Plunge in apartment construction leaves new supply critically low
Leading industry analyst and economic forecaster, BIS Shrapnel, is anticipating rental growth around
Australia will surge in 2010, following a period of more moderate growth in 2009. The company says
over the three years to 2012, national average yearly rental growth will be 5.8 per cent, resulting in
rental households passing an extra $1.9 billion to landlords each year.
In an update to its Residential Property Prospects, 2009 to 2012 report, BIS Shrapnel says construction
of new medium and high-density housing has fallen to the lowest level since 1991. Starts of only about
30,700 medium and high-density housing units are expected in 2009, representing an annual decline of
30 per cent.
“While supply has plunged, demand remains very strong,” says BIS Shrapnel Senior Economist Jason
Anderson. “Net overseas migration in 2008/09 is estimated to have been about 300,000 persons, a
record high.”
However, there is some relief for housing supply, with a strong upturn in detached house construction
expected to come through in 2010. Owner-occupier purchases of new houses are running at a strong
rate and this will alleviate the degree of undersupply in 2011.
The number of first-home buyers in 2009 is running at a record level of about 200,000 and BIS Shrapnel
says first-home buyers are likely to be adding to the pressure on rental markets.
“Many qualifying first-home buyers were young adults living at home, accumulating the savings which
are now required for home loans,” says Anderson. “A first-home buyer moving out of the family home,
and purchasing a former investment property, will have actually reduced the available rental stock.”
BIS Shrapnel says this effect is part of the reason why rental growth has remained solid in 2009. The
company is estimating national rental growth will be 5.1 per cent in 2009, down from 8.3 per cent in
2008, but still high by historical standards.
“With the very low rate of medium and high-density dwelling construction in 2009, it is inevitable that
rental markets will tighten considerably in 2010, and remain very tight in 2011,” says Anderson.
Monitor survey, which was conducted after the November 2009 rate rise, showed that 30 per cent of all
Monitor survey, which was conducted after the November 2009 rate rise, showed that 30 per cent of all
households looking to purchase a dwelling were investors. This proportion was unchanged from the
previous survey in August 2009, indicating that investor appetite was unaffected by the initial rate rises.
The low rate of medium and high-density dwelling construction is largely attributable to tighter lending
restrictions on development projects. BIS Shrapnel says it is uncertain as to how long it will be before
lending restrictions are eased and, even if some improvement were to occur in the near future, it would
be some time before supply improves as most medium and high-density dwelling projects take 12 to 18
months to complete.
Anderson says the forecast growth in rents will complicate the Reserve Bank of Australia’s fight against
inflation.
“Continued strong growth in residential rentals will limit the potential decline in underlying inflation
measures,” he says. “Given that underlying inflation remains high, relative to the Reserve Bank of
Australia’s target range, we expect that the escalating shortage of rental properties will be a significant
factor contributing to further interest rate rises.
“Higher interest rates would dampen the construction of new dwellings, exacerbate the housing
shortage, and thereby place upward pressure on rentals. This dilemma is set to become much more
evident during 2010.”
BIS Shrapnel says the causes of escalating housing costs require close attention from governments at
all levels. Australia is nearing the end of a decade where housing costs have risen far more sharply than
the price of overall household good and services.
During the 1990s, the housing component of the Consumer Price Index (CPI) was flat, and did not
contribute anything to inflation over the decade. However, over the ten years since the start of the
millennium, the housing component of the CPI has risen by 56 per cent, which is well above overall CPI
inflation of 36 per cent.
“To put this in perspective, housing costs have jumped by more than the social ‘bads’ of alcohol and
tobacco, for which average prices have risen by 55 per cent over the decade, and are transparently
affected by rising government levies,” says Anderson.
“The burden of government charges and policies on housing are more indirect, but pervasive. Both
owner-occupiers and renters are being affected and unlike cigarettes and alcohol, housing is not a
service that can be picked-up ‘duty free’.”BIS Shrapnel forecasts by region
Brisbane
Residential rental growth in Brisbane has been very strong over the course of this decade. Average
annual growth in rentals was 6.9 per cent from 2002 to 2008, well above the national average of 4.4 per
cent. BIS Shrapnel forecasts more moderate growth of five per cent per annum over the next three
years to 2012.
