Melbourne and Sydney are in housing oversupply


by Lindsay David

If I were an Australian central banker, politician, bank economist, or even a negatively geared property investor, I’d be telling you Australia has a chronic housing shortage, which is responsible for our sky-high housing prices. But as an independent macro researcher, the data tells me otherwise.

The best method to determine whether a surplus or deficit of housing exists is to compare the flow of new net dwellings to new net households. This has given rise to the LF Economics Dwelling Supply Index, which tracks the supply and demand trends since June 1996.

Using the most conservative estimates to err on the side of caution by biasing downward the number of dwellings while biasing upward the number of new households, the data tells us the following:

▪ In September 2014, Australia had a net cumulative excess supply of at least 165,000 dwellings.

▪ This surplus is equivalent to more than one year’s supply at current population growth rates nationwide, and about three years for the most oversupplied state, Victoria.

▪ Australia’s dwelling oversupply peaked in June 2006 at 349,000 dwellings.

Western Australia, Queensland and Northern Territory are the only states undersupplied, given the rapid influx of population to service the mining sector. This is reflected in both the continuing net deficit of dwellings relative to households and strong rental price growth. These metrics are now reversing as the mining boom unwinds.

This illustrates the classic case of supply and demand: when the index shows a persistent surplus, rental prices remained subdued. During the global financial crisis, however, rental prices surged as a genuine shortage occurred because of a moderation in construction and heightened population growth via net overseas migration. Unlike capital prices, rents cannot be leveraged, so they demonstrate the true supply and demand situation.

1965 - 1968 Bodo Hennig Schlafzimmer diepuppenstubensammlerin via Compfight

If there were such a dire shortage of housing as the housing cheerleaders suggest, property investors en masse would not be negatively geared in a record low interest rate environment. This tells us leveraged speculation has generated “artificial” demand that has absorbed a wealth of the supply.

Sydney and Melbourne are today’s prime examples. Unfortunately, it is only when the tide rolls out that the masses realise no such housing shortage exists. Miami and Dublin are excellent examples.

The numerous global housing price booms of the 2000s were written off by government, industry and the economics profession as a failure of inadequate housing supply and a rapidly growing population. The facts later demonstrated these booms were actually gigantic asset bubbles, spectacularly crashing and revealing mass overbuilding.

A tiny fraction of the 15,000 professional economists in the United States managed to correctly identify that their housing price boom represented a bubble and was not the result of a dwelling shortage. Relative to scale, Ireland was no different. And it appears Australia’s economists are following suit by falling into the same trap of illogic.

It is easy to see why Australia’s housing lobby places the blame for high prices on government regulations and dwelling shortages: it’s an easy and a much safer explanation than admitting the real cause to be debt-financed speculation – a bubble. Indeed, as of September 2014, Australia has the world’s third-most indebted household sector relative to GDP, edging closer to Denmark (1st) and Switzerland (2nd).

Unfortunately, the faulty narrative is maintained by government and industry, whose experts have numerous unresolved conflicts of interest.

Lindsay David is the author of Australia: Boom to Bust and Print: The Central Bankers Bubble. David holds an MBA from IMD Business School and recently founded LF Economics.


  1. Frank Reitzenstein23-04-2015


    If there is an under supply of Perth housing why has the rental vacancy rate increased a lot in recent months, not to mention housing inventory on the market plus commercial real estate? Perhaps things changed rather rapidly since the “mining boom” and your sources may no longer be current.

    I think in the case of Perth, mining personnel were once pouring in, but that is rapidly changing. Considering the size of the boom, it was an order of magnitude and the unnecessary construction of roads we see that the time will come before too long when there will be a massive glut.

    Also remember government intervention. First home owners’ grant only for new dwellings? Sounds smart doesn’t it? But not when Perth isn’t expecting a boom for another generation and there is already talk of oversupply. Perth the mining ghost town.

  2. karl27-04-2015

    i cant wait for the housing collapse,then me and my friends can finally efford a house without going into life ruining debt..i will not feel sorry for these greedy magots that put us in this possition because of their greed,,now they are going to pay dearly for it in bankrupt court

  3. Karl Fitzgerald
    Karl Fitzgerald15-05-2015

    Fair call Frank. Rents seem to be falling, thats the important precursor to lower house prices. But will the market follow logic?

  4. John22-05-2015


    Once the housing collapse occurs you’ll have the extra cash to take an evening course in writing to improve your punctuation, grammar and spelling!

  5. Eddie Leong28-05-2015

    The boom days are over for Aussie property markets. China is cracking down on illegal movement of money overseas and the corruption. The Asian Chinese buyers are also not going to buy as before.

    The Asian economy is slowing down. Oil prices will not recover to US$80 for a long time. Forget about $100. Major oil firms have been doing projects with Oil that needs $100 to $120 to be profitable. Mega LNG projects in project cost up to US$ 40 billion…an insane figure.

    Without the mining and energy boom, without the flood of Asian (mainly Chinese) buyers, how can Aussie property price stay up? The pipeline is chocked with too many properties now under construction. Expect some developers to go bankrupt soon.

  6. Conrad04-07-2016

    I believe the market will crash for social rather than finical reasons. The younger generation does not want a house in the suburbs, they do not want the responsibility of commitment, maintenance or workload. they want to be mobile and free. The migrants at this stage are happy to live several families to a home and the baby boomers are no longer able to support their grown up children. The baby boomers are looking for downsize and lifestyle. The employers and government’s are moving to casual labour making it impossible to borrow. Many if not most of the youth are drug infested or unemployed. The government has no vision for Australia and simply fix problems rather than move towards the future.
    Having said this, rural and farm properties are seriously undervalued and living in rural Australia is the best lifestyle in the world.

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