Last Friday we sent you a request. We asked if you had any authentic research to support the claim made by property spruikers that Australia suffers from a ‘chronic housing shortage.’
We assumed there must be such research in existence. After all, it is the main basis the property bulls make to support the idea of continually rising property prices.
They further argue the shortage is magnified due to immigration and natural population growth, so that there are not enough houses being built to accommodate everyone.
That should make you think that data supporting the argument is easily available.
Well, you’re right. It is easily available.
However, we can only think that no-one has ever read it.
Because if they have, they could not possibly conclude that there is a ‘chronic’ housing shortage.
The numbers which represent the entire basis for the ‘chronic’ housing shortage just don’t add up.
Shortly, I’ll show you once and for all that Australia does not have a ‘chronic’ housing shortage. Further, I’ll show you that as soon as government runs out of ways to manipulate the housing market, prices will collapse.
But before I go through the details, a quick follow up to the Money Weekend article on the Future Fund flogging its Telstra shares.
It seems as though your editor grossly underestimated the handsome payday enjoyed by the brokers handling the sale.
Our estimate was that brokers would have charged the Future Fund a commission of about 0.02%.
It seems as though we were way off the mark. As Money Morning reader DT wrote:
“I hope your recommendations are better than your facts, institutional comm rates more like 20bps than 2, and the fee on a placing like that probably more! Maybe you should eat a bit of humble pie smarty pants.”
We’re more than happy to tuck into some delicious humble pie. But DT may want to grab a spoon, a bib and some ketchup and join us. Because an unnamed Money Morning spy reckons:
“UBS charged the Future fund 1% commission, the clients were not charged commission on buying the stock.”
And because the sale was up-scaled to $2.4 billion, if our spy is right, UBS would have earned a cool $24 million.
It’s amazing how little the guys at the Future Fund worry about fees when it’s not their money. There goes another $24 million of taxpayer cash, sloshed around and divvied out to their chums.
But back to the ‘chronic’ housing shortage…
To be honest reader, your editor is almost speechless. For years we’ve heard the argument about demand being far in excess of supply.
We’ve lost count the number of times the likes of Christopher Joye, Rory Robertson and the Housing Industry Association (HIA) have told us about the shortage and how this is the reason why property prices cannot fall.
But the one thing that always struck us was the lack of referenced evidence. We’ve hardly ever read one of these ‘experts’ point towards ironclad proof.
Sure, plenty of times we’ve read vague numbers being thrown around. As if merely saying there’s a shortage and then applying a number to it is somehow proof enough.
Well, last Friday we decided enough was enough.
On a whim I wrote to you:
“Aside from yourself, there are now about another 40,000 people who receive Money Morning every day. I know for a fact there are property bulls and bears among the audience.
Therefore if you have access to authentic research which identifies the ‘chronic’ housing shortage in Australia, please email to the Money Morning mailbag at: moneymorning@moneymorning.com.au
I would be glad to read it and I’m happy to publish the highlights.”
I soon wondered what kind of response I would get. I also wondered why I hadn’t simply ‘Googled’ for it. Was your editor being lazy? Or could we just blame it on being a Friday?
Well, the responses we received made us realize the following…
First, it was laziness. A simple search on Google would have given us the information we needed in a flash.
Second, we thank Money Morning readers Laurie and Rob. Both of them provided the link to the research that is the basis for the ‘chronic’ housing shortage argument.
Here’s the link to the report.
It’s 193 pages long, so you may want to brew a cup of tea and tell your receptionist to hold all calls for a few hours.
But even before you get out of the Executive Summary on page xiv you’re hit with a giveaway to how unreliable the data in the report is:
“The Council stresses that projections beyond two years are speculative…”
Two pages later:
“The Council estimates that a minimum of around 85,000 dwellings is the gap (unmet need) in the supply of housing in 2008… The Council acknowledges the crudeness of this estimate and also points out that there were some 830,000 vacant dwellings in Australia at the time of the 2006 Census.”
There’s the source of the 85,000 shortage. I’ve actually removed a sentence that followed because I want to highlight it separately.
