Supply v Demand #2

Following on from last week’s post – revisit here – this week I have looked at the state of play for new housing supply and underlying demand for south east Queensland.

Two tables are included, the first looks at the situation by major region – inner Brisbane (within 5km of the CBD); middle Brisbane (between 5 and 20km); outer suburbs (20 to 50km) and the outer conurbation (50km+) – and the second table, by local authority area.

The LGA table is at the end of the post in the Missive extra area.

Table 1: Underlying dwelling demand versus actual dwelling supply  

LGA Underlying demand Dwelling supply Status of new housing supply
Inner Brisbane 19,657 21,350 1,693 9%
Middle Brisbane 16,809 23,426 6,617 39%
Outer suburbs 39,734 43,035 3,301 8%
Outer conurbation 47,601 42,366 -5,235 -11%
Total SEQ 123,801 130,177 6,376 5%

Some comments

1. Inner Brisbane’s supply overhang is almost absorbed.  For more go here.

2. There is too much of the wrong stock across Brisbane’s middle ring suburbs. Think five + storey apartment product in locations without high enough local amenity and infrastructure provision to offset this building density.

There is a need for more infill housing; boutique townhouse or terrace projects and the old fashion three storey six packs but only in the right locations and with a very high degree of market match.

3. Overall the outer suburbs are keeping up with demand, but it isn’t an even spread. Logan and Moreton Bay are struggling, whilst Ipswich and Redlands have enough registered new stock for the time being.  See the Missive extra table below.

4. The outer conurbation, across the board, is struggling with new dwelling supply.  Again see the Missive extra table below.

Supply v Demand

Much is written about population growth in the real estate space, with most making comments about how it adds to underlying housing demand.

In equal fashion a lot is written about new housing supply, with many quick to jump on either the ‘under supplied’ or ‘oversupplied’ bandwagon.

Most of the time these discussions are in isolation from each other and it is rare to see them interwoven. But they should be because it’s the relationship between supply and demand that matters most.

I have included four charts that outline the state of play for new housing supply and underlying demand (that is the need to build new dwellings) for the four major capitals.

In summary these show that Sydney is oversupplied; Melbourne is more or less balanced; Brisbane’s recent oversupply looks to be short lived and Perth is almost through its market correction.

Inner Brisbane Apartments

Much has been written about the apartment market and the perceived state of play of inner Brisbane apartments.  Like most things in real estate, hyperbole is the order of the day, with the recent boom and current doom being exaggerated.

Our research has found that inner Brisbane is now struggling to keep up with the underlying demand.   That isn’t a typo.  I repeat it is heading for an undersupply.

The recent oversupply of new apartments has been shortlived.  The main reasons for the quick ‘oversupply to undersupply’ reversal include growing demand to live downtown and the swift contraction of new apartment supply.

Let’s look at the demand side of the equation. The official population forecasts for the inner Brisbane area are way below recent trends.  We estimate, based on the last decade, that there is a need to build 6,000 new dwellings each year across inner Brisbane.  Nearly all of these new dwellings will be apartments.

This forecast applies for the next ten years. But we think the need will be greater, especially now that Brisbane City Council has effectively said NO to infill suburban development.

On the supply side, there are 185 new major apartment projects proposed across inner Brisbane, totalling around some 48,250 apartments. However only 30% of this stockpile is under construction and an addition 17% or about 8,000 apartments are probable over the next two to three years.

Over half of the currently proposed inner Brisbane apartment stock is unlikely to commence anytime soon.

Further good news is that inner Brisbane’s available apartment rental supply is now falling.  This contraction has been quite sharp.  Many of Queensland’s recent interstate migrants from Sydney are young couples trying to make a new start in Brisbane.  They are mostly renting new inner city apartments.

Now we aren’t going for spruik here – and no doubt that this is some sorting out still to do – with, for example, apartment prices still falling for one-bedroom and two-bedroom apartments.  However, prices are now rising for larger apartment stock.  A similar trend can be seen when it comes to weekly rents.

Importantly the rate of price fall for the smaller one and two bedroom stock is now braking and hasn’t been as bad as many commentators predicted.

And whilst last year most apartment sales – both for new stock and resales – sold to investors, this is now changing on two fronts – less interstate investor interest and more locals buying as owner residents.  Apart from a few hot spots, overseas buyers have never really had that much interest in buying in Brisbane.  They seem to stick to Sydney and Melbourne.

All real estate obeys a cycle – and as we noted a few weeks back this cycle runs on short, medium and long term time frames.

The short-term cycle is about supply and demand; the medium term is about structural changes like zoning and the long term concerns the economic, social and demographic trends.

The Brisbane inner city apartment market gets a tick for all three cycles.

Cars

Much is written about population growth and its positive impact on most things economic.

But there is also sting in that tale.

