Tuesday, July 6, 2010

Effects of dwelling composition in the property market

Much popular property market analysis based on flawed principles.  A secret to identifying rubbish analysis is to note the following meaningless buzzwords and phrases; underlying demand, housing shortage, urbanisation or population growth.

These buzzwords are based on fallacy.  The problems they have in common is that they are quantity based (thus ignore prices), and they ignore changes in the composition of dwellings.

Commentators calculate underlying demand by dividing the quantity of population growth in a given period by the average occupancy rate.  This is supposed to give a measure of quantity of dwellings that ‘should’ be constructed of the period.  Unfortunately, the occupancy rate itself changes over time.  It has been declining dramatically for three decades.  If the trend continues we may soon be able to calculate a housing shortage even if we build a new home for every new person!

Calculating a ‘housing shortage’ is then a simple matter of subtracting the number of dwellings constructed over a time period from the underlying demand.  The graph below shows the result of this calculation for Australian from 1994 – 2009 using quarterly data (and the occupancy rate at each quarter – not the current occupancy rate).

Spruikers use this measure to justify the likelihood of price gains, however the price changes observed seem to in fact be inversely correlated to underlying demand.  We had a price boom from 2002-2004 at the same time as a housing surplus!

These measures also fail to acknowledge the heterogeneity of housing.  Counting a studio apartment and a 5-bedroom house as equal in the calculation of a housing supply is mere fallacy.  Clearly these two different dwellings will house different numbers of people.

Furthermore, the size of existing homes change over time with renovations and extensions.  It has been widely acknowledged that many home owners have chosen to renovate instead of relocate in their search for more spacious accommodation.  It is easy enough to imagine a street of heritage homes, for example, being renovated and extended to allow a large increase in the population of the street.  No new homes, plenty of new people, and no housing shortage.

What we have seen in the latest property boom is a continuation of the trend to build larger homes with more bedrooms, while the occupancy rate continued to decline.  At some point you would expect the occupancy rate to bounce back before we all ended up living alone with three spare bedrooms.  And it did. 

The ABS summarises the long-term change in dwelling composition and occupancy as follows:

The average number of persons per household has declined from 3.1 in 1976 to 2.6 in 2007-08. In the same period, the proportion of dwellings with four or more bedrooms has risen from 17% to 29% and the average number of bedrooms per dwelling has increased from 2.8 to 3.1.

In 2007-08, most households enjoyed relatively spacious accommodation. For example, 86% of lone-person households were living in dwellings with two or more bedrooms; 75% of two-person households had three or more bedrooms; and 35% of three-person households had four or more bedrooms. Over a fifth (21%) of three-bedroom dwellings, and 8% of four-bedroom dwellings, had only one person living in them

Important demographic reasons explain why we should expect the declining occupancy trend to come to an end.  The aging population including baby-boomers downgrading is a key way in which this will occur (others include a rise in share housing by the forever young Gen-Y who are delaying family formation).

For example, the parents of a family whose adult children have moved out with friends or partners might find that the upkeep of a large house conflicts with their ‘grey nomad’ retirement plans.  They can sell their 5-bedroom house and move into a new 2-bedroom unit, pocketing the price difference for their retirement. 

In this scenario the construction of a 2-bedroom apartment resulted in a 5-bedroom home being available to meet the housing needs of population growth.

The final fallacious buzzwords that provide property bulls justification for their position are urbanisation and population growth.  If we were discussing any other good or service the pattern of habitation would be of little consequence to the expected prices.  Increased urbanisation doesn’t drive up the price of food, petrol or any other goods – nor does population growth.  

Increased urbanisation can lead to increased land prices, but that doesn't necessarily lead to increases in median housing price measures due to compositional change.  Because new dwellings in outer areas are typically inferior locations to existing homes, the prices one would expect for identical dwellings in new estates would be lower.  Since there is more land at the fringes of cities, we would expect that proportionally more cheaper dwellings to be added to the mix of housing.  Prices for existing homes can rise, but due to the greater proportion of housing in outer areas in the mix, a price index can remain flat at the same time.

The table below shows a hypothetical city made up of identical dwellings, where new supply is mostly added at the fringes.  Even though the price of each individual dwelling increases 10% over the period, a city-wide mean price index would remain flat due to the greater proportion of cheaper dwellings.  The same effect can happen with new apartments in traditional detached housing areas.
Also constantly overlooked is the fact that urbanisation can only occur AFTER new urban dwellings are constructed unless driven by an increase in occupancy rates.  Until the end of 2005 prices was rising fast, urbanisation and population growth were occurring, but the occupancy rate continued to decline.  

Analysis of the property market should focus on returns in comparison with other investments, with renting, and historical returns.  Counting dwellings, and implying demand from population growth or urbanisation is problematic due to compositional factors.


