Sydney’s housing shortages – decade of under supply

This note sets down the key macro drivers that we work with to consider the interaction between the local economy and residential markets. Considerable angst continues to be expressed, by some commentators, about a potential oversupply of housing in Sydney. On occasion, the building cycle impacts are extended into pessimism about the level of prices for established property. Our view remains one of cautious optimism.

Sydney’s rate of housing supply has clearly increased substantially over the past two years. However, this improvement needs to be understood in the context of a long period of very low construction.

From 2002 to 2009, the number of dwelling approvals trended down, and reached record lows. At the same time, the city’s population growth surged, led by overseas migration including university students.

There was an extended period of seven years (2006-2013) where housing supply failed to keep match with population growth.

So while the rate of housing construction has reached high levels over the past three years, a considerable deficiency of housing continues to be evident. This situation is most clearly reflected in Sydney’s residential rental vacancy rate, which remains low at 1.9%.

Sydney housing demand and supply

graph1

Source: ABS, MacroPlan

Sydney’s economic cycle – sustained strength from major projects

Sydney’s economy is currently enjoying buoyant conditions, as reflected in the rate of employment growth.

The city’s jobs growth has reached 3% over the course of FY2016, the highest rate in eight years.

The State Government has enjoyed robust revenues, through a combination of asset sales and conveyance revenues from the property market. In response, the Government has greatly expanded its expenditure on infrastructure projects, and also paid down its debt.

With low unemployment, Sydney is drawing in more skilled workers from other states and overseas, leading to higher population growth.

The overall trend is positive as a ‘virtuous cycle’ is underway for the local economy, which is supporting the residential property market.

Sydney jobs growth (annual average)

Source: ABS, MacroPlan

Source: ABS, MacroPlan

Sydney’s economic cycle – sustained strength from major projects

Since 2011, Sydney’s population growth has improved markedly, rising to an annual rate of 1.8%. There has been a greater supply of housing (both greenfield and infill), which will continue to support the city’s inward migration.

Sydney’s economy is currently enjoying a sustained period of solid growth. Positive effects from infrastructure spending are likely to extend out to 2020, due to an extensive program of complex road and rail projects.

Combined with a faster pace of retirement, it seems likely that Sydney’s population growth will stabilise at record levels over the next five years.

By 2025, Sydney’s transport infrastructure is projected to function at a more efficient rate, with a series of major projects extending the economic cycle:

  • Light rail service through the CBD and eastern suburbs.
  • Completed WestConnex enabling a full radial movement between the M4 and the M5.
  • Badgerys Creek airport operational and serviced by the M12, supporting freight and mail deliveries and leading to a decant of some services out of Mascot.

Sydney construction work done by sector – $m work done in constant prices

Source: ABS, MacroPlan

Source: ABS, MacroPlan

Sydney residential property prices – poised for further growth

Sydney’s residential property prices have increased sharply over the past three years. However this recovery followed an extended period of weak growth.

Over the past ten years, housing values have shown similar growth to residential rentals. Indexing both values and rentals to a starting point of 2006, it is evident that the cumulative gains have been similar. Residential property prices rose by a cumulative 88% over the ten years to June 2016 (6.5% p.a.), compared with a comparable increase of 76% for rentals (5.8% p.a.).

As housing loan interest rates have dropped steadily over the past decade, price growth has not translated directly into mortgage affordability. As rental values continue to rise, due to the city’s historical deficiency of housing, there will be support for further price growth.

Sydney housing market indexes

Source: ABS, MacroPlan

Source: ABS, MacroPlan

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About the author:

Jason Anderson
Chief Economist
E: anderson@macroplan.com.au 
Jason Anderson is MacroPlan Dimasi’s Chief Economist.  Jason joined the MacroPlan team in 2010 after working as a Senior Economist for a Property Market Research Company, and prior to that as a senior researcher with both the private sector and Federal Government.   Jason possesses extensive quantitative and research experience in the fields of residential analysis and commercial property and development.  Jason’s views on the property and development sectors are regularly sought by the national media.  Jason has considerable experience in the analysis and development of the residential development policy environment and has undertaken several major reports for a number of industry associations, designed to achieve productive policy reform.
About MacroPlan Dimasi:
MacroPlan Dimasi’s experienced and qualified economists align their understanding of macro-economic forces with micro-economic variables such as geographic and industrial characteristics, demographics, labour market shifts, resource demand and commercial realities.  Contact Jason Anderson – Chief Economist today to discuss your property research requirements.

 

 

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