All the ingredients are in place for a dramatic escalation in dwelling prices in both Sydney and Melbourne over the next 15 years. Few Australians have any concept of the dwelling price pressures that will start to build up in the next few years unless the supply of dwellings is increased.

 

For me, what really highlighted the supply pressure was the population forecast data from Infrastructure Australia combined with that produced by the Housing Industry Association.

 

Understandably, Infrastructure Australia focuses on the high cost of inadequate infrastructure investment in our major capital cities. But the data is even more alarming when applied to number of dwellings required in the next 15 years.

 

Infrastructure Australia predicts that Sydney’s population will reach 6.1 million in 2031. In 2015 it is estimated to be around 4.9 million, so an extra 1.2 million people will come to Sydney or 80,000 people a year.

 

Infrastructure Australia says Melbourne’s population will be just under Sydney in 2031 — a total of 6 million. But Melbourne’s current population is estimated at 4.5 million, so a 6 million population involves a rise of 1.5 million on the level of population expected for 2015 — an increase of 100,000 people a year.

 

(Infrastructure Australia uses a 2011 comparison rather than the current 2015 population. I have used 2015 estimates, but clearly the predictions are approximations to highlight a trend.)

 

Let’s start with Sydney. The harbour city must accommodate in the vicinity of 80,000 extra people every year for the next 15 years. The number of extra dwellings required depends on housing density but given the rise in one to two-bedroom apartment living, let’s use 1.5 people per dwelling, which means Sydney needs 53,000 dwellings per year.

 

If the density is only 1.25 per dwelling, then 64,000 dwellings a year are needed. According to the Housing Industry Association, the entire state of NSW will start 54,000 dwellings in 2015 — a record. But in the next four years the HIA expects the yearly level of NSW starts to fall to about 47,000 made up of about 45 per cent apartments.

 

If the population forecasts are right, then Sydney must either step up its dwelling construction, greatly increase its people per dwelling ratio or suffer major shortages with consequent price rises.

 

In Melbourne, the figures are even more dramatic. Melbourne’s population increase is expected to be 1.5 million people or 100,000 a year for 15 years.

 

If the number of people per dwelling is 1.25, then Melbourne will need 80,000 dwellings a year. And if the occupancy rate is 1.5, then 66,000 dwellings will need to be built each year.

 

In 2015 the Housing Industry Association estimated dwelling starts in the entire state of Victoria at 56,000 and expects it to slump to an average of 46,000 over the next four years.

 

Clearly the HIA believes Melbourne may have got ahead of its population trend but if Infrastructure Australia is right about the longer term Melbourne population trends, serious shortages are ahead.

 

I emphasise again that the HIA figures are focused on the states, rather than the cities, so they understate the shortage.

 

We are looking to lift our dwelling stock in the two major capitals by well over 25 per cent in 15 years (and the trend keeps rising), or cram many more people into each dwelling.

 

The Australian savings and banking system is simply not geared to finance such an expansion. The superannuation money in big funds can’t be accessed and self-managed fund dwelling investment is a cumbersome process which concentrates investment allocation in one sector.

 

Unless we are prepared to release some of that superannuation money, we are going to need massive overseas investment to fund the need for housing stock, let alone infrastructure.

 

But given that about a fifth of the population is linked to employment in the building industry, we will not have a major unemployment problem.

 

Where will the extra people come from? A vast number are going to be migrants because people want to live here. That’s why they are buying dwellings off the plan on a massive scale in both major cities. Many have done the sums.

 

Excerpted From Business Spectator