But before I do, remember, this report is the basis for every single argument made by property spruikers.
So, how have they come to the conclusion that there was a shortage of 85,000 dwellings in Australia in 2008?
This is the part that left me speechless…
“The Council estimates that a minimum of around 85,000 dwellings is the gap (unmet need) in the supply of housing in 2008. This is based on the incidence of homelessness and the low level of vacancy rates in the private rental market.“
The underlining is my emphasis.
There you have it. The housing market will always rise because of the ‘chronic’ housing shortage, a ‘chronic’ housing shortage being measured by the number of homeless people.
We’ve no doubt that Dr. Merv would tell us not to try and reason with fools, but we’ll go through the motions anyway.
Before I do, let me give you the full rundown of the 85,000 shortage.
According to the report, the dwelling gap, which is the difference between the demand for housing and the supply is made up of:
Dwellings required to address homelessness – sleeping rough = 9,000
Dwellings required to address homelessness – staying with friends and relatives = 35,000
Dwellings required to house marginal residents of caravan parks = 13,000
Dwellings required to increase rental vacancy rate to 3% = 26,000
Now, the human calculators out there may think, “Hang on, that’s only 83,000.”
You’d be right. But in true statistician fashion, they are only capable of dealing in numbers rounded to the nearest 5,000…
Hence, there was a housing shortage of 85,000 homes in Australia in 2008.
But the report doesn’t stop there. Not content with providing a suspect set of numbers for 2008, the report goes on to outline the shortage for future years.
So, based on the 85,000 starting number for 2008, this has been extrapolated to 108,000 for 2009, all the way up to 431,000 for 2028.
We’re not surprised the property spruikers have never mentioned the numbers behind the gap. If they did they’d be laughed out of town.
To argue that a housing gap and therefore ever-rising property prices can be based on the number of homeless people is utter nonsense. We don’t think we’ve ever come across such statistical foolishness.
For a start, there is a big difference between the desire for a dwelling and the demand for a four-bedroom home in the suburbs, or a two-bedroom townhouse in the inner city.
Put it this way, we haven’t seen too many house auctions, but odds are first home buyers aren’t facing stiff bidding competition from the local hobo.
And furthermore for the researchers to claim that the lower rental vacancy rate implies a shortage of housing is also statistical smoke and mirrors. Perhaps we could make the target vacancy rate 4% and argue there is an even bigger ‘chronic’ shortage in housing.
The facts are, as we suspected all along, the case for a housing shortage in non-existent. It does not exist. There is no housing shortage.
That’s because it is price that is the major problem in the housing market. Prices are at unsustainable levels brought about by the manipulation of demand and supply by the various levels of government.
As soon as the manipulation ends, price discovery will lead to a collapse in the housing market.
Only then will the property spruikers realize there is not, and never has been a ‘chronic’ housing shortage.
Other Stuff on the Markets
The S&P/ASX200 fell 1.99% on Friday, while there was better news on Wall Street with the Dow Jones Industrial Average adding 155 points. In Europe the FTSE100 gained 1.98% and the CAC40 added 3.15%.
The price of gold in Australian dollars is trading at $1,143.46, while in US Dollars it is trading at $954.10.
The Aussie dollar strengthened slightly versus the US dollar and Japanese Yen, trading at USD$0.8359, and JPY78.75.
Further strength for Crude oil, closing Friday at USD$73.89.
For the biggest movers on the market yesterday click here…
{ 18 comments… read them below or add one }
Absolute gold.
Well done all!
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&
ggggggggggggglllllllllllllllllllooooooooooooooooooooommmmmmmmmm
I agree with your housing analysis
Technically if we doubled the amount of people living in each house in Australia from 2.4 to only 4.8 people per house then half of our houses would actually be unoccupied!
Did you know that as houses are getting bigger and bigger in Australia that less and less people actually live in them
go here to find out
http://www.abs.gov.au/AUSSTATS/abs@.nsf/0/8DD7826E7F7235D8CA25732C0020820B?opendocument
Even the last three years has seen housing occupancy rates fall from 2.7 to 2.5 people per house. See Aussie bureau for more stats. Did you also know that in some states that I read about had over 10 percent of houses with nobody living in them! Add to that that some states have up to 20 percent of houses with only one person (baby boomer widows etc) living in them!