  1. Thanks Leith.

    I forgot to mention the scale of these compositional factors in relation to changes in new dwellings. We build less than 200,000 dwellings each year, but have an existing stock of around 9million homes - we increase housing stock by less than 2% per year.

    Compositional change can easily increase housing capacity at similar scales. Through the mechasims I discussed (reorganisation of households, new larger dwellings, extensions and renovations) it would only take only one extra occupant per 50 dwellings to accommodate a years population growth without the need for any new dwellings.

    The ABS 2002 social trends survey found that there were about 400,000 home extensions (excluding renovations, only additional house space) in the decade to 1999. That's 40,000 per year in the 1990s. A realistic figure for the 2000s might be 50-60,000 per year.

  2. "Even though the price of each individual dwelling increases 10% over the period, a city-wide mean price index would remain flat due to the greater proportion of cheaper dwellings."

    Fantastic observation Cameron.... I think it clearly demonstrates that the ARE dwellings that FHBs can afford, just like their parents could only afford cheaper dwellings in the new outlying suburbs.

    As to the rest of the post.... shallow analysis... yes of course - demand is elastic, but 'reorganising accommodation' ? Do you mean we all swap wifes/kids, so that those spare bedrooms get filled ?

    In good times (like now) we tend to spread out because we can.... in hard times, we move back in with parents or share.

    Your chart is flawed - it compounds errors. Use ABS3236 instead see http://www.ausstats.abs.gov.au/Ausstats/subscriber.nsf/0/DF2989BFFA7392E1CA256EB6007D63F4/$File/32360_2001%20to%202026.pdf

    It clearly shows projected number of households & popln in 2011 and also density. Tells me that we'll be short by almost 0.5M houses next year. Maybe you could just run the figures using ABS stats.

  3. Which chart is that?

    The occupancy rate is simply population/ dwellings with adjustments made for new dwellings since the last census (and adjustments for demolition of 1 in 6 new dwellings).

    ABS3236 extrapolates 2001 census data which doesn't help much is a dicussion of the property market in the 2000s.

  4. ABS3236 has a start point of 2001. Your chart starts in 1994 & projects. Which is gunna be more accurate ? Yours has compounded an extra 7 years of errors.

  5. Both charts are based on ABS contruction and population data for the period 1994-2009. They are not projections, they are historical measures. ABS3236 is a set of projections based on 4 data points - 1986, 1991, 1996 and 2001 census years.

  6. Wow you didn’t get much sleep before you wrote this column did you Cam?
    From page one, paragraph seven you write; “It has been widely acknowledged that many home owners have chosen to renovate instead of relocate in their search for more spacious accommodation. It is easy enough to imagine a street of heritage homes, for example, being renovated and extended to allow a large INCREASE in the POPULATION of the street. No new homes, PLENTY OF NEW PEOPLE, and no HOUSING SHORTAGE.”
    Whoa. Say what? You began the piece by forcefully announcing, “Much popular property market analysis based on flawed principles. ‘A secret to identifying rubbish analysis is to note the following meaningless buzzwords and phrases; underlying demand, HOUSING SHORTAGE, urbanisation or POPULATION GROWTH’”. Hhmm, rubbish analysis by your own words. What th!?
    Further, if such activity as renovation and extensions are occurring and these extensions are being filled with, as you say, “plenty of new people”, what comes next?
    Where is the next movement of renovation and extensions for the ongoing stream of “plenty of new people”? Are you saying that that this “plenty of new people” river is stopped by a tap? What about tomorrow?
    On; while you write with eloquence on housing booms and trends to build larger homes, you don’t mention the land used for such building. Houses are taking almost the entire block of allocated living space, four bedrooms, double car garage, family rooms, media rooms, enclosed verandahs and all. BUT they are still built on one, increasingly smaller house block, with no space left to swing the family pet.
    It’s not about house size it’s about 1. Land mass and 2. Carrying capacity.
    I take umbrage to you quoting ABS statistics like they should be law. “Lies, more lies and statistics”. You offer no firm figures on how many persons occupy that premise legally.
    Let me take you by the hand….
    Many, many, many households receive rent from boarders without mention of it to anyone, let alone the tax man.
    Take a look around you and see just how many students/youths/young workers are being shovelled into accommodation houses legally (and what of; illegally?) and then do the math. To relay just one personal education experience; I’ve taken a look at an inner city Brisbane unit just before the tenants were due to move out and there were 10 beds and a basinet in one 2 bedroom high-rise unit with no garden/yard. The realtor said to me “by turning a blind eye to how many reside there, it makes it affordable”. Hhmm.
    I disagree to the nth degree when you say “Increased urbanisation doesn’t drive up the price of food, petrol or any other goods – nor does population growth”. Oh but yes it does, the cost of building food outlets and service stations etc etc on extremely valuable land, valuable because of its very scarcity to the position it’s found itself, necessarily increases the flow on effect of that property’s value to the consumer. This flow on effect is directly fuelled, btw, by population growth.
    Well so far, hhmm, that’s enough. I’d suggest lots more homework on actual fact, carrying capacity, cars allowed per dwelling (is there and answer to that?) legal requirements and on and on and on. Then we’ll take a look at real economics.

