Lack of rent growth confirms there is no shortage

Posted on 22/01/2014  
Lack of rent growth confirms there is no shortage

As 2014 progresses it will become increasingly clear that over-supply is a bigger issue than shortage in Australian property markets.

It may also become apparent that the greatest threat of a future market downturn will not come from the mythical price bubble concocted by journalists who don't care too much about accuracy or balance but from an emerging serious over-supply in some markets.

For several years the notion of a dwelling shortage, often described as "a chronic housing shortage crisis", has been promoted by some organisations and individuals pushing vested interests.

That notion has never been supported by any factual data nor by the behaviour of markets, but it hasn't stopped newspapers from treating it as a fact because it was a cheap and easy headline.

Most market outcomes in recent times have made nonsense of the shortage claims. The fact that four of the past six years have been periods in which prices on average have fallen is inconsistent with the idea of a chronic shortage so bad it has been often called a crisis.

So too has the lack of rental growth in most of our major cities. In the past couple of years only Darwin and Perth have delivered major rental growth.

Darwin has been perhaps the only capital city to which the term "housing shortage" could be accurately applied in recent years. When the Ichthys gas project brought thousands of new workers into this rather small cities, and supply-demand imbalance worsened and rents rose sharply. Darwin has by far the highest residential rents in capital city Australia.

The rental growth in Darwin, and in resources-related centres such as Port Hedland, demonstrates what happens when there truly is a shortage of dwellings relative to demand.

Where there is no rental growth, you can safely conclude that there is no dwelling shortage.

According to the latest Rental Report from Australian Property Monitors, Darwin remains the only state or territory capital city with any realistic claims to a shortage - and even there the rate of rental growth has dissipated considerably.

In the past year, there has been no growth in Sydney's median house rent and only moderate growth in the unit median.

Melbourne recorded no change in unit rents and just 4% growth in house rents. Rents in Canberra fell, both for houses and rents, largely because the city has the opposite of a dwelling shortage.

Brisbane showed no growth in apartment rents, because it has a growing over-supply, and house rents increased just 2.6% in 12 months.

The previous rental growth in Perth has come to a halt, as shown by the 5% decline in the median unit rent in the December Quarter. In Melbourne, the median unit rent fell 3% in the December Quarter. Both cities have significant surpluses in their apartment markets, especially in Melbourne where the inner-city over-supply is already serious but will get worse and may create a market crash in the future.

But don't be surprised if you continue to spot market commentators, particularly economists, talking about "the housing shortage". This furphy has been aired so often it's regarded as fact by those who are poorly-informed about real estate issues - a description which covers most Australian economists.

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