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Australia's housing shortage is likely to get much worse before it gets any better, reports property research group RP Data, because construction of new housing continues to fall well behind the number of properties required.

Recent figures released by the Australian Bureau of Statistics (ABS) suggest that residential property developers are still cautious of soft market conditions - despite a fundamental undersupply of residential housing stock and record high levels of population growth.

RP Data research director Tim Lawless said the reluctance by developers to build is “based on a lack of buyer confidence”, coupled with a drop in housing loans as credit standards tighten.

Adding pressure to this is a shortage of labour and rising construction costs. "The net results of these factors are that low supply additions and strong population growth are at odds with each other.

At the base level, we’re seeing demand for housing far outstripping supply additions, and the situation is becoming worse,\” Lawless said. "To arrive at the value of land at that date we have to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration.

We must further suppose both to be perfectly acquainted with the land, and cognisant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land and the likelihood, as then appearing to persons best capable of forming an opinion of a rise or fall

for what reason so ever in the amount which one would otherwise be willing to fix as the value of the property".

"To add to this, the pressure is building on the rental market. Vacancy rates are averaging less than 2% across the nation’s capital cities, and rental rates for houses increased by 11% over the past 12 months."

He added that he’d expect to see rises in weekly rental rates “of a similar magnitude over the coming year”.

ABS figures show that new dwelling commencements declined for the second consecutive quarter, with construction of just 38,348 homes commenced in the three months to June, a seasonally–adjusted drop of 3.7% on the March quarter.

Over the year ending June 2008, approximately 157,000 new dwellings commenced construction, well below the 200,000 dwellings estimated to be required, according to the Commonwealth Treasury.

This equates to around 43,000 too few dwellings being built over the year.

The undersupply of new housing has created a ‘natural floor’ under property prices, which Lawless believes is the fundamental reason why property values haven’t fallen further in Australian’s major residential markets.

At the same time, Australia’s population is increasing at a rapid pace, creating further demand for accommodation.

Last year, the nation’s population grew by around 330,000 new residents, with both overseas migration and the level of natural increase at historic highs, Lawless added. Source