Why is there a housing shortage?Posted: April 13, 2010
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.
Mr Battelino argues that Australians can afford to spend more on housing at any given income level because we spend less on other things than Americans. A key reason for this is our lower health costs. Australians also pay off their housing loans faster than Americans and hence are less likely to get financially stressed. Americans are more highly geared, most likely because owner-occupied mortgage rates are tax deductible.
So why do we have a shortage of dwellings in Australia? Supply isn’t keeping up with demand – Ross Gittins summed it up:
Our fundamental problem is simple: demand for homes is running ahead of supply. The growing demand is being fed by exceptionally high levels of immigration. In a textbook world, increased demand eventually calls forth increased supply. But not in our world. The supply of additional homes is being constrained by the banks’ unwillingness to resume lending for multi-dwelling development projects (temporarily, let’s hope) and by the failure of state planning processes to make sufficient land and medium-density building opportunities available. The annual addition to the housing stock has been falling well short of new ”household formation” for some years and there’s no sign the annual shortfall will be closed.”