**2.3. Australian house prices and the fundamental influences**

Australian housing demand has been strong and can be also attributed to the following:


findings of the research include:

in first home grants among others.

United States. Japan registered the largest house prices fall of 30%, while house prices in Germany and US were down 17% and 2% respectively during the same time. Other major

 housing markets have typically risen fastest in countries with the fastest growing economies. On average, the countries with the biggest rises in house prices since 2001 have seen GDP increase by more than 100%. Countries that had large rises in pre-crisis

 house prices within countries that form part of the Euro have climbed an average of 23 percent since 2001. France saw the largest increase with 82%, Belgium rose 69%, Spain

The performance of the established house prices in Australian housing market provided by the Australian Bureau of Statistics (ABS) is presented in Figure 8. The Australian housing over the past five years has seen some corrections. The period can be divided into pre-global financial crisis (GFC), during GFC and post GFC. Prior to GFC, there has been a considerable growth in the established housing prices. This growth pattern however changed course and reached the worst levels in August 2008 when the GFC was setting in. However, the prices of established homes climbed steeply during the peak of the GFC when markets around the world were playing havoc. This defiance could be mainly attributed to the management initiatives taken by the RBA [21] and government of Australia. The RBA drastically reduced the interest rates to a record low of 3.25% supported by the federal government incentives such as economic stimulus plan, which included substantial increase

This financial incentive was "too good to miss" for anyone considering their first home purchase. This led to flood of first home buyers entering the market that drove the prices up against all odds. Since the time the incentives have been wound back, and the market and investor sentiment took over. This led to a fall in the growth when compared to the preceding three years and has been mostly in the low sentiment in the past two years. Therefore, although Australian market prices are influenced by the global events, a collapse similar to that seen in markets elsewhere seems appears a distant possibility. This can be attributed to the underlying government incentives to manage the risks during the crisis.

Australian housing demand has been strong and can be also attributed to the following:

lending standards stricter than most advanced economies including the US; and

Other micro-economics aspects also helped manage the downturn.

**2.3. Australian house prices and the fundamental influences** 

strong overseas migration from 2004 to 2007;

Australian household sizes are shrinking;

interest rates at record lows.

housing shortages due to a rapidly growing population;

times lost the most after the GFC affected their economies; and

26% and Italy was up 31%. But Spain has seen a major decline in 2012.

#### *2.3.1. Trend of net population increase and net overseas migration increase*

House prices have been underpinned by a chronic housing shortage in Australia. This was brought about by an ever increasing population and constraints placed on housing supply over time. Figure 9 shows the increase in population growth from both natural growth and migration since 2006. From 2006 to September 2010 natural population growth has only seen a marginal increase, but during the same period the net overseas migration growth has been substantial.

Source: ABS

**Figure 9.** Trend of natural population increase and net overseas migration

Figure 10 shows that there has been an increase in the total population by about 1.6 million people 2006–2010. During the same period, the Net Overseas Migration (NOM) accounted for 1.02 million people compared to only 600 000 increase in natural population. However, given that there has been a large influx of people into Australia, the question was whether there was enough housing infrastructure in place.

Importance of Risk Analysis and Management –The Case of Australian Real Estate Market 377

20,000,000 20,200,000 20,400,000 20,600,000 20,800,000 21,000,000 21,200,000 21,400,000 21,600,000 21,800,000 22,000,000 22,200,000

Source: ABS

**Number of units**

Jan-2007

May-2007

Sep-2007

Source: NHSC


0.0

50.0

100.0 150.0 200.0

**Figure 12.** Estimated dwelling gap in the last decade

nearest hundred), June 2010

National housing supply council (NHSC) estimates a demand versus supply gap of approximately 640 000 houses in 2030; and an increase in the gap from 250 000 in 2012. Figure 13 shows the projections in the supply gap to 2030. The figure shows an increase over

Estimated dwelling gap since June 2001 ('000 dwellings, rounded to

time till 2015, and indeed a higher rate of increase predicted from 2015till 2030.

**Figure 11.** Trend in the number of dwellings commenced and population

Jan-2008

May-2008

Sep-2008

Jan-2009

**Estimated dwelling gap since June 2001 - June 2010**

**Population increase Vs new dwellings commenced**

May-2009

Dwellings Population Poly. (Population)

Sep-2009

Jan-2010

May-2010

Sep-2010

Source: ABS

**Figure 10.** Net overseas migration and components of population change

#### **2.4. Trend in the number of dwellings commenced and population**

Figure 11 shows the trend in the population and dwellings commenced from January 2007 to October 2010. As shown earlier, the population growth showed an upward trend over the entire period. The number of dwellings commenced shows a rather distressing trend. Figure 11 shows the commencement of new dwellings significantly fell short and did not keep pace with the rapid growth in population. For an addition of 1.25 million people during this period only about 235 000 new homes were built demonstrating a significant shortage in the housing market. Interestingly, this situation presents a case for more property investment as people search for a place to live.

### **2.5. Demand and supply scenario**

Historically, Australia has been behind in the demand versus supply of residential dwellings, but more so in the last decade than any time earlier. Figure 12 shows the dwelling gap in the previous decade. Australia continues to run large annual deficits in housing supply - the underlying demand for dwellings and the completion of dwellings has not matched. In view of this it can be expected that in the longer term Australia's housing market is underpinned by insufficient supply in addition to robust underlying demand.

Source: ABS

19500

20000

20500

21000

21500

22000

22500

376 Risk Management – Current Issues and Challenges

Source: ABS

**'000**

people search for a place to live.

