If you have ever been to a fresh food market, particularly at the end of the day, you have seen the free enterprise market dynamic first hand.
Prices are determined by the supply of fresh fruit and vegetables and the demand for them. If the demand is low, stocks sit on the shelves, if supply is low perhaps due to adverse weather events, then prices rise and of course the opposite is true.
Surplus perishable items or less popular items will come down in price at the end of the day!
To understand the property market we need to examine the interaction of the demand side drivers and also the constraints on the supply of housing and how they influence prices.
DEMAND SIDE DRIVERS:
- POPULATION GROWTH – Australia’s population grew by 1.6 per cent in the year ending 30 September 2018, reaching 25.1 million, according to the latest figures released by the Australian Bureau of Statistics. Net overseas migration added 240,100 people to the population and accounted for 61 per cent of Australia’s total population growth. This is lower than net overseas migration of 259,400 in the year ending 30 September 2017.Natural increase contributed 155,000 additional people to Australia’s population, which was the result of 312,600 births and 157,600 deaths. This is higher than the natural increase of 147,500 in the year ending 30 September 2017.
- Australia’s population to reach 30 million in 11 to 15 years
Based on current trends, Australia’s population is projected to reach 30 million people between 2029 and 2033, according to the latest figures released today by the Australian Bureau of Statistics (ABS).
Population projections are based on assumptions of future levels of fertility, life expectancy and migration, which are guided by recent population trends.
Three series of projections (series A, B and C) have been selected from a possible 72 individual combinations of the various assumptions. Series B largely reflects current trends in fertility, life expectancy at birth and migration, whereas series A and series C are based on higher and lower assumptions for each of these variables respectively.
Under all assumptions, the population of New South Wales is projected to remain as the largest state with a population of between approximately 9 and 9.3 million. Victoria is projected to experience the largest and fastest increase in population; possibly reaching between 7 and 8 million by 2027.
Queensland is projected to continue growing over the projection period, increasing to 6 million people in 2027. Western Australia is projected to increase to 3 million by 2027, while South Australia is projected to have slower growth, increasing to 2 million.
67% of Australians live in and around capital cities and this is expected to increase to around 70%. Melbourne is projected to be the largest city in Australia by 2066 with a projected population between 12.2 million and 8.6 million, surpassing Sydney in 2031. Brisbane is projected to increase from 49% of Queensland’s population to 51% in 2027, becoming the majority part of Queensland’s population.
The population of the Australian Capital Territory is projected to increase to between 479,000 and 510,000 people closing the gap on Tasmania’s population which is projected to reach between 545,000 and 573,000 people in 2027. The Northern Territory is projected to increase to between 270,000 and 284,000 people in 2027.The demand for housing is a product of its necessity and of the population size and forecast growth, currently at record levels both current and projected. It’s also influenced by government policy, incentives, consumer confidence and unfortunately at times, the media!
2.NET MIGRATION – Australia is a culturally diverse nation – over 200 different nationalities go into the mix with 25% identified as overseas born on the last Census night. Migration continues to be a significant factor in the growth of our population and workforce.
While exhibiting a pattern of variability over time, net overseas migration has remained above 180,000 people since 2006. After two consecutive years of increases, in 2018 there was a decrease as shown in the graph below:
In the year ending 30 June 2018 there was a net gain from overseas migration of 237,200 people.
More people are deciding to call Australia home – if not permanently, at least for longer than a year. The lift in permanent and long-term arrivals reflects a perception of Australia as a great place to live and work – a country with a high standard of living and great opportunities….the annual total of 844,800 is also a record high and up 11.4 per cent on a year ago – the strongest growth in 20 months (Commsec Eco Insights April 2019)
DEMOGRAPHIC CHANGES – while there are approximately 10 million households in Australia presently demographic changes such as the size of those households and the divorce rate influence not only the number but type and size of housing that is being demanded.