What really happens when kids have trouble with the mortgage?
They go home and live with mum or dad and rent their own house out. This has been promoted in the press in QLD as a way to cope with a large maortage on your house if you dont want to sell. Rent a small unit or go home to mum and rent your house out to help pay the mortgage. All of this means that alot more people will fit into existing houses. Take my friends selling their house last week. The only prospective buyers they got was TWO large families wanting to buy the house jointly. One family was going to live downstairs and the other upstairs. Thats over ten people in a four bedroom house. They are new immigrants. Thats alot more than the Aussie average of 2.4. Technically if we doubled the amount of people living in each house in Australia from 2.4 to only 4.8 people per house then half of our houses would actually be unoccupied!
Add to that fact is that house areas are actually getting larger.
Go to the Bureau of stats -I am sure you will find heapppppss more
Why there is no housing shortage.
ABS Statistics
1996
Population 17,752,829
Dwellings = 7,175,237
Unoccupied = 679,165
(9.5% vacant) – 2.47
2001
Population 18,769,249
Dwellings = 7,790,079
Unoccupied = 717,872
(9.2% vacant) – 2.40
2006
Population 19,855,288
Dwellings = 8,426,559
Unoccupied = 830,376
(9.9% vacant) – 2.35
Honestly Kris, that article you wrote about the so called ” housing bubble” would be one of the worst articles i have ever read.
I bet you have been saying that for the last 5 years. None of your facts have any merit. How could you get a job as an editor with such bullocks.
You have lost the plot and need another job!
HAV SOME INVESTMENT PROPERTIES IN SYD. GETTING WORRIED ABOUT FUTURE,WHAT WOULD HAPPEN REGARDING INTEREST RATES,HOUSING BUBBLE AND ECONOMY
keep it coming!
We are constantly told by the various contrarian views, received in our inbox daily ,that to protect ones self from inflation as a result of the current “American printing money syndrome”is via investment diversification into precious metal’s or energy. Putting aside the much broader, vast, expansive and numerous warranted details of these debates-there was a comment that caught my eye the other day which simply stated “well the value of Uranium will not fall to nil as it is WORTH SOMETHING”or words to that effect. By that I assume the following things need to be true in these inflationary safe havens:
Cost of production will not be free.
Supply will not exceed demand.
Consumption of this commodity will be needed.
Unlike say a handmade horse buggy back in the 1930s. My interpretation of what was at least implied, was that Gold,Silver,Uranium,Coal will keep up with inflation if not beat it!. Housing is also worth something and cant and should not be viewed as “Land Value”,Labour,Materials. Just the nightmare of funding and dealing with ones bank, builder and various trades people has to have an intristic value. Much like refined energy or metals. Rewind back to your various articles and references to”Zimbabwian Hyper Inflation” as a result of all the money printing ,a quote often used in this newsletter. In the mid 80’s the former Yugoslavia also experienced “hyperinflation”. The result was that the Proletariat and Inteligencia bought properties at say$50k in their currency back then, being the Dinar.Locked in fixed term loans ( A critical and key element).Within 2 years it cost them the equivalent of $50k(again in their money) to buy a Car.A year later the same amount bought them a Color TV . And a year or so later these “clever” individuals paid off their loans and held real estate-freehold. Paper money was worthless. Incomes still increased even though they did not keep up with inflation. The cost of Housing increased. While I note the distinction between Hyperinflation and Inflation I simply can’t see how property will NOT increase overtime if there is inflation. Inflation seems to be at least the “Buzz word” if not a consensus within your articles. Then there is the real concern that the US and its 260 or so million people will simply (particularly if we head into a catastrophic depression) say, well -Fuck it! We are not paying you back…We have the Bomb. Sure we cant afford a war but we can send you back to the stone age!In which case our Real estate prices will still increase,as the Chinese Proletariat, Inteligencia and the Capitalist Tzars migrate en mass to our shores.And even if thats only 2% of them its still more than a “boat load”.
