Supply and demand is always a hot topic in property. It’s something we get asked about all the time, and in investing it is very important to know whether the area you’re considering has an oversupply in property, or an undersupply.
This is something we keep a very close eye on here at Providence, and in this article we will take a closer look at some of the key numbers. It’s very easy to get distracted by photos or videos of lots of new homes being built in housing estates or new apartment blocks going up in a given suburb. We see plenty of articles in the media that jump to fast conclusions about the state of supply but provide zero quantitative research to reach their conclusions.
To draw our conclusions we use a range of data; some of it in the public domain, some of it from fee for service databases. This data may not be perfect, but we believe it is quite accurate and a good basis on which to draw our conclusions.
Supply and demand in Australia’s property market — the real figures
What we will look at today is overall capital city supply and demand data focusing on Sydney, Melbourne and Brisbane. This consideration is one of many – considering the supply within and around any given suburb where you’re considering investing is essential. As part of the work we do, we examine and analyse supply and demand data both at macro/city level and at micro suburb level.
Looking back a few years, through the GFC there was certainly an undersupply across the capital cities. Developers couldn’t get funding for new developments, so less developments were built. Meanwhile, migration rates stayed the same or even increased during that period and so there was a consistent undersupply for a number of years.
As we moved our way through the GFC and banks began to loosen credit for developers and home buyers to access construction funding, we’ve seen a supply response, particularly over the last 4 years. Whether you’re in Melbourne, Sydney or Brisbane, there have been a lot more cranes in the sky and more properties being built.
As part of our analysis, we’ve looked at population growth, establishing what population growth is occurring in each capital city. We then looked at the predicted demand based on a requirement of 2.6 persons per household (the average number of persons per household, according to the ABS).
Our research then takes into account the number of dwelling approvals and the approximate dwellings that will be completed based on those actual dwelling approvals. Then we have to make an inference about the number of dwellings that will actually be completed, because of course all the dwellings that are approved are not necessarily completed. So we’ve done this on the basis of the statistics for the last 30 years. We also make a subtraction for a number of demolitions, because not only are there properties being built, there are many properties being demolished to make way for the new.
We often see highly emotive articles about oversupply based purely (and erroneously) on the number of development applications that have been submitted – not taking into account these other factors. A significant proportion of development applications do not make their way to completion. The media frequently talks in crisis and generalities to drive circulation, to get eyeballs, and to do whatever it is that they need to drive advertising. So it’s really important that when supply and demand is discussed, it is based on facts and data, not emotion.
Supply and demand in Sydney
Take a look at the chart below and you’ll see that in Sydney in 2011/12 and 2012/13 there was a shortfall in required dwellings, moving into a surplus in all the following years. Not a massive annual surplus, but a small one. This has created an accumulated surplus of around 29,990 dwellings to date, which as a proportion of the total dwellings in the city is a very small percentage. We don’t see this as anything to be concerned about at a macro level. However it is certainly meaningful on a localised area basis, and there are absolutely areas where this concentration of excessive construction will have an impact. These would include Zetland, Epping and Holroyd.
Melbourne property oversupply or undersupply?
Now let’s take a look at Melbourne. We will see that once again during 2011/12 and 2012/13 there was a shortfall in required dwellings, moving into a small surplus in all the following years. This has created an accumulated surplus of around 31,521 dwellings to date which, once again as a proportion of the total dwellings in the city is a small percentage. We don’t see this as a concern at a macro level, however areas where this property oversupply is concentrated and would be of a particular concern would include Southbank, Docklands and the CBD.
What about demand? The ABS predicts that Melbourne is increasing in population by about 1800 people per week. So based on dwelling size, the number of people per dwelling being 2.6, Melbourne requires 700 new dwellings per week. So that 30,000 oversupply that we are talking about is about 40 weeks of excess supply based on current growth numbers.
Now we’ve seen from those numbers that supply moves in waves. There are periods of oversupply and undersupply, and what we’re seeing in bank funding to developers is credit has been tightening dramatically.
Importantly for the supply numbers not only in Melbourne but also in each of these three cities, we are seeing the trend of expected completions falling significantly. You can see that in the figures. We expect to continue to see lower completion numbers across Sydney Melbourne and Brisbane in the near term.
Brisbane’s supply shortfall
If we take a look now at Brisbane, we see supply shortfalls in 2011/12, 2012/13 and 2013/14 and again in 2016/17 and 2017/18 resulting in an overall undersupply/supply shortfall of 13,248 dwellings. This is interesting news considering we have seen reports of oversupply in various articles on Brisbane.
There has certainly been an oversupply in specific suburbs – such as Brisbane CBD, Fortitude Valley, Hamilton, Albion and the East side of Chermside. But an overall supply shortfall is an interesting revelation and is one of the reasons we think parts of Brisbane make it an appealing property investment destination.
Dwelling-type specific oversupply in property
Another interesting dynamic we’ve seen in areas with apparent oversupply in property is that there are always markets within markets. Although there may be an oversupply of a certain type of property within a specific suburb – for example, small living area, high volume, commoditised, apartments in high rise buildings – there can be in fact a very strong market in that exact same suburb for higher-quality, more scarce/lower supply property.
For example, higher quality, lower density dwellings or premium quality oversized apartments eg 3 bed, 2 bath, 2 car. We’ve seen a number of examples of this in various suburbs around the country where these scarcer types of properties have demonstrated rental yields, vacancy rates and capital growth as if there was no oversupply in the suburb. In effect, a two-speed market for properties in that suburb. This is something that we will explore further in later research posts.
If you would like further detail or to discuss supply in any particular markets you’re considering, please feel free to contact us and we can put you through to one of our research analysts.