What Lies Ahead for the Housing Market?

Managing Director of the Real Estate Institute of Australia, David Airey recently addressed the Australian Financial Review’s Residential Property Conference and engaged in some crystal ball gazing.

The presentation looked at where we are now and where the housing market is heading: Its aim was to explain the behaviour of house prices and identify factors that will affect future performance.

To explain these factors Airey looked at the economic variables that affect house prices and additional factors that will have an impact on the dynamics of the market in the future.

First up he identified the key drivers of median house prices – population and migration; household creation; supply of housing; composition of households; ageing of the population and; tax structure. He then drew a conclusion.

Median House Prices:

During the period December 1996 – December 2009 median house prices increased from around $160k to around $500k, a steady trebling in thirteen years.

Population and Migration:

From September 1995 to September 2002 natural population growth decreased by 16.9%: From September 2002 to September 2009 natural population growth increased by 51.8%. A huge turnaround!

From September 1995 to September 2002 net overseas migration grew by 2.7%: From September 2002 to September 2009 it increased by 142%.

Forecast: 2011 to 2016 an increase in population of 8.8 % is predicted: From 2016 to 2026 the prediction is 17.6%.

Household Formation:

For the five years from 2001 to 2006 the number of households increased by 9.4%.

The Australian Bureau of Statistics (ABS) anticipates this growth will slow to an 8.0% increase for the five years 2006 to 2011.

Building Approvals and Dwellings Completed:

From December 2002 to December 2009 the number of building approvals and dwellings completed decreased by 5.1% and 7.3% respectively.

Whilst the Government’s stimulus package improved approvals slightly it has not turned the trend around.

If this trend continues we will see further pressures in the housing market as population grows and the number of households grow.

Composition of Households:

The composition of households will affect not only the number of dwellings demanded but also the type, size and location.

According to the ABS, from 1995-96 to 2007-08 there was an increase in the proportion of “couples only” one family households (from 23.7% to 26.5%).

Over the same period of time “lone person”, non-family households increased from 22.8% to 24.8%.

According to the last report of the National Housing Supply Council (NHSC) the demand for houses is projected to grow proportionately less quickly than demand for flats, units and apartments.

Ageing of the Population:

According to the Intergenerational Report 2010 (IGR) over the next 40 years, the number of people aged 65 to 84 years will double and the number of people aged over 85 will quadruple.

The NHSC projects increased pressure on both private and public rental markets to meet the needs of older renter households.

At the same time, the NHSC projects that demand for private rental housing by younger households will decline.

Henry Review:

(Treasury Secretary Ken Henry’s tax review.)

Nothing in immediate response by the Government to the Henry Review will bring changes to the housing market.

It is important that the Council of Australian Governments (COAG) place a high priority in reviewing institutional arrangements that impede housing supply and affordability.

It is important to encourage governments to reform inefficient state property taxes such as stamp duty. This would encourage mobility and allow for a better match of peoples housing requirements throughout ones life cycle.

Conclusions:

• House prices have been related to movements in mortgage rates, stock returns and family income. This will continue.
• Future activity will be influenced by “structural” factors such as, population growth including migration, household formation and construction of new dwellings (including removal of supply constraints).
• Sound policies and action by governments are a pre-requisite for matching demand and supply.
• The future for the Australian housing sector is sound, albeit with changes in the products required by our changing population.