Aussie house prices are set to fall

Australian house prices are set to fall … and it’s all about supply and demand.

There is not much doubt about that, but the big questions are how substantial the falls will be and how long the price declines will last?

The supply of dwellings is increasing in line with an extraordinary construction boom. Australia is building dwellings at a record level. At the time, underlying demand for dwellings is falling as population growth has slowed to its weakest pace in close to a decade.

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Let’s look at the dynamics.

Over the course of 2015, Australia’s population rose by 326,100 people. This is well down from the peak level of almost 460,000 in 2008, 422,000 in 2009 and even 400,000 in 2012.

In terms of the new demand, 326,100 people will require around 142,000 new dwellings to live in based on the estimate by the Australian Bureau of Statistics of 2.3 people occupying each dwelling. In 2014, with population growth of 328,500, 143,000 extra dwellings were needed.

This pace of population growth appears likely to continue for the couple of years, meaning that demand for new dwellings is likely to remain around 140,000 to say 145,000 per year for the next couple of years.

In terms of new supply, an under-building of dwellings relative to underlying demand from population growth was evident in the five year period up to the end of 2013. There was simply a shortage of property and this was a principle driver of the house price surge.

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Since then end of 2013, the number of dwellings in Australia (which is new construction less demolitions of old properties) increased by 147,600 in 2014 and 167,500 in 2015. Based on the building approvals data so far in 2016, it looks like there will be a further 185,000 to190,000 new dwellings in Australia by the end of 2016. And recall that this occurring when demand from population growth has slowed to around 142,000.

There are already reports of gluts of apartments in Brisbane and pockets of Melbourne. Perth house prices have dropped a quite remarkable 9 per cent since the start of 2015 as the mining investment slump has hit the economy and population flows out of the city and back to the eastern states has picked up.

If simple supply and demand dynamics are applied to the housing market right now and over the next couple of years, it is likely that there will be an over supply of properties in the not too distant future which will certainly lead to price falls.

The extent of those price falls will be determined by how the market reacts.

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Given the new lower level of immigration, new housing construction is probably, if not certainly, poised for a decline as it adjusts to the excess supply of dwellings. If the fall is gradual and new supply continues to significantly outpace new demand, house price falls could be quite marked. Say 10 per cent across large parts of the economy.

If new construction of dwellings falls away sharply as we go into 2017, the house price falls may be muted as the level of oversupply is contained. Of course this latter scenario is not good news for the economy with a housing construction slump eating away at an already fragile economy,

Either way, the near term is set to see house price falls in most cities and for new dwelling construction to follow shortly there after.