In 2014-2016 the upswing in housing was the gap filler which took up the slack as the big wind-down in resource construction subtracted from overall economic activity. Latest approvals data suggest dwelling activity roughly peaked in 2016, so the balance of the economy [the other 90%] will have to generate the economy’s growth in 2017 and beyond. The good news is that, with some exceptions, e.g. dairy, the farm sector has had an exceptional year, while the lift in coal and iron ore prices in 2016 has had a stabilising, combined with positive impact on mining. In manufacturing, the domestic car industry is closing, but the competitive exchange rate has modified the structural decline in this sector. The global outlook poses plenty of uncertainties but, despite its fair share of problems, China has recently surprised on the upside while, for all the political heat in Washington, the US should do well. So there are reasons to discount the one quarter of negative growth (Sep’16) and the soft employment numbers in 2016 (Table 2) and think that 2017 will be an OK year. On the demand side, housing has a two-way relationship with the broader economy. On the one hand, it has a significant impact on the business cycle – in this case modifying the business cycle for Australia as a whole vs its more normal accentuating of the business cycle (in the case of e.g. WA) – and a sharp downturn in housing (unlikely) would be a threat to the economy. On the other hand, equally, demand for housing is very much influenced by the state of the economy and (related to that) population growth. While population growth is down from the resource boom peak, it is running well above levels in the 1990s and first half of the 2000s (Table 1). An OK year means that demand for housing will remain at good levels, and specifically that population growth is likely to continue at about a 1.4% pace.
The housing story is very different across the states. WA will continue to bear the brunt of the end of the resources investment boom, with population growth sagging to 1% from 2.6% levels in the boom and pre-boom 1.5%. In the face of this big negative demand shock, the best that can be expected is that it will stabilize in 2018.
In Victoria and NSW, the supply side will be more critical to the outlook.
Despite being the centre of the declining manufacturing sector, Melbourne is the fastest growing city, with Victoria’s population growth running at 1.9% (vs national and NSW/Sydney 1.4%). It is a more affordable city than Sydney on any measure and this is a factor in its relative performance in attracting business and people. In terms of the various labour market indicators the two big states are currently the best performers but Victoria clearly showed the strongest employment growth in 2016 (Table 2).
While dwellings approvals starts and completions have been running at records levels, implying a risk of oversupply, that fails to account for higher rates of population growth. The broader story is that in 2015 and 2016, supply (as measured by growth in the dwelling stock) has been roughly in line with demand generated by population growth (Figure 1). Inevitably the rate of starts must translate into completions and a higher rate of growth in the stock in 2017 and 2018 but the apparent decline in approvals/starts in 2016 will negate the risk of a major over-supply developing.
The downside risks in the Melbourne market are in the inner city/unit market as the pipeline of units under construction means the supply of units lift at a higher rate in 2017 and 2018. That quantum of supply will put some competitive pressure on inner city house prices, while the inner house and unit market also faces “competitive” pressure from the outer detached housing market where land prices had been contained in the period 2011-15, minimizing growth in prices in outer LGAs.
The short-term outlook in the Melbourne market is for some easing in price pressures in 2017. But in the medium term the risk is that land prices in the outer urban areas will come under upward pressure – some evidence of that in 2016 prices - as the limits imposed by the urban growth boundary become more binding. Policymakers need to take note.
The Sydney market continues to suffer from the lag effects of “Sydney is full” and “supply does not matter” policy failures of the 1990s and 2000s, exacerbated by the stronger growth in population – even if well below Victoria’s (Melbourne’s). The inevitable price pressures are evident in the large rises in land and dwelling prices. There is a Sydney premium (the harbour, etc.) but that alone cannot explain the difference between outer greenfield land prices in Sydney ($400-450k) and Melbourne ($225-250k).
The good news story is that the strong supply response is now starting to makes its mark on the market (Figure 2). The lags inherent in the unit market mean that growth in stock of dwelling completions only caught population growth in 2016 but the pipeline of work in progress means that the supply response will be quite significant in 2017 and 2018. That will swing the market balance more evenly towards buyers and renters and put some downward pressure on rents and prices. But any weakness will only be short term unless policy-makers take a long-term view and maintain their commitment to supply.
Notes on Figures 1 and 2. From 1961-2001, the Census data confirmed a significant structural decline in the size of households, e.g. with fewer children per family. The 2001, 2006 and 2011 Censuses indicate little change in household size so that population growth is a now a good indicator of household growth and hence potential demand for housing. Actual dwelling stock growth is based on completions and makes allowance for demolition of old housing stock (reliable benchmark estimates for Census years). The dwelling stock growth based on starts indicates the gap between starts and completions and, with a lag (4-6 quarters), the likely direction of actual stock growth in the period ahead.
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