  7. Gary. If there were a housing shortage, you would expect it to be showing up in higher rental costs. Correct? Why then have Australian CPI-adjusted rental prices increased by only 11% since 1972. If you don't believe me, you can work it out for yourself (see ABS CAT 6401.0).

    Admittedly, real rental growth in Australia's capital cities has been very uneven. Sydney's real rents have risen by 24% over this period; Adelaide's and Melbourne's have been relatively flat; whereas Perth's and Brisbane's real rents have fallen. As a comparison, real established house prices have tripled in real terms since 1972.

    Near my home, a 50 year-old three bedroom house was recently sold by a couple in their 60s. This house was demolished and replaced with a giant McMansion that now houses a large three-generation Indian family. Same number of dwellings, but more people comfortably accommodated. This is the nub of Cameron's analysis. Houses have gotten much bigger, allowing them to comfortably house more people.

  8. It's not about a housing shortage per-say, it's about a land shortage. Australia is not made up only of people. It contains bio-systems, environmental areas of immense importance, flora and fauna that we as the superior race are responsible for. I constantly hear, bigger houses - more people accommodated, but you've gotta look at that scenario without the rose coloured glasses. More people on the same land section still means more hot showers, more water, more space required for the one car per person life we're living, or, more buses on the roads. More clothing required which means more sheep for wool, more water for more cotton growing, more food required around the table even though it's still in one dining room. I can give you a mighty long list of increases every time another person steps foot on a land section. But please, think of some yourself. You've gotta see the big picture when you start playing with economics. We're all together in this. But when do we start thinking of our brothers, the flora and fauna? It is a cycle of life that is required, not only humans.

  9. Sorry Gary. I got caught up on the housing shortage argument. I didn't realise that you were commenting on environmental/sustainability issues, which I agree with you on.

    I am opposed to Australia's current population Ponzi-scheme on environmental, livability and sustainability grounds. I think this is the key cause of many of the problems that you have raised.

  10. For a blog on housing composition and the house shortage myth the comments have certainly taken a bit of a divergent tact!

    @Gary given the topic of the article I'm not sure if it would be appropriate for it to try and address the environmental issues of the urban sprawl. I'm not saying that it isn't an important issue just that no article can hope to cover all the bases.

    Regarding your comment "rubbish analysis by your own words" I hardly think this article falls into that category. I would point you in the direction of news.com.au property section for those. Look for the "House prices to rise 40% this year due to HOUSING SHORTAGE". They are pretty easy to pick and somewhat amusing to read.

    "I take umbrage to you quoting ABS statistics like they should be law". Better ABS then REIx or other spruiker sources as at least they have some hope of being unbiased. Also I doubt that anyone would be able to offer you firm figures on how many persons occupy premises illegally. My vote is with ABS as being your best bet for the legal number but.

  11. Jeremy, maybe you should read the Topic Headline. Clear as day (unpolluted hopefully) it reads: “Effects of Dwelling Composition in the Property Market”. Maybe what you think that means and what I think that means are two different things but I have not diverged from any blog topic.

    I’ve iterated very clearly that statistics in this forum can’t be considered as law as there are many instances that are not statistically provided for and anyone only has to look around them to know this to be fact. You’d be the only person to argue against that.

    There may even be as many as tens of thousands of people in SEQ alone that do not correctly align with statistics.

    Cameron says to beware of "rubbish analysis”, “A secret to identifying rubbish analysis is to note the following meaningless buzzwords and phrases; underlying demand, housing shortage, urbanisation or population growth” and then he goes on to use the same terminologies to boost his argument.

    The fact remains that if you have a larger group of people prepared to pay more for a property, sale, lease or rent than the number quoted on the lease then that will increase prices/cost. Landlords often offer to the highest bidder, legally or illegally.
    More people create higher prices not only in the property market but overall. Supply and demand.

    Six people sit at a table in a restaurant and while ordering a steak each, two friends arrive. Everyone squeezes together so that the table of six becomes a table of eight. BUT more wine is ordered AND those six steaks are not shared amongst eight, rather eight steaks are ordered. That’s an increase of purchase. Suddenly the restaurateur sees more profit so he squeezes more people in every night after.

    When he comes to sell his business he proudly states that his landed business is worth this much and therefore the sale price is this much.

