Franzen Tips #1163: Is it Supply or Demand or Both?

Is it Supply or Demand or Both?

 

Supply, supply, supply, supply, supply. I must admit that pretty much every time we see or hear about the problems with the property market, the focus from politicians, industry leaders and journalists have focussed on fixing the supply problem. We just need to build more houses, don’t we?

 

In last week’s tips, we identified the focus of the national cabinet was agreeing on a new target which is to build 1.2m new homes (supply) over the five-year period starting 1 July 2024. This has raised the eyebrows of many analysts wondering just how achievable the target is, even assuming more supply will address the problem. However, at least one analyst believes that supply is not actually the main problem but the other side of the equation is “demand”.

 

Leith van Onselen is the Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness and has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs, so presumably he knows a thing or two. In his recent article in Macrobusiness, he claims that “Australia enjoyed the largest housing construction boom in history last decade, during the 2010s. As a nation, we built more homes than ever before, as shown below:”

 

He also says that Australia is ranked fourth in the OECD for home building, and we have one of the largest proportions of construction workers in the OECD. So, given that we have been building more homes than ever, how is supply apparently the problem? Mr van Onselen believes Australia has one of the world’s largest immigration programs which is causing housing demand to always exceed supply. In his article, he says Australia’s net overseas migration (NOM) averaged 96,000 people per year from 1992 to 2002 and this then increased to an average of 190,000 in the 20 years through to 2022 which included the negative period caused by the pandemic.

 

He poses the question: “How will Australia’s housing supply ever keep up with demand if the population is expected to expand by 355,000 people each year for the next 40 years? Over the last two decades, Australia has not built enough dwellings. Although the rate of home construction increased to record levels last decade, it was unable to keep up with the enormous increase in immigration-driven population growth that began in the mid-2000s”.

 

This is certainly an interesting perspective that has not had a lot of media attention and we have not heard it discussed in political circles. “Supply and Demand” are obviously both important parts of the equation and probably both need to be fixed to fix our housing crisis.