THERE is a single demographic driver that underpins the residential property industry and that varies from city to city and from year to year. And it’s not the rate of population growth, although that is a contributory factor.
The thing that drives demand for houses and units is the rate of household formation. More people pouring into a city through interstate or overseas migration makes a contribution to household formation, but so too does the number of 20-something Generation Ys making the decision to leave home.
Household formation can also be driven by a change to living arrangements. Separation and divorce, for example, increase demand for housing because where there was one household now there are two.
And as households transition from family to empty-nester and to widowhood and assisted living, there are further shifts in the demand for accommodation that is being driven by change in household composition.
Household formation translates more or less directly into demand for residential property.
This demand can be expressed and satisfied in the form of rental property or indeed in the form of straight-up home ownership.
Imagine if the property industry had a dataset that measured and monitored the rate of household formation on a city-by-city basis with associated commentary to assess whether this demand was rising or falling? I have set up just such a dataset albeit in a streamlined format.
I have measured the net growth in households for each of the 10 largest cities in Australia between the 2006 and 2011 censuses where each city is based on 2011 boundaries. Boundary changes at the 2011 census make such comparisons difficult without the necessary technical adjustments.
Over the five years to 2011 up to 80,000 net new households were added to Sydney, which translates into annual demand for 16,000 dwellings.
Over this same period, Melbourne added 125,000 households or an average of 25,000 dwellings per year. Sydney developers should have expanded into the Melbourne market a decade ago.
This also suggests that the Sydney housing market was affected by the global financial crisis, and/or that Melbourne offered a better combination of job prospects and affordable housing over this period.
If housing demand in Sydney was unusually subdued in these years for whatever reason, it also suggests that there might be a compensatory uptick in demand over the following five years to 2016.
Perth was a better market for housing over this period than was Brisbane: 73,000 net extra households as compared with 69,000. Housing demand in Brisbane is inextricably linked to migration flows specifically from Sydney.
Any loss of confidence in the Sydney market translates directly into an impact on the Sydney market. If Sydney recovers so too must Brisbane and, in due course, so too must the Gold Coast.
The stock of households in Adelaide jumped by 26,000 between 2006 and 2011 while Newcastle, which is a city with half the population base of Adelaide, yielded only 7000 net new households.
On the other hand, Canberra, with about half the population base of the Gold Coast, added roughly the same number of households: 13,000 for Canberra as compared with 15,000 for the Gold Coast.
I suspect that household formation surged in Canberra as a consequence of public sector expansion associated with the change of government in 2007.
Both the Sunshine Coast and Wollongong round out the top 10 cities with net growth of 6000 and 5000 households, respectively, over this period.
Clearly the markets to have been in over the last decade are Melbourne, Perth and Canberra.
The question for the property industry is how demand will shift, is shifting, over the five years to 2016.
I am of the view that Sydney and therefore southeast Queensland will recover from a low base. Sydney is a global city that will recover with the global economy and with good – I’ll even accept competent – administration.
The housing market in southeast Queensland will rise in concert with Sydney.
But there is more to the household formation dataset than the basic numbers. Of the net new households added to Sydney and Melbourne between the censuses, about 20 per cent were single-person households and about 30 per cent were couple households.
The balance in both cases was dominated by net growth in mum-dad-and-the-kids type households.
If we allow for, say, half the net new couple households to comprise young people intent on establishing a family, then what is evident is that perhaps as much as two-thirds of net new household formation is being driven by families or by people seeking to establish a family.
The current drive towards apartment living in Sydney and Melbourne is most likely to be a response to perceived affordability issues in both cities. I am not convinced that mainstream Australia would prefer a unit to a separate house to raise a family. This might work in New York or Paris, but it is not yet the Australian way.
Two generations ago, couples would buy a three-bedroom house in the burbs and raise a family and then retire all within the same house. Today there is a house and a household journey that is evidenced by trends implicit within the household formation figures.
Today’s 20-somethings live with mum and dad, then they move out into share houses, then they live as singles or as a non-committed couple, then they move into an apartment, and then they move into a separate house. And then in their 50s as children leave home there might be another move to a nearby unit or to a CBD-fringe apartment or to a lifestyle beachside property.
The market for residential property has shifted and continues to shift. Not only does demand rise and fall with the fortunes of different cities and states, but there is greater articulation within the life cycle that encourages households to shuffle between apartments and houses.
To be successful in today’s property market, business more than ever needs to respond to what used to be known as the vagaries of the market but which in reality is the shifting and the shuffling in the key demographic driver of household formation.
Bernard Salt founded and heads KPMG Impact Demographics; email@example.com.
By BERNARD SALT From: The Australian 6 March, 2014
Original article here