A number of analysts have recently expressed enthusiasm at the apparent resurgence of dwelling construction, which the Reserve Bank is hoping can fill the void left as the mining investment boom unwinds.
A classic example of such an view was provided earlier in the week by Crikey’s Bernard Keane and Glenn Dyer, who argued “that a boom is taking shape in the new home market”.
In responding to Crikey’s assessment, I produced the below chart showing that while overall dwelling approvals are improving, they are merely tracking in line with the 30-year average, with detached house approvals remain in the gutter (see next chart).
What makes the situation even worse is that Australia’s population has grown by around 45% over the past 30-years, meaning that construction is significantly underperforming on a population-adjusted basis.
To illustrate this point more clearly, I have produced the below charts showing the actual number of dwellings completed per 1000 head of population.
First, below is the overall number of completions – both detached houses and apartments – per 1000 head of population:
As you can see, the rate of dwelling completions relative to the population has trended down sharply since the mid-1990s, reaching a 30-year low in 2012 of just 6.2 dwellings per 1000 head of population, well below the average construction rate of 7.9 over the 30-year period.
The next chart shows the seasonally-adjusted figures since 1985 broken-out by detached houses and apartments:
As you can see, the down trend in overall dwelling completions has been driven almost entirely by detached houses, with apartment completions remaining steady relative to population.
Three main conclusions can be gleaned from this analysis.
First, the data indicates strongly that Australian housing supply has become increasing unresponsive (inelastic) with respect to price given the massive surge in house prices since the mid-1990s.
Second, in spite of the push for density by Australia’s central planners (e.g. via urban growth boundaries and other planning constraints on land supply), and despite all the hoopla over how “popular” apartments are now, Australia is only building roughly as many apartments per head of population as it was in 1985. There has barely been any movement in the apartment build rate per 1000 for almost 30 years.
Third, the higher land prices eminating from the various supply-side constraints does appear to have killed-off detached house construction, which does not bode well for the Reserve Bank’s rebalancing plan, given that detached housing is the more employment-intensive sector.
