Thursday, September 24, 2009

Property bulls take note

The main problem with the housing shortage proponents is that they neglect the existing 8.5million or so existing residential dwellings as a supply of housing. Currently, the average dwelling occupancy rate across the country is 2.53 persons/dwelling. This rate has varied between 2.48 and 2.60 over the last 27 years. In fact, it peaked at 2.6 in 1982 (soon after the second oil crisis). The graph below shows that we are currently heading back to level of occupancy last seen in the 1980s.

But surely, with such a small variation, this issue is minor compared to the 17,000 homes we are currently short of! On the contrary, it is the crux of the whole debate. You see, a change in the occupancy rate occurs for all dwellings, including the 8.5million existing homes. The 43,000 people apparently in need of the 17,000 dwellings can be accommodated in existing dwellings, and the result would be a shift in the occupancy rate of 0.005. If you look at the y-axis scale you can see how small an increment this is (one quarter of one notch), and how quickly we are heading that way.

In fact it only requires 1 in 200 households to welcome another person. Seems realistic to me, considering how popular this trend is amongst my peer group. Also, considering that the average dwelling is much larger now than when the occupancy rate was 2.6 back in 1982, such a shift would barely be noticable. 

I have mentioned before how this adjustment in occupancy rate occurs, for example:
  • youths stay home with parents longer
  • group households rent spare rooms
  • elderly parents move in with children’s families
  • other lone relatives move in
  • when families relocate they choose smaller houses… and so on
This is happening and there is plenty of scope for it to continue. In 2003-4, 35% of households reported one spare bedroom, while 42% reported more than one spare bedroom. That’s at least 9.4million spare rooms in existing dwellings.

So I caution the property bulls to be realistic with their investments. Don’t expect a boom of 6 years to be followed by a six month bust. If you want to get into the market now, buy on the high rental yield and find good tenants. And of course, don’t forget about location.


  1. Nice post - seems to be what everyone forgets to mention.

  2. This is a rather odd observation based on a selective reading of the data. Do you think that just maybe, maybe, number of occupants per dwelling would be related to family size. Wasnt' the number of children per household was also higher around this period...

  3. Anonymous,

    Yes, obviously there is some relationship between family size and this figure. But dwellings themselves have grown over this period as occupancy has fallen.

    Much of the explanation for this trend can alos be attirbuted to the growth in single person households - either youngsters, or oldies who have already lost their spouse.

    If I understand correctly, your position is that family size explained the occupancy rate until around 2005, when suddenly some other factor, that was previously absent, took over?

    My position is that there are multiple factors that determine occupancy rate, and subsequently demand for dwellings, and that price is a major one of these. The other point to note is that a very small change inoccupancy rate of the very large pool of exisiting dwellings makes a significant difference to the underlying demand and shortage calculations.