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    Mounting under-supply of housing

    BIS Shrapnel

    The Australian downturn in dwelling commencements is expected to extend into 2006/07 as rising interest rates force some households to postpone the purchase of a new dwelling.

    In the latest edition of Building Industry Prospects, leading economic and industry forecaster, BIS Shrapnel , predicts national commencements will fall by a further five per cent in 2006/07 to 142,500 dwellings. This would extend the downturn into a third consecutive year, following a four per cent drop to 150,500 housing starts in 2005/06.

    An anticipated interest rate rise of 0.25 per cent in November 2006, followed by another forecast rise of 0.25 per cent in June quarter 2007, will further depress residential building activity, according to BIS Shrapnel, extinguishing the embers of recovery in national dwelling construction that were evident in the middle of this year.

    However, higher interest rates are not the sole source of the under-supply in housing. BIS Shrapnel argues limitations on residential land supply and consequent upward pressure on prices, particularly in Sydney and south-east Queensland, have also contributed to challenging affordability and the downturn in demand for housing.

    Senior Project Manager, Jason Anderson explains the decline in housing supply is occurring despite an influx of people into Australia through net overseas migration 1. National population gain through net overseas migration averaged about 130,000 persons per annum in 2004/05 and 2005/06, according to figures from the Australian Bureau of Statistics. This was the highest net overseas migration gain (over a two year period) since the late 1980s. Anderson has identified long-term visitors, such as people on working visas and overseas students, have been the primary driver of the surge in net overseas migration.

    Based on BIS Shrapnel estimates, strong population growth from overseas migration will support underlying demand of approximately 165,000 new dwellings in 2006/07.

    However, BIS Shrapnel expects supply will fall well short of this demand. “The surge in population gain through overseas migration has led to very strong demand for housing, particularly rental properties. As a result, rental markets throughout Australia are as tight as a drum, with vacancy rates in all capital cities below 2.5 per cent as at June 2006,” commented Anderson.

    “With the supply of new dwellings decreasing, rental markets are set to tighten even further in 2007 and 2008. Dwelling completions will fall sharply in Sydney and Melbourne, which will exacerbate housing shortages.

    “The extreme undersupply in the Sydney market will trigger a substantial and extended adjustment to residential rentals. As completions of new dwellings diminish sharply during 2006 and 2007, tighter supply will generate strong growth in residential rents, which will gradually improve rental yields during 2006 and 2007.

    “A very large increase in rents is required to improve yields on residential property in order to draw investors back into the market and push up the number of new dwellings back towards underlying demand. We expect average rentals to rise by five per cent during 2006, and then accelerate to at least 10 per cent growth per annum over the course of 2007 and 2008. The cumulative increase in average rents in Sydney could be as high as 40 per cent over the five years from 2006 to 2010,” concluded Anderson.

    1) Net overseas migration comprises permanent settlers and long-term visitors.

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