Here are 4 reasons why the NAB isn't concerned about apartment oversupply

(Photo by Kevin Frayer/Getty Images)

Rising supply of homes is worth monitoring but it is not alarming yet, given the pent up demand over the years, according to National Australia Bank.

Construction rates have failed to keep pace with strong population growth in recent years, contributing to an undersupply, NAB’s economics team said in a note.

Mortgage rates which fell to a near six-decade low before inching back up, along with higher returns in a low yield environment boosted demand and only now the supply side response is being felt, NAB said.

The supply side response has largely been in high rise apartments though and would require a shift in buyer preference with Australians typically leaning towards detached homes, the economists said.

Here are four reasons why they say the looming supply of apartments won’t be as catastrophic as regulators and some analysts fear.

1. Population growth: The growth, led by migration, rising congestion, deteriorating affordability and an ongoing concentration of employment growth in metro areas suggests that a shift in buyer preference to apartments may come by way of necessity.

“Assuming that population growth in Australia remains around the currently elevated levels, a modelling exercise that assumes the pipeline of residential dwellings under construction returns to its pre-boom historical trend, suggests that the housing market will remain undersupplied until late 2018,” NAB said.

New South Wales will still have a deficit of housing by late 2018, Queensland will have shifted into a small surplus, while Victoria will have a relatively modest oversupply of dwellings, it said.

2. Price divergence: Continued divergence in price growth between detached houses and apartments will also assist in shaping preferences.
NAB is forecasting house price growth of 7.2% in 2017, while unit prices are forecast to increase 6.8%. The market is expected to cool from late-2017, resulting in more modest growth of 4.3% for detached houses and -0.4% for units in 2018.

3. Self regulation: Nevertheless, with concerns rising around potential settlement risks for new developments, particularly as credit conditions are tightened, the construction industry is likely to begin to “self-regulate” the volume of new supply. That would be consistent with past behaviour and can already be seen in the level of new building approvals – although they are yet to fall to the extent that is expected.

4.Elongated construction cycle: Australia could potentially see the construction cycle become more elongated than previously thought – peaking at a lower level, but holding at elevated levels for longer – which would also help to alleviate over-supply concerns.

NAB’s statistical modelling suggests that residential commencements could fall more than 13% in 2017 and a further 7% in 2018. If so, dwelling construction would actually decline by 4% a year in 2017 and 2018 according to these models. However NAB’s models predict the pipeline of existing projects to run down much slower than would seem likely in practice.

It forecasts dwelling construction to rise another 2% in 2017, before falling around 1% in 2018.

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