_Does Sydney have a supply problem?

Dwelling completions in Sydney are currently at historical highs and the number of cranes dotted around the skyline has led to many pundits calling Sydney an oversupplied market. However, supply only represents one side of the story and the pick-up in housing construction needs to be put into context with historical trends.

Between 2005 and 2012, dwelling completions across Sydney did not keep pace with demand and housing shortages became widespread. Coupled with solid house price growth which occurred between 2001 and 2004, many potential buyers were forced into the rental market during this period and as a result solid rental growth ensued. 

So while a large increase in dwelling completions has occurred over the past four years, the recent pick-up represents a period of catch-up following an extended period of limited construction activity. Current housing shortages are highlighted by Sydney’s residential vacancy rate which at 1.8% remains well below the ‘market equilibrium’ of a balanced market at 3%.

By location, dwelling completions over the past 12 months ending June 2017 have been concentrated in middle ring areas, underpinned by the Parramatta LGA where 4,392 dwellings were added to the market over the past year. The completion of several significant apartment projects in and around the Parramatta CBD including V by Crown, Meriton’s Altitude project and JQZ’s River Vistas project were the catalysts behind this result. Elsewhere, completions were significant in Blacktown (3,000), Bayside (2,423), Camden (2,205) and Canterbury-Bankstown LGAs over the same time.

Using Sydney’s household formation rate of 2.8 persons per household (2016 Census) and population growth, we are able to compare demand against supply (dwelling completions). As highlighted by Figure 3, demand has significantly outstripped supply over the past decade. Between 2007 and 2010, a pick-up in net overseas migration led to a surge in demand at a time when residential building remained weak. Although supply has picked-up markedly since 2012, there remains significant levels of pent-up demand which has helped propel price growth in recent years.

Although supply in 2017 was moderately above demand, the cumulative imbalance since 2007 remains heavily weighted towards an under-supplied market. Over the 10 years to 2017 alone, it is estimated that there is a stock deficiency of close to 90,000 dwellings. In this case, even if population growth stalled and completions remained at the same levels as 2017, it would take almost three years for the imbalance to revert back to zero. 

In all, the fundamentals for property in Sydney remain solid, underpinned by significant levels of pent-up demand and a healthy state economy.