Despite the intelligentsia telling us the opposite, the number of vehicles per capita, is on the rise in Australia.  It is currently 776 vehicles per 1,000 bodies.  It was 723 a decade ago and just 644 in 1998.

Gentrification, urbanisation, uberisation and all those other trendy urban movements haven’t yet had an impact on our car use and especially the number of cars on our streets.

There are just over 19 million registered vehicles in Australia, which is up 25% on ten years ago.  Pity our road and parking capacity hasn’t increased anything like that volume over the same time frame.  It is no surprise that traffic congestion has become much worse and many of our streets are now parking lots.

Registered vehicles
Australia, states + territories

State/Territory 2018 (no) Decade change % change
NSW 5,618,385 1,098,422 24%
Vic 4,923,032 1,001,458 26%
Qld 4,045,335 871,888 27%
SA 1,408,960 230,056 20%
WA 2,234,564 487,985 28%
Tas 480,935 89,608 23%
NT 162,500 39,514 32%
ACT 302,568 60,806 25%
Australia 19,176,279 3,879,737 25%

Tasmania, in particular, is feeling the change with 921 vehicles per 1,000 people and a 17% increase in this statistic over the past ten years.  Queensland, South and Western Australia are also feeling the heat.

Interestingly Victoria – read Melbourne – has seen little change in the ratio of vehicles per population.  Yes, their recent high rate of population growth has seen their streets get more crowded, but it is not as bad as it might have been.

Registered vehicles per 1,000 population
Australia, states + territories

State/Territory Vehicles/1,000 Decade change % change
NSW 712 59 9%
Vic 774 25 3%
Qld 817 60 8%
SA 816 72 10%
WA 863 53 7%
Tas 921 134 17%
NT 660 96 17%
ACT 733 35 5%
Australia 776 53 7%

There are lots of lessons here including Melbourne’s somewhat more decentralised workforce; medium density infill housing in Melbourne’s middle and outer suburbs; the city’s range of effective public transport options and a strong local culture of public transport use.  It isn’t prefect but better than what is (or more to the point, isn’t) happening in our other urban centres.

So, when you hear all the positives about population growth, remember 1,000 additional people means 776 more cars, Australia-wide, and closer to 817 more cars in Queensland.

End note

Maybe driverless cars will reverse this trend.  GoGet and other car sharing schemes might help too.  But I am not that convinced.

For mine the key is to get people working closer to where they live and to provide housing closer to where they work.  Yet most councils and state governments have planning schemes and policies that do the opposite.

Spring!

I am often asked about when it is the best time to sell a home.

Most think it is spring.

And yes, it is slightly better but only marginally so.

As a summary across all capitals – 21% of sales take place in summer; 26% in autumn; 25% in winter and 27% in spring.  New listings are sometimes higher in spring, than the other seasons, but not always.

Even in ‘holiday’ markets like the Gold or Sunshine Coasts there isn’t much difference between the seasons.

Bigger factors come into play.

Australian capitals
Housing sales distribution by season

Capital city Summer Autumn  Winter Spring
Sydney 20% 26% 25% 28%
Melbourne 21% 26% 26% 27%
Brisbane 22% 26% 25% 27%
Adelaide 24% 26% 26% 24%
Perth 23% 26% 25% 25%
Canberra 22% 26% 24% 28%
Darwin 24% 27% 25% 23%
Hobart 23% 26% 25% 26%
Average 21% 26% 25% 27%

It does pay, however, to launch a new housing project in the first half of the year.

Now, Soon and Later

I am quite interested about how a forecast is made. I like to understand the thinking behind the prediction.  I am particularly fascinated when a very definite outlook has been supplied.

Sadly – although not that surprising – property forecasts are often very definite but lack when it comes to the reasoning behind such a prediction.

Too often forecasts are made by relying on the past.  Most, if not all, look at the future in the context of previous experiences, rather than through the trends that are shaping what lies ahead.

I am not saying that I have the answers.  I spend a lot of my time these days saying, “I don’t know”.

But I do use three ‘tools’ to help assess what the future may hold when it comes to the residential market.  These work for me and they might work for you too.  They cover three time periods – now, soon and later.

Now

Property at the coalface is all about supply and demand. The interplay between the two determine short-term (next 2 to 3 years) property performance i.e. price or rental growth. In Brisbane, for example, dwellings sales volumes are currently declining whilst the amount of stock for sale is increasing.  Yet some are prophesising a short-term housing boom?

Soon

Here I like to think about three factors – cyclical influences, structural changes and what I call the ‘X factor’.  The time frame in question here is typically 3 to 5 years.

Cyclical things include confidence, interest rates, population growth and employment to name a few.  Structural changes involve taxation/charges, urban planning (such as urban growth boundaries and regional plans), government handouts (i.e. FHOG) or rules (i.e. FIRB).

