Effective housing supply - how many months of supply is evident across the Australian market

Source: RP Data. 22.10.10

Effective housing supply - how many months of supply is evident across the Australian market

Based on the current rate of sale and total number of homes being advertised for sale, the Australian residential market is currently recording about 4.1 months of effective housing supply. There are two ways to measure supply in the residential market place: ‘core supply’ which is the difference between base level demand (ie population growth) and base level supply (ie new dwelling construction) and ‘effective supply’ which measures the amount of properties that are available for sale in the market place. Effective supply is expressed as the number of months it would take to sell all of the housing stock being advertised for sale in the marketplace based on the current run rate of sales. Across the combined capital cities, the effective supply of properties is currently recorded at 4.1 months. Despite the fact that property value growth has been slowing since April of this year, there is yet to be a significant increase in the effective supply of properties. As a comparison, the US Census Bureau recorded that based on current rate of sale, the USA had 8.4 months of supply currently available. Since the beginning of 2007 the effective supply level across the capital city markets has been recorded at an average of 4.0 months and reached a high point of 6.0 months in the late stages of the GFC. The number of months of supply figure bottomed at 2.5 months during March 2007. This suggests that currently the capital city effective supply level of dwellings is around average. Between the start of 2007 and August 2010, capital city property values have increased by a total of 29.9%. Recent listing data highlights that the total number of homes available for sale is beginning to increase as property value growth slows, with an expectation of a lower volume of sales for the remainder of 2010. The consequence of more listings and a lower rate of sale will most likely reflect a higher level of effective housing supply across the combined capital cities. Looking at the quarterly value growth results, the trend seems to be that once the effective supply level has been recorded at greater than four months, typically the rate of property value growth begins to slow or decline. Although nationally the effective supply is recorded at 4.1 months, across various capital cities the results are quite different. The differentiation across markets highlights that the national results are not necessarily reflective of individual capital city markets. Throughout the major capital cities Melbourne has the lowest current effective supply at 2.8 months whilst Perth and Brisbane have the greatest effective supply recorded at 9.0 and 5.9 months respectively. Perth has consistently recorded the greatest effective supply amongst all of the capital cities since the beginning of 2007. The Perth market has been recording a poor market performance for much of the period following the significant surge in property values recorded in the city between 2005 and 2007. Since that time, sales volumes have been sluggish and clearly a significant volume of properties have been available for sale, resulting in an elevated level of effective supply. The soft market conditions within the city is reflected by the fact that on average there have been 7.6 months of effective supply in the Perth market and property values have only increased by a total of 4.4% since the beginning of 2007. On the other hand, Melbourne currently has the lowest effective supply amongst major capital cities (2.8 months) and has also recorded the strongest growth in values between the start of 2007 and August 2010 increasing by a total of 51.2%. The strong market conditions over this timeframe have resulted in increasing demand for properties and as a result, those listed for sale are being rapidly consumed by the market. Looking forward, there is an expectation of lower sales volumes for the remainder of the year as the market transitions from a growth phase into fairly flat conditions. As a result, it is anticipated that on a national basis there will be an increase in the effective supply. Markets such as Perth and Brisbane have been underperforming for some time and we don’t expect to see significant further increases in effective supply. The markets which are likely to be at a greater risk of an increase in effective supply are those cities which have below average supply levels currently and those which have recently recorded a significant slowdown in property value growth.