A world wide housing shortage

A consistent story reported in the media from countries that experienced high house prices is a "housing shortage".

According to economics, price in a free market is set by the interaction between supply and demand. If supply is greater than demand, prices fall, if demand is greater than supply, prices rise. Prices have risen at drastic, unprecedented rates in many locations around the world - so self evidently demand exceeded supply. When demand exceeds supply this is called a shortage.

Demand is measured in dollars and can increase in a number of ways:

Increased number of buyers - due to immigration, births, changing demographics etc. New lending products like subprime or low-doc loans mean that some people who may not have previously qualified for a mortgage add demand to the marketplace.

Increased borrowing capacity - from lower interest rates, financial innovations in the mortgage industry, or asset price gains leveraged from existing property.

Speculative demand - buying a house because "it is a good investment" or "house prices always go up". People buying because of high prices cause a feedback effect - called a speculative bubble - which can often lead to a financial mania where prices become completely disconnected from underlying yields or value on the belief that there will always be capital gain.

Fear - Some first home buyers may feel pressured to buy now to "get on the ladder" or "before they miss the boat" causing future demand to be brought forward.

As you can see, demand is measured in dollars and is just a number in a banks computer. Thus it can change almost instantly when rates are cut or someone qualifies for a new type of loan. Supply however involves real life physical houses that have to be constructed on appropriate land.

A question to ask when seeing prices rise so dramatically is whether the "shortage" in supply and demand is due to a fundamental population to housing stock shortage or rather artificial or temporarily high demand? For if it is the latter, the shortage can disappear almost instantly with credit conditions or a changed in sentiment (such as a bubble bursting) and become a glut.

Interestingly enough, it seems that during a house price bubble, almost everyone from the media to the government to the people believe that it is due to a fundamental lack of houses. This theory is put forth by housing industry groups who ask for concessions for their industry or increased government assistance.

Media and industry commentary from around the world

USA

Construction industry says housing crisis has hit California

Public Policy Institute of California (2004)

Facts from the California Building Industry Association (2006)

Los Angeles Times Sunday magazine cover in November 2003.

Senator Mel Martinez, secretary for US Housing and Urban Development


A department of housing report "California's deepening housing crisis" from September 2008 contains a remarkable set of mutually exclusive arguments which are eerily similar to the arguments used to justify current Australian house prices.





So it seems that rapidly rising prices prove there is a shortage. Far more rapidly falling prices are bad though because they deter building which exacerbates the shortage that we know exists because prices rose.

Australia

ANZ April 2008 housing snapshot


HIA: Housing shortage to 2010

New Zealand

http://www.andrewking.co.nz/pm/don-t-buy-coffee-and-cars-if-you-want-a-house/

United Kingdom

2007 link

The Barker review of Housing Supply investigated not whether housing supply was adequate, but why it was inadequate. It was even reported in the reputable press as "the Barker Review into why there is a massive housing shortage". Yet as the bubble bursts in the UK many new build flats have been close to unsaleable.

Yet by early 2009 the guardian newspaper reported that

Houses and People: The facts

So how do we know if we actually have enough houses for everyone? Did every country around the world seeing record high real estate prices just not build enough houses?

How come the USA thought they had a shortage, but then when the artificial demand from the housing bubble disappeared, they suddenly had a glut? Is this likely to happen elsewhere? How can we tell?

Below is a comparison of housing and population growth for Australia and the USA using their respective census data:

USA

USA	2001	2006	%change
population	285,226,284	299,398,484	4.97%
dwellings	117,858,349	126,316,181	7.18%

The rate of increase in the number of dwellings in the USA exceeded the rate of growth in the number of people in the USA by 44%

Australia

Aus	2001	2006	%change
population	18,769,249	19,855,288	5.78%
total dwellings	7,790,079	8,426,559	8.17%
Occupied Dwelings	7,072,207	7,596,183	7.41%
Unoccupied Dwellings	717,872	830,376	15.67%

The rate of increase in the number of dwellings in Australia exceeded the rate of growth in the number of people in Australia by 41%. The rate of increase in the number of empty houses was 2.7 times the rate of population growth.


For much more detail see: OverbuildingByLocation

Australia has built 1.6 dwellings per new person over the last 20 years, despite haveing an average household size o 2.6 people per household. For more detail see: DwellingsAndPopulationOverTime


But perhaps what matters is not the raw total population figures. After all, small children don't require their own homes. Young adults do. The amount of under or overbuilding might better be calculated from the rate of household formation or the growth in the number of adults compared to the number of additional dwelling units constructed over a period. The following tables use census data to calculate population growth, adult population growth and growth in dwelling stock:


These paint a slightly different picture, a small rise in the number of adults per occupied dwelling between 2001 and 2006. But the most outstanding feature is the number of unoccupied dwellings, which increased rapidly against any measure of population.