**2.5. Demand and supply scenario** 

there was enough housing infrastructure in place.

**Figure 10.** Net overseas migration and components of population change

**2.4. Trend in the number of dwellings commenced and population** 

Figure 11 shows the trend in the population and dwellings commenced from January 2007 to October 2010. As shown earlier, the population growth showed an upward trend over the entire period. The number of dwellings commenced shows a rather distressing trend. Figure 11 shows the commencement of new dwellings significantly fell short and did not keep pace with the rapid growth in population. For an addition of 1.25 million people during this period only about 235 000 new homes were built demonstrating a significant shortage in the housing market. Interestingly, this situation presents a case for more property investment as

2006 2007 2008 2009 2010

NOM Natural increase change at the the end of year

Historically, Australia has been behind in the demand versus supply of residential dwellings, but more so in the last decade than any time earlier. Figure 12 shows the dwelling gap in the previous decade. Australia continues to run large annual deficits in housing supply - the underlying demand for dwellings and the completion of dwellings has not matched. In view of this it can be expected that in the longer term Australia's housing market is underpinned by insufficient supply in addition to robust underlying demand.

Figure 10 shows that there has been an increase in the total population by about 1.6 million people 2006–2010. During the same period, the Net Overseas Migration (NOM) accounted for 1.02 million people compared to only 600 000 increase in natural population. However, given that there has been a large influx of people into Australia, the question was whether

**NOM and components of population change**

**Figure 11.** Trend in the number of dwellings commenced and population

Source: NHSC

**Figure 12.** Estimated dwelling gap in the last decade

National housing supply council (NHSC) estimates a demand versus supply gap of approximately 640 000 houses in 2030; and an increase in the gap from 250 000 in 2012. Figure 13 shows the projections in the supply gap to 2030. The figure shows an increase over time till 2015, and indeed a higher rate of increase predicted from 2015till 2030.

Importance of Risk Analysis and Management –The Case of Australian Real Estate Market 379

180.0 **Estimated additional underlying demand and adjusted** 

**net supply, July 2009 to June 2010, ('000 households)**

Underlying demand Adjusted net supply growth

**Net population change in each state over the last decade** 

Source: NHSC


Source: ABS

Mar-2000

Dec-2000

Sep-2001

Jun-2002

Mar-2003

Dec-2003

Sep-2004

Jun-2005

Mar-2006

Dec-2006

Sep-2007

Jun-2008

Mar-2009

Dec-2009

Sep-2010

Jun-2011

NSW Vic Qld SA WA Tas NT ACT

**Figure 14.** Housing demand and supply by states

Increase in gap in year to June 2010

**Figure 15.** Net population change - state by state over 2000-2011

Source: NHSC

**Figure 13.** Supply and demand gap projections to 2030

To examine whether the situation is the same throughout Australia or mainly confined to a few states, data from all the states are explored in more depth. Figure 12 and Figure 14 both show that not all states have an acute shortage of housing such as South Australia (SA), Tasmania (Tas) and Australian Commonwealth Territory (ACT). Their data runs against the trend for the last decade but more so during 2009-2010. The larger states of New South Wales (NSW), Victoria (Vic), Queensland (Qld) and Western Australia (WA) all continue to have high deficits year after year and the deficit is increasing – however, Victoria being an exception in 2009-2010 where it managed to go against the trend temporarily (Figure 14). To further understand the nature of the differences between states, the net population increase in the demand across states needs to be compared. Figure 15 shows the state by state net change in population as well as housing issues. The states with a high influx of population showed higher dwelling demand.

Not surprisingly, the high demand has led to a rather strong rental market particularly in the larger states and this has provided an impetus for higher rental returns and an ideal time for new investors to consider for the longer term. With recent housing approvals declining, this demand supply gap can only be expected to widen. Clearly, the population increase cannot only be driving the market. Therefore, other aspects need investigation such as house price to income ratio; and house hold debt to income ratio.

Source: NHSC

Source: NHSC

0

200,000

400,000

600,000

800,000

demand.

ratio.

**Figure 13.** Supply and demand gap projections to 2030

To examine whether the situation is the same throughout Australia or mainly confined to a few states, data from all the states are explored in more depth. Figure 12 and Figure 14 both show that not all states have an acute shortage of housing such as South Australia (SA), Tasmania (Tas) and Australian Commonwealth Territory (ACT). Their data runs against the trend for the last decade but more so during 2009-2010. The larger states of New South Wales (NSW), Victoria (Vic), Queensland (Qld) and Western Australia (WA) all continue to have high deficits year after year and the deficit is increasing – however, Victoria being an exception in 2009-2010 where it managed to go against the trend temporarily (Figure 14). To further understand the nature of the differences between states, the net population increase in the demand across states needs to be compared. Figure 15 shows the state by state net change in population as well as housing issues. The states with a high influx of population showed higher dwelling

2010 2011 2012 2013 2014 2015 2020 2025 2030

Growth in gap between underlying demand and adjusted net supply

(number of dwellings), including cumulative impact

**Growth in gap between underlying demand and adjusted net supply (number of dwellings), including cumulative impact**

Not surprisingly, the high demand has led to a rather strong rental market particularly in the larger states and this has provided an impetus for higher rental returns and an ideal time for new investors to consider for the longer term. With recent housing approvals declining, this demand supply gap can only be expected to widen. Clearly, the population increase cannot only be driving the market. Therefore, other aspects need investigation such as house price to income ratio; and house hold debt to income **Figure 14.** Housing demand and supply by states

Source: ABS

**Figure 15.** Net population change - state by state over 2000-2011
