It’s now overwhelmingly clear the government is pinning its hopes on dwelling investment to fuel solid growth into 2014.  The declines in house prices since the peak of the boom in 2010 have obsessed property clock watchers for much of the interim – particularly as we now have a daily “home value index” monitoring “true value of movements” across individual housing markets.  And now the Treasury has weighed in and all but given a cart blanche guarantee that property is in “recovery mode”.

"In a world where mining investment doesn't contribute to growth any more, one of the obvious things is the housing market, given we think there is an under-supply. That's a natural and desirable development and we're seeing early signs of it." (David Gruen – head of the Treasury’s macro-economic division.)

Undersupply – I’m tired of hearing the word.  I’ve written previously, that the only ‘undersupply’ we have in our buying market is the availability of affordable, well-located accommodation – and by “well-located”, I don’t mean accommodation stuck on the fringes of our cities, where essential “infrastructure” extends no further than the single road in and out of the CBD.  The spruiked 25-minute drive buyers were sold when they purchased can now be a three-hour congested headache in peak hour traffic.

The housing shortage debate is one that gains regular media traction yet is rarely understood.  If it’s simply a case of putting every newly formed household prospected to enter the country into a new home, then the short answer is yes, we have a housing shortage – we’re not building enough.

The National Housing Supply Council claims there is a shortage of 230,000 homes based on future population estimates, which is all well and good, however, if you’re going to build more supply to sell to this expected population surge, you have to do so in an atmosphere where there is consumer demand – something both state and federal governments are now hoping to stimulate.

The housing shortage debate is one that gains regular media traction yet is rarely understood.  If it’s simply a case of putting every newly formed household prospected to enter the country into a new home, then the short answer is yes, we have a housing shortage – we’re not building enough.

It would be easy to formulate a long list of reasons why home buyers generally avoid new dwellings when searching for residential property in an incentive-less environment. Some would include the lack of amenities in the areas detached dwellings are located, or the quality of construction, which is overwhelmingly poor, not to mention the restrictive lending practices that deter first-home buyers purchasing high-rise accommodation.

However, the evidence generally underlines that owner-occupiers – and for that matter investors – prefer purchasing established over new, which goes a long way to underpinning prices in this sector of the marketplace.

Over the last decade to 2011, 92% of all borrowing by residential property investors was for established dwellings – slightly higher than the 82% of borrowing by owner-occupiers during the same period.

Obviously every market suffers from inevitable periods of low confidence and downward market cycles – therefore, to maintain underlying demand in the new home sector, it’s essential new homes attract a larger demographic of property buyers – principally family home buyers.  Sensibly speaking, there is only one way to do this – infrastructure in new estates needs to be funded and time lined at the start of a new project. At the moment, land prices are increased disproportionally by development and community costs, yet families moving into outer-suburban areas see little evidence of the ”promised” essential amenities to meet the growing surge in population.

Furthermore, because construction costs are disproportionately inflated, it’s impossible for developers to reduce the capital cost to entice cash-strapped home buyers who would perhaps be willing to compensate on location in order to purchase a bigger property.

As for affordability – well, you only need look at the overall number of home sales, which nationally are at their lowest levels in 25 years  (figures not seen since the late 1990s) to assess activity from buyers is sending a clear message that ‘affordable’ isn’t in abundance. In the new home sector, hefty development overlays and other imposed taxes all but ensure land prices remain above fair market value.

It’s not just a case of low confidence and debt aversion that is pushing greater numbers onto the rental ladder – especially considering our current environment of low rates and flat prices. We’ve all run out of steam, too busy paying down debt while coping with the rising cost of living – as recent surveys have underlined.  Even this weekend’s super Saturday results – which showed a marginal improvement on long-term trends – are still a long way from guaranteeing a period of solid growth in the established sector.

However, the Treasury is adamant – it is looking forward to a “pick-up in construction activity” to meet a prospected surplus, and by hook or crook the government is going to get us there. Of course, to achieve this aim, there has to be demand for new housing, and how does the old saying go?  You can lead a horse to water but you can’t make it drink. At the moment, developers are struggling to give house-and-land packages away – let alone sell them!

As the ABS recently confirmed, the number of housing starts recorded for the June quarter was 13.4% lower than the 10-year average.  Therefore, if the housing market is going to save the government’s stubborn need for a 2013-14 surplus, fresh demand needs to be stimulated – and stimulated quickly. There’s only one way to do it, and that’s falling back onto the old tried and tested first-home owner grant formula.

Nationally construction has been dwindling since 2006 – except for Victoria, that is, which from the start of 2008 to March 2012 underwent a building boom, which accounted for one third of Australia’s total building starts for the same period. The majority of this new housing – 60% – was in the form of detached dwellings in the sparsely facilitated “fringe” locations, however, the boom happened to coincide with the federal and state government first-home buyer boost as well as historical low lending rates.

Consequently a large “interest-rate sensitive” demographic was encouraged to purchase “new” over established. A look back at the sales data during this period reveals that in November 2008 overall sales of new dwellings had increased by 1,764 to 11,695.  Melton, in Melbourne’s west, grew by 8.2%, equating to 7,535 new residents – an all-time high.

Other regions such as Deer Park (17 kilometres west of Melbourne’s CBD) recorded a 15% rise in its median value. And by January 2009 there had been 530 house sales recorded in Tarneit (25 kilometres south-west of Melbourne), with prices increasing 21%.

Werribee (32 kilometres southwest of Melbourne) and Point Cook (25 kilometres south of Melbourne) attracted the greatest number of grant recipients, with Werribee South recording a whopping 25% rise in its median house price, which was clearly unsustainable over the long term.

As with all first-home buyer incentives, once the grant was stripped away – prices retracted and demand fell away. First-home buyers encouraged to buy on a whim through short-term cash incentives were consequently stuck in limbo during the inevitable “correction” phase of the market.

The remaining 40% of building activity in Victoria during this period was principally in the form of high-rise dwellings in Melbourne’s CBD and immediate surrounds. As I’ve reported previously, I still come across first-home buyers who purchased during this period, with mortgages in excess of the current valuation on their apartments.

However, the solution remains that to date, the only sure way both state and federal government have been able to fuel an uplift in “new home” demand is by way of first-home buyer invectives, and previous lessons of negative equity and inevitable market retractions are not going to deter their plan to kick-start the second housing boom in a decade.

In Western Australia first-home buyer grants are at their highest levels since the federal boost ended in 2009, and according to information from the REIWA, first-home buyers have made up 30% of sales in Perth during the September quarter.

Other states are also coming to the party, with South Australia offering a $8,500 grant to anyone building a new home while at the same time, various construction companies are also adding on their own sweeteners to the deal.

South Australia plans to spend thousands on TV and print media advertising the incentives, aimed principally at first-home buyers who will see their grants double from $7,000 to $15,000 to sweeten the deal.  However, place a note in your diary for the inevitable market correction, which – if the predicted surge eventuates – should kick in by 2014, after which the grant will be culled completely.

Whether the uplift in demand fuels another bubble is debatable – it could be that the underlying and very fundamental change in consumer behaviour, which is encouraging cautionary sentiment, will continue to deter a majority from heeding the government’s call. With the RBA being “forced” to lower interest rates in an increasingly soft environment, expect housing busts and booms to remain a very real feature of our future housing and “new home” market.

Catherine Cashmore