Australia has never had so many houses or bedrooms per person in our history. Nor has there ever been as many empty bedrooms or vacant houses (830,000 or almost 10% of the housing stock according to ABS 2006). We have constantly built houses faster than population growth.

Australia - A century of excess building

According to the Australian Bureau of Statistics (ABS) we've had excess construction for 95 years:
http://www.abs.gov.au/AUSSTATS/ABS@.NSF/Previousproducts/1301.0Feature%20Article392001?opendocument&tabname=Summary&prodno=1301.0&issue=2001&num=&view=

"The past 100 years have seen a massive increase in the Australian housing stock. In the period from 1911 to 1996 there was a fourfold increase in the Australian population - from 4.5 million to 17.9 million. The housing stock did not just keep up with this rapid rate of population increase; it increased at almost double the rate."

The above was for 1911 - 1996. Then from 1996 - 2006:

1996 - Population = 18,310,714 .... Dwellings = 7.2m
2006 - Population = 20,701,488 ....Dwellings = 8.4m
http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/CA25687100069892CA2568890028D7A6/$File/32180_1996-97.pdf
http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/CA25687100069892CA2568890028D7A6/$File/32180_1996-97.pdf

Population growth = 13%
Dwelling growth = 17%.

So in Australia over the last 95 years we have:
1911 - 1996 = Excessive building
1996 - 2006 = 13% population growth, 17% dwelling growth.

Questions to ask

How is it possible that 95 years of excess construction suddenly turned into a housing shortage just because we built less in 2006 and 2007?

If there really was a shortage of houses, why has construction dropped? Why have new home sales dropped? Why are property developers sitting on so much unsold inventory? Why isn't the market responding with more NEW supply for this demand?

Why did the government raise the First Home Buyers grant to stimulate demand when demand supposedly already exceeds supply?

Why are these circumstances so similar to the top of the US house price bubble?

It is clear that we didn't have a supply problem, rather one of artificially high demand. People wanted houses not to live in, but because they anticipated a profit.

So many houses - but not all used.

There appear to be enough houses, but because total demand seems to exceed that required for shelter (ie hoarding & speculation) not all of them are available for shelter, which means some people may have less shelter than they need or have to compete for rentals.

"Specufestor theory" is that as the house price bubble peaks, more and more houses are appropriated for speculation rather than shelter. This could perhaps be the cause of the rental crisis. A large number of houses are held empty (for various reasons - see below) while trying to sell as the market drops away from wishing prices while sellers stay delusional. They eventually give up and either sell or they turn the house into a rental "while waiting for the market to pick up".

If houses are turned from speculative purposes back to being used to house people you would expect the "rental crisis" to ease. And if it does so (ie vacancy rates up, rents not going up) during apparent "underbuilding" vs UnderlyingDemand? it would add to the that Specufestors were responsible for the rental crisis. (see ShelterWeeks for more on this)

For theory and discussion of this topic, please see the article EmptyHousesEffectOnTheMarket

For a local paper news article with an example of the thought process of a belief in rising prices keeping houses empty, and falling prices making them available for living in, see here.

Economic commentators revising shortage claims

After claiming a chronic housing shortage BIS Shrapnel chief economist Frank Gelber changed his tune AFR 16 Dec 2008



For more details see HistoryOfHousingShortageClaims

The current state of the Australian housing market

Since the collapse of securitised mortgage lending markets since August 2007, known as the credit crunch, tighter lending standards and a drop in consumer confidence have decreased the amount of money available to be borrowed for house purchase.

Remember that demand is measured in dollars, this has reduced demand. Accordingly, the number of houses for sale continues to outpace the number sold causing inventory to rise. Instead of the shortage and rising prices we are used to, the increase in inventory shows that demand is less than supply at current prices - a glut.

A glut means one thing - if sellers want to meet the market and sell their house, they will have to lower their prices. However, because people "believe" in housing so much they will hold out for wishing prices for ages. Some turn houses into rentals. There was approx 1 year of riding at the peak in the USA, UK and Australia before prices started to really decline.

Links:
Empty dwellings in a city desperate for places to live
Australian housing shortage myth - Contrarian Investors Journal

Footnotes:
2001 US census 2006 US census

2001 AUS census 2006 AUS census