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16-08-2014, 11:40 PM
Household formation, not population, is the driver of demand
THE AUSTRALIAN AUGUST 14, 2014 12:00AM
Bernard Salt
Social Editor
Bernard Salt: Household formation
http://cdn.newsapi.com.au/image/v1/exter...z9c5xuj3mc
WHAT is the demand for housing in Australia? It is tempting to answer this question by citing the current rate of population growth: more people translates into demand for more housing.
But is this the case?
What if population growth is largely the result of a high birth rate? This might mean that families simply transfer out of a two-bedroom apartment and into a four-bedroom house. In this case, there is no net gain in housing demand because it involves transferring from smaller to larger accommodation.
In some respects a better indicator of the demand for housing, and for all the accoutrement that hangs off housing, such as household furnishings and home finance, is the level of household formation. Over calendar 2013 the Australian population increased by 392,000 or 1.7 per cent to reach 23.3 million. Right now, in August 2014, the Australian population sits at the 23.6-million mark; we will pass the 24-million mark at some time in late 2015 or early 2016.
The greatest number of people ever added to the Australian continent occurred in calendar 2008: in that year population growth was 460,000 or 2.2 per cent. You might recall that it was towards the end of 2008 that prime minister Kevin Rudd made his famous “I believe in a big Australia” comment. This statement seemed to trigger a shutdown in the rate of overseas migration such that population growth dropped to 310,000 during 2010.
Thereafter the growth rate recovered and has hovered around the 400,000-mark for a few years. This is an important indicator for the property industry and for Australian business more generally. Ten years earlier in calendar 2003 Australian population growth was 222,000 or 1.1 per cent. Over a decade the rate of population growth in this nation has ratcheted up by 77 per cent.
There is a prima facie case to say that the house construction and home finance industries should have performed well over the last decade. But this is only part of the story because it is households and not population that actually drives demand for housing and for home finance. What is Australia’s current rate of household formation and how has that changed over time?
It may not surprise you to learn that household formation is quite a technical term. It is best measured through estimates of private occupied dwellings, which excludes a relatively small proportion of the population living in hospitals, nursing homes, prisons, convents and staffing quarters such as mining camps. About 92 per cent of the population live in private occupied dwellings.
I think that at December last year there were 8.425 million private occupied dwellings in Australia, up 149,000 or 1.8 per cent over the previous 12 months. At a national level, household formation is tracking an annual growth rate (of 1.8 per cent) that is marginally faster than the rate of population growth (1.7 per cent). This is good news for the property industry. The demand for housing is just outstripping population growth.
But this is actually not new news. Household formation, or more correctly growth in private occupied dwellings, has by my calculations outstripped population growth more or less every year for the last decade.
Separations and divorce; the rise of widowhood; 20-something Generation-Ys leaving home to live in an apartment are all social drivers of demand for household formation. These demographic and social shifts have steadily lifted the demand for housing over the past decade and probably for much longer.
During 2003 household formation in Australia was 85,000 or 1.2 per cent. On these numbers the demand for housing has lifted by 75 per cent over the decade to 2013.
Whichever way you look at the numbers — either by straight population growth or by the increase in household formation — the past decade has seen an underlying expansion in demand for housing that equates to growth rate of around 7 per cent a year.
In order to have kept pace with market growth and to have retained market share, a national home builder or home finance provider, for example, should have recorded sales in real terms in 2013 that were 75 per cent greater than the levels in 2003. Anything less represents a loss of market share. But this is a broad national analysis. What national players in the housing space really require is a city-by-city municipality-by-municipality market-by-market estimate of annual growth in household formation. I have looked at household formation in two slow-growth markets: Broken Hill and Hobart.
Some technical adjustments have been necessary to ensure consistent city geographies over time, but the results are illuminating.
Between 2006 and 2011 the population of Broken Hill fell 0.6 per cent a year. The number of households in Broken Hill dropped by 0.7 per cent a year. In towns that are losing population, household contraction exceeds population decline, leading to an oversupply of houses on the market and to a softening of prices.
Hobart is a different market since it is growing, albeit at a slow rate. Hobart as now defined contains about 210,000 residents growing at an average rate of 1 per cent a year.
Household formation is tracking 1.4 per cent a year.
There are some towns where household formation runs well ahead of population growth, such as Hobart.
Perhaps there is a higher than average level of separations and divorce in Hobart than in other Australian cities.
Or perhaps it’s that Gen-Y is leaving the parental nest earlier because housing is cheaper. Whatever the reason, the outcome is that housing demand can actually be quite strong in slow-growth markets.
It prompts the question of what is the population and household growth equation in different cities and markets? What would be really helpful is if the Australian Bureau of Statistics measured household formation as well as population growth on a city-by-city basis. This information would inform, or it should inform, the strategic thinking and action of Australia’s housing industry.
