boded well for renters seeking 2-3 bedroom housing 15mins away from the CBD by train. Commentators say that we’re no longer building housing at the ‘bottom rungs of the ladder’ and in locations where most of us want to live. As the population grows, more of us turn up at the ‘open for inspections’ in the desired locations.
‘Buy land, they’re not making it anymore.’
Why is our serviceable land so expensive? Essentially, we’re all competing for the same lots. As the quote above attributed to Mark Twain over 150 years ago alludes to. In Melbourne over the past 5 years, which has underperformed relative to other capitals, house prices have grown 20%, while units have only managed 6%. So much of the value of property is in the land. What makes it so scarce? Please see the graph below that compares how concentrated Australia is with the UK and US. It shows the number of cities totalling 50% of the country’s population.
This is highly unusual amongst other OECD nations, where most are quite regionally distributed. We are an outlier on this. Melbourne and Sydney alone are 40%. Australia is a very urban country and was settled this way, despite the good bushland folklore, if I recall my economic history studies correctly.
We can see that other factors are at play besides population/immigration growth that impact pricing and rental markets. Australia has one of the lowest levels of housing per person of any OECD country and is one of only four OECD countries where the amount of housing per person went backwards over the past two decades. Take the greater city of Berlin, it is about the 3x smaller in geographic size than Melbourne, but its density is 6x that of Melbourne. A comparable European city the size of Melbourne does not exist. Melbourne is extremely wide spread, 100 kms West to East. Sydney is similar but along the coast. These are unique Australian traits. We continue to build outward as the costs nearer to the centre are so restrictive. Affordable housing is essentially on the fringes.
Another rare thing we have is detached housing with backyards within walking distance to the CBD. We extend this further into the inner-city suburbs which is fairly non-comparable to most of the world’s cities where high and medium density housing is the norm. Apart from some on the waterfront, they’re the most valuable pieces of land in the country.
Sydney and Melbourne are both very large (~10,000sqkm) and effectively only bettered by a handful of cities like Tokyo and New York. However, the densities of these massive cities are far greater, with Tokyo at 37 million people (6x Melbourne and Sydney) and NYC at nearly matching Australia’s total population. A house on a piece of land is ingrained in our national psyche. It keeps our cities large with low density and makes them problematic for governments to properly service with infrastructure and transport.
Following from the previous post 29th Aug, the same macro-level story holds: even in the last 5 years dwelling growth outstrips population growth. There seems to be no escaping this fact. We need to explore elsewhere and the many other factors that influence housing prices and rents that are quite unique to Australia.
Drawing a line under these two posts
Yes, strong migration has seen Australia’s population rise much faster than most other wealthy countries in recent decades, boosting the number of homes we need. But this has happened while other factors have continued pressure on the housing market as we have seen above. Rising incomes, and demographic trends such as rising rates of divorce and an ageing Australia, have further increased housing demand, as people per household continues to decline.
There’s much not discussed here including the role of interest rates (which Dr. Lowe can address below) and the growth in credit from the financial sector. What we can learn is that house prices are caused and influenced by many factors, macro and micro, that dynamically create the market. Care needs to be taken on singling out one factor alone to ‘solve’ for the housing and rental crisis. Eg. cutting immigration may slow price growth and increase availability somewhat, but it will have other adverse knock-on effects negative on the economy overall.
As a way to tie-up these posts - and perhaps start a flurry of new and interesting ones! – I offer the words from Dr Philip Lowe - former RBA Governor – in his final RBA speech, Sept23:
‘…The reason that Australia has some of the highest housing prices in the world isn't interest rates, which have been roughly at similar levels in other countries with quite different levels if housing prices. The high housing prices are the outcomes of the choices we've made together as a society:
- Choices about where we live;
- How we design our cities;
- How we zone and regulate urban land;
- How we invest in and design transport systems;
- How we tax land, and
- How we tax housing investment.
In each of these areas, our society and our politicians have made choices that lead to high urban land and high urban housing costs. It's by tackling these issues that we can address the cost of housing in Australia, which personally, I view as a serious economic and social problem.’
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