Does Australia really have a housing shortage?

Australia’s housing shortage is hotly contested by some. Photo: Erin JonassonScarcity is the fundamental economic problem.
Nanjing Night Net

If humans possessed the ability to produce all the goods and services they desired in a cheap and easy fashion, there would be no scarcity and no need for economists.

But scarcity does exist, in both time and in resources. And it’s one of the most powerful influencers of price.

Products that are not particularly scarce, like televisions, can be produced and sold at a price not too far above the cost of production. A consumer desires a television, so she chooses from the abundant supply of makes and models and  buys one. If lots of consumers suddenly desired a new television, television manufacturers could respond with increased supply, which would limit any price increases.

But what about diamonds? Diamonds are little pieces of rock. They are very hard and so are quite useful for cutting other rocks. But that’s not why most people own them. Consumers pay high prices for diamonds because they are rare.

So, are houses like televisions or diamonds?

The answer is they are a bit of both. Building a house is like building a television, there are plenty of builders willing to work to build a property, so long as you pay them a bit over their costs of production.

But the land on which houses sit is more like diamonds. Particularly in our cities, where there is a fixed supply of residential land in central areas. There is some flexibility of supply on the fringes, but supply is quite restricted where most people want to live.

Demand for housing increases  annually with population growth – driven by migration and babies – and the formation of new households. Australians are living in smaller households than ever before, due to ageing singles and young people delaying marriage. This increases the demand for housing above the growth in the overall population.

What about supply?

Well, the number of new homes being completed is easy to measure. Of course, many new homes are built in the place of old homes, so to accurately measure new housing supply, you must subtract any houses demolished in the process. It also matters if there are changes in the stock of vacant homes, perhaps because more investors are buying homes and sitting on them for tax purposes.

So put it all together and what have you got? Well, that depends which economic modeller you ask.

The ANZ Bank recently released an analysis putting the shortage at 250,000 houses nationally.

That analysis is challenged  in modelling by LF Economics titled, The Australian Phantom Housing Shortage: The Myth in Every Bubble, which estimates a housing oversupply of about 220,000 homes.

The difference? LF Economics starts  its cumulative tally of the housing shortage/oversupply in the mid 1990s, while ANZ starts  its in the mid 2000s.

That is highly significant. It is clear from both analyses that during the decade from the mid 2000s, Australia failed to build enough new homes to keep up with demand. But in the decade before, Australia did build enough new homes to match demand and often exceed it comfortably.

So, if you start your tally in the mid 1990s, the most recent shortage just depletes the massive oversupply that already existed. But if you start counting only a decade ago, you get only shortages.

The two analyses also differ in the assumptions they make about the rate of new household formation and the rate of demolitions.

Which approach is correct? That is open for debate.

Most economists tend to think the massive growth in house prices over the past decade is  a symptom of undersupply. And given the relatively fixed supply of land, it is not hard to see why houses might exhibit diamond-like price properties.

But homes are not diamonds. Land can be subdivided – if the price is right – and apartments can be built. The supply response to price increases may be “inelastic”, or slow, but it is not non-existent.

Which is exactly what is happening, particularly in inner Melbourne and Sydney. This new housing will ease pressure on home prices in those areas.

But prices will be underpinned by the extent to which there is pent-up demand for new housing. How big that pent-up demand is is anyone’s guess.

This story Administrator ready to work first appeared on Nanjing Night Net.

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