I do totally agree with you guys on the fact that there will be a property crash and I have not been too keen on buying a house as a result of my gut feeling.
Good stuff… This has confirmed my suspicions
you guys are a brilliant alternate financial voice in an otherwise advertiser influenced media.
Hi to all @ MM, I have been reading your newsletter for a few months now, and as a complete novice in the world of “markets”,housing/stock, I must say you have me really worried about the future….. I own my home, but am in the middle of renovating…….(which means Bank loan) I know I can`t ask you for advice, so what does a person do when faced with your info, but not savvy enough to steer through to safe waters??? I also would like to invest in your recomendations (small cap) but again it`s just too much language I don`t understand……… Don`t you have a nursery for those of us who want to learn, but are “a bit slow”…………Sylvia…
Now that I’ve read the data I now realise that if we were to all become homeless tomorrow there would be 100% vacancy and the shortage would be over. And since we were homeless none of us would be bidding at auctions for the chance to own a home, so prices would crash until homes were free, but we still wouldn’t move in, because that would damage the vacancy rate.
Coincidentally I imagine if prices were to drop demand would increase as people currently sharing to shelter from the high prices enter the market. When prices rise either they correct or peoples expectations do.
“There is no housing shortage.
That’s because it is price that is the major problem in the housing market. Prices are at unsustainable levels brought about by the manipulation of demand and supply by the various levels of government.
As soon as the manipulation ends, price discovery will lead to a collapse in the housing market.”
Perhaps you could provide a similarly lengthy and detailed exposition of this manipulation as you have of the numbers put forward by the National Housing Supply Council.
people who criticize this article and believe housing should and will keep going up should be killed!!
Do they want us to live in a $#%$^#$ DRAIN PIPE!!! WAKE THE %$# UP SHEEP
The whole housing market is like a big auction. There are many players of different kind. Just saying that ‘there is a huge demand and not enough supply’ does not tell the whole story. Yes there is a huge demand. In fact WE ALL wanted to buy a house. But the question is “At what price?”.
Fundamentally, house price should only rise relative to household income. But what happened during the last ten years, and especially the last 12 months saw the Ave house price to income ratio increased from about 3 or less to 4. (In some cases up to 6). This is unsustainable level.
This is how the house price will tumble.
Now that the stimulus is gone and the rates starts to rise, buyers stays on the sideline or wait for the house price to cool down (ie. lowering their bid). First players to crack are the house speculators. Because they can’t sell at higher price (no bid), they start to sell at lower price to cut their losses. The next are the empty nesters – when they see the prices starts to decline, they decide its time to sell. This time the market is inundated with sellers, but no buyers so prices will continue to decline. Then are the the First home buyers. Seeing that house prices are declining, suddenly they realise that they owe more than the value of their house, they start to “fire sale”. Now the market is full of sellers, but not much buyers. Price continue to decline to the “crash” level. Next group of sellers are the new unmemployed caused by the recession. This is the final ingredient to the crash. Prospective buyers will further lower their bid knowing that recession will cause the rise in unemployed.
it is sad that the government of the day,thru their own selffishness ,trying to prop up the hugely inflated housing market.when are we going to wake up?when oversea lenders call back their money,we may need to print more of our money to pay them.hope the day won”t come!
I saw a report on TV last week that the ‘average’ home for the 1st time buyer in Sydney cost over 500K .
So we have 1st time buyers committing to a mortgage of what ?
The report didnt say … i mean you could put 250K deposit and have a mortgage of 250K couldnt you ?
The REAL info which was missing was HOW MUCH WERE THEY BORROWING !!!! not how much the property was worth ….
The maniplulation and misinformation propagated by the news channels REALLY does need to be legislated.
These guys are becoming the modern day snake oil salesmen but who pays the station to air such views ?
How many 1st time home buyers in each state, the costof the home and how much deposit they put down, and how much was borrowed …tells the REAL story.
So why are we not getting it ???
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