Housing supply is set to fall in 2010 due to the low pipeline of new apartments. Medium and high-density
dwellings starts are estimated to have plunged by 45 per cent in 2009, reaching the lowest level since
1987. BIS Shrapnel expects the Brisbane rental market will tighten during 2010, leading to further
growth in rentals.
Sydney
Residential rental growth in Sydney has remained quite high in 2009, at 6.2 per cent. BIS Shrapnel
forecasts this will accelerate over the next three years to 2012, to average 7.1 per cent per annum.
Housing supply is set to fall in 2010 due to the low pipeline of new apartments. Medium and high-density
dwellings starts are estimated to have plunged by 28 per cent in 2009, reaching the lowest level since
1987. BIS Shrapnel expects Sydney’s rental vacancy rate will drop below one per cent next year, and
then remain very low during 2011.
Melbourne
Residential rental growth in Melbourne has remained solid at 4.8 per cent in 2009. BIS Shrapnel
forecasts this will accelerate over the next three years to 2012, to average 5.6 per cent per annum.
BIS Shrapnel estimates there is a deficiency of new dwellings in Victoria, but the gap is not as great as
that in Sydney. Medium and high-density dwellings starts are estimated to have risen by six per cent in
2009, which will gradually provide some restraint on rental growth.
Adelaide
Residential rental growth in Adelaide has been moderate compared to the national average. Average
annual growth in rentals was 4.2 per cent from 2002 to 2008, slightly below the national average of 4.4
per cent. BIS Shrapnel forecasts slower growth of 3.4 per cent per annum over the next three years to
2012.
Adelaide is unusual in that housing construction has kept pace with underlying demand, which is
reflected in the softer rate of rental growth in recent years. Looking ahead, it seems likely that
construction will continue to match underlying demand, leading to only modest growth in rentals.
Perth
Residential rental growth in Perth has been very strong over the course of this decade. Average annual
growth in rentals was 6.5 per cent from 2002 to 2008, well above the national average of 4.4 per cent.
High rental growth has continued in 2009, with an estimated rise of 6.6 per cent. BIS Shrapnel is
forecasting more moderate rental growth of 3.2 per cent per annum over the next three years to 2012.
Much of the rental growth has occurred due to very large increases in average wages. However, the
labour market has improved considerably during 2009 and the unemployment rate in Western Australia
is now sitting at five per cent. BIS Shrapnel expects average wages growth will be more moderate over
the next three years, and this will constrain rental growth.
In addition, dwelling construction has generally kept pace with underlying demand and this balance is
likely to continue into 2010.
About BIS Shrapnel’s Home Buyer Monitor
The monitor is a survey of 1,500 households, undertaken each quarter. It commenced in August 2009,
and the second survey round was undertaken in November 2009.
The primary objectives of the Home Buyers Monitor are:
• To track the mood and opinion of Australian home buyers on a regular basis;
• To fill an identified gap in the availability of current attitudinal and perception feedback from
would-be home buyers; and
• To provide a platform for our clients to use this ‘live’ panel of consumers currently seeking to
purchase a dwelling, for their own customised research needs.
About BIS Shrapnel
BIS Shrapnel is Australia's leading provider of industry research, analysis and forecasting services. BIS
Shrapnel helps clients better understand the markets in which they operate, through reliable and
detailed market data, analysis of developments and drivers and thoroughly researched forecasts.
BIS Shrapnel compiles accurate, clearly explained and detailed information on industry sectors, markets
and industries in which their clients operate. BIS Shrapnel provides market size and segmentation data,
market shares, consumer attitudes and supplier reputation information, and regularly conducts both
business-to-business and consumer research.
Over the company’s 45-year history, BIS Shrapnel has built up a strong level of expertise and unique
methodologies for forecasting.
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