And there is always a X factor.  Think: the Brisbane Flood in 2011 which interrupted the local housing recovery at the time or overseas buying (much of it illegal) in Sydney and Melbourne, which helped fuel their recent price bubbles.

Looking forward a possible X factor is a Labor win at the next federal election.

Later

Here I am talking about the next decade or two.  For mine, more time should be spent thinking about this timeframe rather than trying to score a short-term sugar hit or avoid a bout of housing depression.

I like to use three ‘thought’ bubbles here:  economic, political and social.  They are often in lockstep and in a tighter bearhug that most realise.  And, for mine, the economic, political and even social conditions looking forward are very different from the past.

In the next decade (maybe longer) there are very few trends that will drive housing prices and rents generically up, and heaps more that will keep them flat at best, but mostly lead to declines in real terms.

For more information revisit:

Future Shape

Many want to reassure us that the current slump in wage growth is just a temporary thing.  Yet despite rising business profits and apparently low unemployment, many are taking less money home (per hour worked) than they were in the past.

Limited wage growth and increasing job insecurity – I think – will be the new norm.

For mine, we are on the cusp of major workplace changes. A lot of the existing jobs aren’t really needed anymore.  Many more jobs can be done, and often better, by less people.  The hollowing out of the ‘middle class’ is set to continue, if not, accelerate.  There will be more lower paying jobs.

Too Orwellian?

No!  Just look in the mirror, we all are doing this to ourselves, every day and increasingly 24/7.  Don’t blame ‘Big Brother’, we are giving it up to the ‘algorithms’, whether it be via digitalisation, automation, robotics or the internet of things.

The table below outlines Australian jobs by major household income segments.  The past are facts and whilst the forecasts are mine they are based on emerging trends and my somewhat extensive research and interest on this topic.

Distribution of Australian jobs by income segment

Income segment Last 25 years Today Next 25 years
High 30% 25% 20%
Middle 50% 40% 30%
Low 20% 35% 50%
Total 100% 100% 100%

A recent US study showed that 47% of existing jobs could be obsolete by 2030 and the demand for some 40% of the other remaining jobs are likely be halved over the next decade.  Most of these job losses are expected in the higher and especially middle-income wage brackets.

Looking forward the jobs that will grow in demand will be those than cannot be done better and/or more cost efficiently by an algorithm.  Such jobs will most likely be lower paying ones.

These changes will have a profound effect on the future shape of cities.

Not Commenced

Today our chart shows the number of dwellings approved, but not yet started.

It is one of those rare property charts where, if the lines go down, it is a good thing.

At present, some 9,500 detached houses have been approved but haven’t yet commenced construction.  This is about a ten percent of last year’s detached house approvals.

But it is the attached dwelling figures that remain alarming, with about 32,000 apartments/townhouses approved, but still waiting in the wings.

When breaking it down the supply of approved but unbuilt dwellings is spread out as follows.  Both tables are for the year ending March 2018.

Detached houses

State

or territory

Number

yet commenced

Spread of

unbuilt stock

% of last

year’s approvals

New South Wales 3,759 39% 13%
Victoria 1,480 16% 4%
Queensland 1,381 14% 5%
South Australia 1,738 18% 21%
Western Australia 823 9% 6%
Tasmania 270 3% 13%
Northern Territory 43 0% 8%
ACT 42 0% 4%
Australia 9,536 100% 8%

Attached dwellings

State

or territory

Number

yet commenced

Spread of

unbuilt stock

% of last

year’s approvals

New South Wales 17,455 55% 42%
Victoria 5,806 18% 17%
Queensland 4,574 14% 26%
South Australia 1,655 5% 41%
Western Australia 1,164 4% 24%
Tasmania 98 0% 20%
Northern Territory 108 0% 84%
ACT 799 3% 20%
Australia 31,659 100% 29%

Some comments

Despite the recent surge in population growth, there now appears to be an oversupply of new housing construction.

In addition, there is a mismatch between the type of new dwellings being delivered and what the local market really wants.

Many new residential projects are no longer viable.

Some are saying that the lack of housing starts is due to a shortage of skilled construction staff.  Maybe?  But according to the bureau of statistics, 140,000 construction jobs were created over the three years, but construction jobs declined by 20,000 over the three months alone.

In short, new housing construction is now well passed its market peak.

Missing Middle

What does the future hold?

For mine demographics shape almost everything.

Future demographic shape

If that is true, what does Australia’s demographic shape look like over the next decade?

The first table shows that baby boomers, who were helping drive generic house price growth over the past two decades, are now starting to downsize and/or retire.  As a result, the size of both the downsizing and retirement housing market will grow in size over the next decade.

