Why is there a housing shortage?

A curious aspect of the Australian housing market is that we have a shortage of housing even though dwelling investment has been at record levels in the last decade. It’s now 6% of GDP.

A key reason is that a large part of that investment has not been directed at building new houses, as this address by Ric Battelino of the Reserve Bank indicates. Instead we’ve been investing in:

• Dwellings that are bigger and of higher quality – real expenditure on each new dwelling is now 60% higher than it was 15 years ago
• Additions and alterations, which now attract almost half of all dwelling investment
• Replacement dwellings – around 15% of new dwellings built between 2001 and 2006 replaced dwellings that were demolished. The figure was 10% a decade ago
• Holiday homes and second homes – there are now 8% more dwellings in Australia than households

Does this shortage of supply mean we’re spending more on housing than we can afford? On the face of it, yes – the ratio of dwelling prices to incomes is higher in Australia than in the US. However what doesn’t gel here is that there’s little evidence of housing stress in Australia – for example, our arrears rates on loans are lower than in the US. Read the rest of this entry »