Executive summary

The National Housing Supply Council’s first State of Supply Report focuses on:

projections of underlying demand and of land and housing supply over 20 years from 2008 to 2028
the gap between housing demand and supply and implications for submarkets, with particular attention on affordability issues for lower income households
a number of current influences on supply and demand, as well as the need for research to better understand how these impact on the housing market
discussion of data collection and methodology, including the need for more sophisticated modelling, and the need to improve data collection and analysis, particularly on land supply for residential development.

The Council’s information gathering and consultation with the housing industry and State, Territory and local governments took place from mid-2008. This was a period of fundamental change in the economic environment, from a period of high interest rates and sustained high levels of economic growth to the sudden and major disruption of the global financial crisis.

The Council has endeavoured to factor some of the possible effects of the global financial crisis into our projections of housing demand and supply.

Demand

The Council focused on underlying demand for its long-term outlook.

The Council’s 20-year outlook of housing demand was based on projections by Professor Peter McDonald and Dr Jeromey Temple¹, using a model that estimates the probable formation of different household types based on various assumptions relating to migration and household transition. Low, medium and high growth scenarios were developed using different assumptions about overseas migration and interstate migration.

For this report, the Council has adopted the medium household growth projection, which assumed overseas migration at a set rate of 180,000 per year, with shares to States and Territories of overseas and internal migration as used by the Australian Bureau of Statistics (ABS) in its latest medium growth projections.

McDonald and Temple’s medium growth projections suggest that some 3,060,000 additional dwellings will be required in Australia by 2028, corresponding to a projected increase in the number of households from 8,347,000 in 2008 to 11,407,000 in 2028.

State-by-state estimates of population and medium growth projections as at 30 June 2008 and 2028 are as follows:

Description of Table


	Medium growth projections of underlying demand (households)
State/Territory	2008	2028	increase
New South Wales	2,692,000	3,471,000	779,000
Victoria	2,063,000	2,780,000	717,000
Queensland	1,661,000	2,521,000	860,000
South Australia	661,000	823,000	162,000
Western Australia	853,000	1,272,000	419,000
Tasmania	206,000	249,000	43,000
Northern Territory	77,000	108,000	31,000
Australian Capital Territory	135,000	182,000	47,000
Australia	8,347,000	11,407,000	3,060,000

While the Council has selected the medium growth projection for its depiction of underlying demand in the short to medium term, it is also prudent to consider the potential for lower and higher growth rates. In summary, the lower growth scenario projects underlying demand for an extra 2,901,000 dwellings, while the high growth scenario projects underlying demand for an extra 3,489,000 dwellings, over the period 2008 to 2028.

Supply

In assessing the prospects for housing supply, the Council considered the trend in growth of aggregate housing supply and information on capital city land supply for residential development provided by State and Territory planning agencies.

Based on the trend in growth of aggregate housing supply since 1980, adjusted for losses due to demolition, the net annual growth of housing stock is projected to be 130,000 in 2010, increasing to 142,000 per year in 2028. These projections would see total growth of 2,716,000 dwellings in the period 2008 to 2028.

As the Council establishes more sophisticated modelling capacity, future reports will utilise a range of assumptions relating to construction capacity, market factors and productivity to present a range of supply projections.

It is important to separate consideration of land supply from housing provision as there are many factors influencing the conversion of raw land to completed residential estates, and land identified and zoned for residential development is usually used for a variety of purposes in addition to housing.

The Data Sub-Group, a group of Australian Government, State and Territory government officials, provided the Council with information on potential land supply and lots already undergoing development in broadhectare development areas and major infill development sites in metropolitan areas. However, there are major gaps and inconsistencies in the data. Some of these are due to varying definitions and expectations about the development time frames and housing yield of land identified for residential use. The Council is particularly concerned about the lack of comprehensive information on infill – especially on smaller ad hoc infill capacity – given the emphasis in most States’ metropolitan plans on infill development providing as much as 70 per cent of future residential supply.

These data indicate that there is sufficient land supply in the pipeline to provide for 357,000 dwellings to be added to Australia’s housing stock in the period 2008–2010. Taking into account available State and Territory estimates of land for development over the next 10 years, there is apparent capacity for an additional 1.3 million dwellings. This compares with medium projected growth of 920,000 households in Australian metropolitan areas over the same period.

The Council stresses that projections beyond two years are speculative, given uncertainty about the actual conversion of land to serviced lots for development as well as potential dwelling yield.

There are a number of factors in the current market that could combine to constrain the rate of development of new housing.