    This scenario is exactly the same on the “Effects of Dwelling Composition in the Property Market”. If people are prepared to squeeze in and pay more the value of the property increases. I then went further pursuing the big picture and highlighted that regardless of how many people share a dwelling the environment suffers and the cost of that comes back to, who? us.

    The price of everything increases because we have the same environment but we’re servicing more people.

  12. Hi Gary,
    Indeed I would agree that we both have a very different view on what this blog is about. My point about divergent comments was in regard to the environmental issues. I would contend that the topic headline is not “Effects of Dwelling Composition on the Environment” but hey if you want to read it like that then go ahead.

    Regarding the use of ABS statistics I think you failed to understand my point. I was not (and I think nor was the author) saying that ABS statistics are gospel and any questioning of them will get you branded as a heretic. Instead I was merely pointing out that of the various sources of statistics ABS are better then some (if not most). Where exactly are you suggesting that the statistics for this type of analysis should come from?

    May I also point out that in the context of the population of SEQ tens of thousands is in the order of less then 1.5%. Sure illegal overcrowding of accommodation is a factor but I would question the overall significance.

    Interesting that you claim the article is "rubbish analysis" based on the use of the afore mentioned buzzwords. Unfortunately using your own pedantic logic your comments then also fall under the same definition.

    Let me take you by the hand (sorry I apologise if that sounds condescending) ... the point about buzzwords and rubbish analysis is that when these terms are used as the entire basis of an argument then the article is "rubbish analysis". When they are used in a considered way with other supporting facts and statistics (particularly when they appear in the negative format) then the article may or may not be "rubbish analysis". In this case it is up to the reader to decide the validity of the case put before them.

  13. Normally I wouldn't carry this kind of to and froing on, however you ask a question of me and so...

    IF all I've said is still unintelligible to you then I concede, I haven't made my point clearly enough. If you think that my determination that an amount of extra people in a house originally built for fewer usage (shoehorning) does not increase its value to the owner, you win.

    If you really think that statistics will tell you what you need to know, go for it.

    Let me take you by the hand means do some ground work, on your own, without statistics. There is nothing condescending, when used correctly, about it, unless you'd like to see it that way.

    If you think that Land is not Environmental, I give up.

    And if you really think that I've called Cameron's piece "rubbish" analysis, I'd recommend to you, an optometrist. They are Cameron's words, clear and concise, I did, at no stage, of my own volition, say that any words or phrases meant or signified "rubbish analysis". I reminded Cameron of a previous paragraph of his.

    If you'd like to question the significance of overcrowding to the point of 1.5% and that tens of thousands is only that, it's all yours. They are still tens of thousands and that's a good few suburbs, but if you don't want to question that, who am I (to suggest otherwise)? "Statistics" is your friend.

    And as for me, I have a country to protect and a friend in Cameron with whom, I don't always see eye to eye. However I do enjoy very much questioning his analysis of things, particularly when he jumps straight in and that, he does often.

    This is a blog, views are meant to be somewhat (I hope) educational and I need that more than anyone.

    Th more I know, the more I know I know nothing.

  14. Great discussion guys.

    Gary, I know your thoughts on population and we can continue that discussion next time.

    Leith, I think we agree on the fundamental flaws of 'dwelling counting'. It will be interesting to watch how the housing spruikers maintain their shortage arguments once prices come off.

  15. No worries Cameron. If the spruikers are right, and we do have a shortage, then prices will fall harder if/when demand falls. I don't think the spruikers understand or acknowledge this fact.

    Once again. Great post.

  16. Hi Gary,
    Yes indeed it appears we don't see eye to eye on some of these issues. It also looks like I have misinterpreted some of your comments. Sorry about that. I guess that is the beauty of a good blog, the vigorous discussion.

    The failing of most people when it comes to the spruikers is that they don't take the time to actually think about or investigate the situation for themselves. The reason why they can get away with it most of the time is because as long as the message/buzzword appears initially passable then it is swallowed without a second thought.

    If prices go off (here is hoping!) I doubt that they will push the shortage argument. Instead they will shift the blame to something else (interest rates maybe) and then just roll out the shortage when they are trying to talk up a stimulus.

  17. You shortage-scoffers are crazy. If there were a housing shortage, you would expect it to be showing up in higher rental costs.
    Using dodgy ABS numbers show Sydney's real rents are up 24% since 1972. That is a huge rise and the figures do not reflect that the "average" dwelling is now a much more expensive commute to the average job.
    Clearly there is a serious housing shortage in Sydney.

  18. the only shortage in sydney is of places with reasonable rent. rents are too high because investors are paying too much for these places and needing a high rent to offset their payments.

    we have a high combined income so we rent a nice place in the $1000 per week range but there are loads of places for rent around this range and many have been vacant for a long time.

    1. Hey !!! Thanks for sharing very important information on this blog, i have visited your blog really you give us great information....!!!!

      House renovations warwick qld