Bernard Salt is a KPMG partner and an adjunct professor at Curtin University Business School; www.bernardsalt.com.au; bsalt@kpmg.com.au
THE AUSTRALIAN AUGUST 14, 2014 12:00AM
Bernard Salt
Social Editor
Bernard Salt: Household formation
http://cdn.newsapi.com.au/image/v1/exter...z9c5xuj3mc
WHAT is the demand for housing in Australia? It is tempting to answer this question by citing the current rate of population growth: more people translates into demand for more housing.
But is this the case?
What if population growth is largely the result of a high birth rate? This might mean that families simply transfer out of a two-bedroom apartment and into a four-bedroom house. In this case, there is no net gain in housing demand because it involves transferring from smaller to larger accommodation.
In some respects a better indicator of the demand for housing, and for all the accoutrement that hangs off housing, such as household furnishings and home finance, is the level of household formation. Over calendar 2013 the Australian population increased by 392,000 or 1.7 per cent to reach 23.3 million. Right now, in August 2014, the Australian population sits at the 23.6-million mark; we will pass the 24-million mark at some time in late 2015 or early 2016.
The greatest number of people ever added to the Australian continent occurred in calendar 2008: in that year population growth was 460,000 or 2.2 per cent. You might recall that it was towards the end of 2008 that prime minister Kevin Rudd made his famous “I believe in a big Australia” comment. This statement seemed to trigger a shutdown in the rate of overseas migration such that population growth dropped to 310,000 during 2010.
Thereafter the growth rate recovered and has hovered around the 400,000-mark for a few years. This is an important indicator for the property industry and for Australian business more generally. Ten years earlier in calendar 2003 Australian population growth was 222,000 or 1.1 per cent. Over a decade the rate of population growth in this nation has ratcheted up by 77 per cent.
There is a prima facie case to say that the house construction and home finance industries should have performed well over the last decade. But this is only part of the story because it is households and not population that actually drives demand for housing and for home finance. What is Australia’s current rate of household formation and how has that changed over time?
It may not surprise you to learn that household formation is quite a technical term. It is best measured through estimates of private occupied dwellings, which excludes a relatively small proportion of the population living in hospitals, nursing homes, prisons, convents and staffing quarters such as mining camps. About 92 per cent of the population live in private occupied dwellings.
I think that at December last year there were 8.425 million private occupied dwellings in Australia, up 149,000 or 1.8 per cent over the previous 12 months. At a national level, household formation is tracking an annual growth rate (of 1.8 per cent) that is marginally faster than the rate of population growth (1.7 per cent). This is good news for the property industry. The demand for housing is just outstripping population growth.
But this is actually not new news. Household formation, or more correctly growth in private occupied dwellings, has by my calculations outstripped population growth more or less every year for the last decade.
Separations and divorce; the rise of widowhood; 20-something Generation-Ys leaving home to live in an apartment are all social drivers of demand for household formation. These demographic and social shifts have steadily lifted the demand for housing over the past decade and probably for much longer.
During 2003 household formation in Australia was 85,000 or 1.2 per cent. On these numbers the demand for housing has lifted by 75 per cent over the decade to 2013.
Whichever way you look at the numbers — either by straight population growth or by the increase in household formation — the past decade has seen an underlying expansion in demand for housing that equates to growth rate of around 7 per cent a year.
In order to have kept pace with market growth and to have retained market share, a national home builder or home finance provider, for example, should have recorded sales in real terms in 2013 that were 75 per cent greater than the levels in 2003. Anything less represents a loss of market share. But this is a broad national analysis. What national players in the housing space really require is a city-by-city municipality-by-municipality market-by-market estimate of annual growth in household formation. I have looked at household formation in two slow-growth markets: Broken Hill and Hobart.
Some technical adjustments have been necessary to ensure consistent city geographies over time, but the results are illuminating.
Between 2006 and 2011 the population of Broken Hill fell 0.6 per cent a year. The number of households in Broken Hill dropped by 0.7 per cent a year. In towns that are losing population, household contraction exceeds population decline, leading to an oversupply of houses on the market and to a softening of prices.
Hobart is a different market since it is growing, albeit at a slow rate. Hobart as now defined contains about 210,000 residents growing at an average rate of 1 per cent a year.
Household formation is tracking 1.4 per cent a year.
There are some towns where household formation runs well ahead of population growth, such as Hobart.
Perhaps there is a higher than average level of separations and divorce in Hobart than in other Australian cities.
Or perhaps it’s that Gen-Y is leaving the parental nest earlier because housing is cheaper. Whatever the reason, the outcome is that housing demand can actually be quite strong in slow-growth markets.
It prompts the question of what is the population and household growth equation in different cities and markets? What would be really helpful is if the Australian Bureau of Statistics measured household formation as well as population growth on a city-by-city basis. This information would inform, or it should inform, the strategic thinking and action of Australia’s housing industry.
Bernard Salt is a KPMG partner and an adjunct professor at Curtin University Business School; www.bernardsalt.com.au; bsalt@kpmg.com.au