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.

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.”

4 Comments on “Why is there a housing shortage?”

  1. Leon harvey says:

    Interesting information – a good read

  2. tiber says:

    I live in the U.S. and I have been doing research on Melbourne for a story I’m writing. Using a few Melbourne web real estate sites as part of my research, I have to say that I am quite shocked at how few homes are available for sale.
    This is simply not the case in the U.S. Go to realtor dot com and check out any large U.S. city, or suburbs area, and you will see numerous homes for sale.
    I just hope your government will stop the urban consolidation (densification) because I see it as doing more harm than good for your country and the environment…and that’s not to say we don’t have our own faults here in the U.S. too…but I just wanted to address this issue…

  3. […] that Australians build the largest new houses in the world. According to the Deputy Governor of the Reserve Bank, real expenditure on each new dwelling is now 60% higher than it was 15 years […]

  4. Paul Thewlis says:

    Thanks for this article Alan. I think it’s really important that we look at the underlying causes and patterns that lead to undersupply of housing in our cities. I’d like to point out that the undersupply can be further masked by young people staying at home with their parents for longer, essentially delaying the ‘formation of new households.’ I think it’s key that young people are informed about how to make the most of Government projects such as NRAS or the First Home Owners Grant to try to deal with this situation, and I’m proud to say that professionally, my company Onyx has been able to help many under 25s into the property market.

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