Does the building industry have the enough capacity to increase the housing supply?

Ehsan Gharaie, RMIT University

We often hear that Australia is facing a housing shortage that is driving up property prices, but what is the best way out of this predicament?

In the final days of last year, National Housing Supply Council released its third State of Supply report, estimating a housing supply shortage of 214,700 dwellings. It predicted that this shortage will reach 328,800 dwellings by 2015 and 640,200 dwellings by 2030.

ANZ has been also reporting and forecasting this shortage for a long time. According to the December issue of the bank’s Australian Property Outlook, the housing shortage in 2011 was about 240,000 dwellings and it will reach 440,000 by 2015.

Knowing that houses are built by the construction industry, and this industry is the final stage of housing supply pipeline, it is worth examining how it has been responding to demand. Australian Bureau of Statistics (ABS) publishes quarterly data of the number of dwellings under construction, indicating the amount of work that industry is conducting at any point of time. It basically shows how busy the whole industry is and how much workload it bears. The most recent data was released in last September, I have drawn its trend for past 25 years in the chart below.

As can be seen, every time that there was a surge in demand, the industry reacted by taking on board jobs and working under pressure.

This was seen before the introduction of the GST in 2000. The number of dwellings under construction was 62,625 in 1996 and it reached 99,150 in 2000. This is an almost 60% increase in workload during five years.

A more significant increase occurred in the past decade. Since 2001, there has been a tremendous increase in housing demand, and consequently, the number of dwellings under construction.

So, if the industry has been responding to demand, why there is concern about housing shortage?

This because dwellings under construction are not considered as housing supply until they are completed and ready to be occupied. Therefore, we must look at the number of completed houses to uncover the actual number of dwellings that have entered the housing market.

The trend of this number is demonstrated in the next chart. The quarterly number of “completions” and the number of “under-constructions” are drawn to illustrate the difference between how the industry reacts to the demand and what the actual change in output of housing supply. I have added linear trend lines to both graphs to emphasise this inconsistency.

As we can see, the actual output of the industry has not changed significantly during last 25 years, while the number of dwellings under construction has had a significant increase.

The historical data of the number of dwellings under construction also shows that there were cyclic dynamics in the industry until 2000. Every time that the workload of the industry increased there was a time that it went back to its underlying level above 60,000 dwellings.

The examples of these cycles are 1986-1991, 1991-1996 and 1996-2000. In all these periods the number of dwellings under construction has reached around 100,000 at its peak. However, in the past ten years, it has reached 130,000 and has not gone down. This makes the current situation different from the past.

The inconsistency between the trend of number of dwellings under construction and number of completions shows that the house building industry has responded to the higher demands by signing more contracts and accepting more work. However, it could not produce higher number of houses and its output remained constant.

This phenomenon indicates a situation in which limitation of production capacity does not allow a system to produce more. The past ten years show that the industry has reached its capacity and with its current structure, it cannot produce more dwellings than this.

Knowing that there is already a shortage in supply and demand will probably increase due to population growth, the need for an increase in housing supply will be inevitable. This cannot be achieved with the current production capacity and limited resources. Thus, the only remaining way to improve the capacity would be through innovation and finding better ways of using the same level of resources for producing more dwellings.The Conversation

Ehsan Gharaie, Lecturer in Construction Project Management, RMIT University

This article is republished from The Conversation under a Creative Commons license. Read the original article.