Also coming through are more first home buyers. This segment is expected to see the largest growth in the coming decade.  High overseas migration – whereby the average age of a new overseas migrant is 29 years – means many more potential first home buyers.

Australia: Past and forecast household buyer type

Household buyer type Last decade

Annual change

Next decade

Annual change

Change
No. % No. % No.
Young renters 29,000 23% 14,000 9% -15,000
First home buyers 7,000 6% 29,000 20% 22,000
Upgraders 28,000 22% 18,000 12% -10,000
Downsizers 36,000 29% 47,000 32% 11,000
Retirees 12,000 10% 26,000 18% 14,000
Aged 14,000 11% 14,000 9% 0
Total households 126,000 100% 148,000 100% 22,000

Some comments

Most aging baby boomers look to downsize/retire in their local area.

But most are not that interested in trading in their detached home for a tight mid-to-high rise apartment.  A ‘middle ground’ product is really wanted.  Better still, is one which can accommodate a relative, grandchildren, visitors, a tenant and in due course, a carer.

First home buyers often need assistance to help pay the mortgage.  Many now take in a tenant.

My Housing Demand Model

Our modelling suggests that over the next decade more housing that fits between a small apartment (often downtown and in large, soulless complexes) and traditional detached homes will be needed.

This housing is often, these days, described as the “missing middle”.

See the schematic below.

More detail

Breaking this demand down further, our work suggests that the demand for housing that caters for sharing is very high – up to 25% – over the next decade.

At present, less than 5% of Australia’s existing housing stock successfully caters to this market.

See the second table for more detail.

Australia: Next decade by dwelling type

Dwelling type Single occupancy Multi-occupancy Total demand
Detached houses on land > 400m2 20% 10% 30%
Detached houses on land < 400m2 15% 5% 20%
Townhouses/villas/terraces/Plexes 15% 5% 20%
Apartments 15% 5% 20%
Age-related care 10% 10%
Total demand 75% 25% 100%

End note

Looking forward, I believe that many Australians will be forced to compromise on their housing.  This is already happening in many locales.

And if I am right – what is often labelled as the “missing middle” these days – should better weather the storm.

To that end, multi-occupancy property is looking more promising rather traditional housing.  This applies to owner residents as well as investors.

For investors, multi-occupancy product already shows a much higher return than most other housing types.  More people are sharing accommodation and a key to getting a better rental yield is to hold property that facilitates sharing.

For mine an astute passive investor will buy strategically for a rental return and not just buy a common property in anticipation of generic price growth.

They will also buy a property with strong owner-resident resale appeal.  This increasingly will mean a dwelling which appeals to multi-generational households.

Missing: Green Infrastructure

Density must be off-set.

That’s a good yardstick.  The chummier our homes – think apartments – the bigger and better the outside space needs to be.

Brisbane is planning to become a very urban city, with many more residents living in mid to high-rise apartments and many of them in the downtown area.

That makes sense, but one thing that Brisbane and especially the inner-city area lacks is public open space.

There are some 275,000 people now living within a five-kilometre radius of the Brisbane GPO; with an additional 100,000 residents expected within the next 20 years.

Yet despite some notable additions like South Bank and Roma Street Parklands in recent years this area holds no more public open space than it did 100 years ago.

Some comparisons

Another way of looking at it is that there is just 6m2 of public open space per resident in inner Brisbane compared to 15m2 in Sydney and 29m2 in Melbourne.  Even in New York City the ratio is nearly twice that of Brisbane.

Worse still is that much of Brisbane’s inner-city open space is fenced and inaccessible to the general public.  This includes sporting infrastructure like the Gabba and Suncorp Stadium; the Riverside Stage and green spaces like Davies Park in West End which is partially fenced for sporting events.

In many of Brisbane’s inner-city suburbs there is insufficient green areas for children (and us adults) to play.

There is little doubt that what open space inner Brisbane does have is well used.  South Bank, apparently, attracts more foot traffic than Central Park in New York City. This to me suggests that South Bank is way too small.

Also, many of the open spaces inner Brisbane does have aren’t used often, nor shared, enough.  Think about Suncorp Stadium’s forecourt or Musgrave Park.

If Brisbane is to accommodate more apartments and at high densities in the inner-city it will need to invest much more in open space infrastructure.

If we use Sydney and Melbourne as benchmarks, then inner Brisbane needs some 100 extra hectares of open space and this will need to be delivered within the next decade.

How can this be done?

For mine, Brisbane’s greatest asset is the Brisbane River.  Like many assets it can be a burden too. The Brisbane River divides the city; confuses the uninitiated and sadly has been sold off in large chunks in recent decades to the highest bidder.

The best place, for mine, to start making inner Brisbane green again is to take back large parts of the river foreshore. Half a dozen bridge crossings – mostly green but a few vehicular ones too – would help matters as well.

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