Tightening of credit for the housing industry in the wake of the global financial crisis has led to the imposition of higher pre-sale requirements for new multi-unit residential developments
Market conditions – including relatively low rental yields and lower expectations of capital growth that will reduce investor demand – are likely to impact on the timing of developers’ plans to bring supply on line. Despite recent increases in real rents, rental yields are still relatively low, with the average yield at or below 4 per cent, compared with around 8 per cent in the 1980s and 6 per cent in the early 1990s
Relatively high land and construction costs for medium- and high-density dwellings, especially in multi-storey developments, are a factor negatively influencing infill supply in established urban areas
Similarly, the timing of broadhectare lot construction varies in accordance with economic cycles, industry capacity and changing demand
Development of land on the urban fringe is being impacted by energy use and environmental considerations
Planning, zoning, subdivision and development approval processes are often very lengthy, and were identified by stakeholders as a major continuing constraint on supply
Related to planning and development approval processes are concerns about high and compounding taxes and charges, including developer contributions for hard and soft infrastructure, that increase the price of housing and may delay or preclude development.

The Council found a lack of comprehensive, consistent and independent information available to it for detailed analysis of residential development in metropolitan areas. Areas identified for future attention by the Council and the Australian Government, State and Territory officials’ Data Sub-Group include:

better indicators of lot production such as the number of residential titles issued
better utilising the range of information held by State and Territory and local governments, including on smaller, ad hoc infill development
improving the quality and consistency of data holdings on land activities in the pipeline including standard definitions to enable a more informative compilation of a national housing supply picture
comprehensive analysis of the factors affecting development risk and the relative price of various types of residential development.

The demand–supply gap

A number of industry representatives have recently commented on the perceived gap between dwelling construction activity and the underlying demand for additional housing.

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 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. The Council has assumed that most of these were probably second homes, homes in the process of sale or homes awaiting redevelopment and that there is likely to be limited capacity for absorbing growth in underlying demand within the present level of housing supply. The Council will also be undertaking research to assist it to better understand the reasons why these dwellings were vacant.

The Council compared its medium growth estimate of underlying demand with a medium supply projection based on the ABS long-term trend in completions adjusted for demolitions.

This comparison showed a cumulative gap by 2028 of 431,000 dwellings. Annually, the shortfall is projected to be 23,000 dwellings in 2010, rising each year by a similar amount until 2016, when the size of the annual gap decreases, consistent with an ageing population.

The greater the gap between underlying housing demand and expected supply, the greater is the likely impact on housing availability and prices. There are two very notable consequences, among many others, of falling housing availability and affordability. The first is the demand-side squeezing of moderate income households – that may otherwise have been able to access home ownership – into private rental, and the progressive squeezing of low income households out of the private rental market or into unaffordable rents. Flowing from this is greater pressure on the supply of social housing. The second is the supply-side market reaction, including increased attractiveness of investment in housing as rents increase, a consequently higher level of production and, in turn, diminution of the gap between demand and supply.

Affordability

The Council’s predominant focus on aggregate demand and supply could mask the diversity of circumstances at the submarket level. This diversity has housing type, housing tenure, geographical, demographic and socio-economic dimensions. The Council is especially concerned about lower income households in terms of access, affordability and choice of housing. Many lower income households that cannot access either home ownership or social housing are likely to become long-term tenants in the private rental market.

Analysis of 2006 Census data – showing the need for an additional 251,000 rental dwellings affordable and available for lower income households – highlights that existing arrangements are failing to adequately provide for lower income households.

Housing affordability for first home buyers generally declined over the decade to 2008. Many would-be purchasers were unable to become home buyers because increases in house prices have enlarged the deposit gap and repayment requirements.

It is difficult to save for a deposit while also paying for private rental accommodation, and many young adults are remaining for longer periods in the parental home or sharing instead of forming independent households.

The number of long-term private renters who cannot move on to home ownership has added to pressure in the private rental market.

Social housing declined from about 400,000 dwellings in 1996 to an estimated 390,000 in 2008. If social housing had maintained its share of total dwelling stock, there would be around 480,000 dwellings in 2008. This, too, has contributed to pressure on the private rental market, and to poor outcomes for lower income households.

Future work

The Council has developed a work program for 2009 and 2010 aimed at improving longer term empirical analysis and forecasting for the annual State of Supply Report and to pursue emerging issues arising from these projections.

Major short-term priorities include:

standardisation and refined national collation of housing-lot supply data including time frames and dwelling yield information for each step in the development pipeline
development, testing and application of a macro-economic model of the housing market
development of a housing cost model to enable comparative locational and dwelling-type analysis of all inputs to the final cost of housing for consumers including raw land costs, lot development costs and charges, and housing production costs.

Other topics for further research that have been identified during the course of the Council’s consultations relate to the efficiency of the housing market and include utilisation of vacant dwellings, analysis of housing submarkets including aged households and first home buyers, and focused analysis of supply-and-demand dynamics in housing market hotspots.

Finally, the Council has developed some key indicators of demand, supply and affordability outcomes for lower income households. These indicators, which will be reviewed and developed further in 2009, are intended to provide a benchmark against which future activity in the housing market might be assessed. The Council’s preliminary key indicators are discussed in Chapter 4 and Chapter 5.

1. P McDonald & J Temple, Projections of housing demand in Australia 2006–2021, report prepared for NHSC with additional projections to 2028, Australian Demographic and Social Research Institute, The Australian National University, Canberra, August and November 2008.

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