AFFORDABILITY – buyer’s perception of affordability will be influenced by a number of factors. As incomes rise, purchasers are in a better position to be able to service debt that is normally incurred to buy a large ticket item like a house. In turn, incomes will be a function of ECONOMIC GROWTH and therefore employment. INTEREST RATES are the cost of that credit or debt and therefore as they fall, the affordability factor increases. Similarly, even if demand is present for housing, the AVAILABILITY OF CREDIT will act to dampen demand if lenders tighten their lending criteria. Sometimes this is to ‘balance’ their loan books, or is in accordance with the prudential regulator’s (RBA & APRA) directives, whose mandate it is to moderate excesses in the market (business cycle)
“The Australian Prudential Regulation Authority (APRA) is an independent statutory authority that supervises institutions across banking, insurance and superannuation and promotes financial system stability in Australia”. www.apra.gov.au
For example, until just recently, lenders were mandated to assess a purchaser’s borrowing capacity as if mortgage interest rates were at 7%, (7.25% as a safety measure) whereas they have been in the range of 3-5%. This has precluded some people from the market. APRA has now announced that it intends to ease the limitation on ADI’s (Authorised Deposit Instirutions) and that they can now adjust the ‘qualifying rate’ to a mandatory, but more modest 2.5% above their rates. The interest rate floor (an example of government regulation and intervention in the freely operating market) will remain, but it should allow more buyers to enter the market and increase demand for housing.
Remember that economics is a social science because it studies human behaviour. To build models of the economy and predict outcomes, economists have to make assumptions about human behaviour and, by and large have to work on the basis that consumers are rational.
Psychologist would beg to differ!
Attitudes, perceptions and CONFIDENCE are important drivers (or inhibitors) of demand. When the economy is growing and the news is good, consumers are buoyed and optimistic about the future and the reverse is also true. The media plays a role in shaping consumer outlook and confidence and unfortunately often, bad news or sensationalism sells!
The first diagram above is a simple representation of the property market. As prices rise for houses less are demanded and more is supplied and vice versa. At P1 Demand for houses equals the Supply of houses.
The positive drivers of demand ( increased population growth and net migration, buoyant economic conditions, low unemployment, rising incomes, relaxed credit conditions, higher consumer confidence, consumer expectations) all have the ability to SHIFT the DEMAND CURVE to the RIGHT as shown in the second diagram.
Assuming SUPPLY cannot be expanded (shifted downwards to right) easily or without significant time delays, the result is a
HIGHER EQUILIBRIUM PRICE, or a rise in house prices.
The supply of housing is the sum of the existing stock of housing plus the level of new construction. According to a recent report by ANZ, Australia’s housing shortage stands at 250,000 currently, due in large part to the fact that the population projections we thought would take 40 years to reach have been exceeded in the last 16! https://bluenotes.anz.com/posts/2018/08/The-25-million-person-housing-problem
In a perfect market, supply should simply shift out to the right to meet the excess demand and all will be in equilibrium again! But we don’t live in a perfect world! The ‘elasticity’ or responsiveness of supply has STRUCTURAL causes that are hard to change in the short term:
- LIMITED LAND – remember the definition of resources, they need to be known, accessible and cost effective. Given most of us ( 67% ) want to live in the metropolitan areas of the capital cities, land releases are LIMITED.
- COMPLEXITY of the PLANNING APPROVAL PROCESS – this ties in with the first constraint. The rezoning of land for residential construction is a long winded and complex task hamstrung by red tape and bureaucracy.
- INFRASTRUCTURE PROVISION – “Investment in economic infrastructure (such as telecommunications and transport networks) and social infrastructure (for example, schools, hospitals and public housing) has a major bearing on the community’s well being” (Commonwealth Government of Australia Parliamentary Research Paper 2014) Releasing land without the provision of infrastructure is a recipe for disaster both economically (employment opportunities, shops to spend in, transport to get to employment hubs, childcare to make work possible etc) and socially ( lack of recreation facilities leads to youth crime etc). Infrastructure are all by and large ‘big ticket’ items ( the Northwest Rail Link in Sydney opening May 2019 cost $8.3B) and so given the competing demands on budget revenues, opportunity costs and trade-offs, the provision of infrastructure is not easy or unlimited. All 3 levels of government are responsible for the provision of infrastructure, both economic and social.
- INFRASTRUCTURE LEVIES – costs imposed on developers by government so they co contribute to the provision of local infrastructure. Contributions are made per lot for the supply of power and water, kerbing and guttering, street lights, roads, and sometimes upgrading of feeder roads and installation of traffic lights. Every parcel of land will have built into it a cost component for these co contributions.