Residential Development Index - Measuring the Activity of Victoria's Residential Development Industry - UDIA Victoria
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Residential
Development
Index
Measuring the Activity
of Victoria’s Residential
Development Industry
March 2018
RDI Major Sponsor: RDI Research Partners:Table of Contents Introduction Executive Summary 3 What is the Residential Development Index? 4 Current Residential Development Index (RDI) Rating 5 Risks to Industry 6 Demand and Supply Gap Current Demand and Supply Gap 8 Future Dwelling Need – Alternative Scenario 10 Other Market Indicators – Changing Household Typologies 11 Trends By Region Trends in Victoria and Melbourne 13 Inner Melbourne 14 Middle Melbourne 15 Outer Ring of Melbourne 16 Melbourne Growth Areas 17 Methodology and Assumptions Data Sources and Glossary 19 Geographical Study Areas 20 Estimating the Demand and Supply Gap 21 Important Notice or Disclaimer The contents of this report are based on secondary research using a variety of sources, which are believed to be reliable. The information obtained from such sources, however, was not independently verified and was relied upon in performing the analysis. Accordingly, no representation or warranty is provided regarding the accuracy or completeness of the information contained in this report. The information contained in this report includes certain forecasts that are based on certain assumptions and qualifications which are outlined in this report. Readers are cautioned that the actual results are often different than as forecasted, because events and circumstances frequently do not occur as expected, and those differences may be material. UDIA (including its research partners) disclaim any responsibility whatsoever in relation to the contents of this report and have no obligations to provide any updates or corrections to the recipient of this report. The key points and conclusions contained in this report represent UDIA views. No reliance for whatsoever purpose should be placed on any of the contents of this report. The readers are cautioned not to take any actions or decisions based on the contents of this report, should they do that it will be at their own risk. 2 | Residential Development Index
Executive Summary
This interim update provides the Residential Development Index (RDI)
rating for June 2017 and a forecast of the June 2018 rating based on
available data as at 15 December 2017.
The RDI uses a unique model to assess the health of Victoria’s residential development industry and
measure its activity on an ongoing basis. The research examines the dynamics impacting the industry,
including economic conditions, population growth, development activity, trend data, regulatory changes
and policy implications. These industry activity fundamentals inform the RDI, which determines whether
the industry is operating in a strong, moderate or weak market, relative to recent and long history.
RDI: Key Findings
• The RDI at June 2017 is 111.1 and is expected to moderate to 110.5 by June 2018 based on
conservative employment and population forecasts relative to current trends. An RDI of
above 102 depicts a market that is either operating in line with medium term trends or
relative strength.
• In 2031 we will have at least 665,000 more people than what was forecast for that year a
decade ago.
• Not all building approvals turn into new housing supply. Between 2011 and 2016, there
was an average net yield of 7.8 dwellings per 10 building approvals. In relation to occupied
dwellings, the net yield was even lower at 6.7 dwellings per 10 building approvals.
• 2017/18 is looking like a strong year with both townhouse and house building activity
continuing to grow, and apartment activity recovering from the slowdown seen in 2016/17.
• It is estimated that there has been an undersupply of dwellings in Victoria of between
3,800 and 4,700 per annum across the 2015/16 and 2016/17 financial years. In 2017/18,
increased building activity will help us reduce the gap and achieve a healthier balance
between supply and demand. However, if current high levels of building activity are not
sustained, the supply and demand gap will widen.
• Household size remains stagnant despite Government forecasts that sizes would reduce.
This is likely due to affordability constraints influencing how people are living, for example
people choosing to live with their parents for longer and a broadening range of people
moving into shared households rather than living alone.
• Factors contributing to the demand for new housing are strong with employment growth
at 4% over the year to June 2017 and predicted to moderate to 3% over the year to June
2018; and population growth at 2.3% moderating to 2% over the year to June 2018.
• Risks to the residential development industry and the housing market include subdued
wage growth which could curb demand, and strong competition for labour from major
infrastructure projects in Victoria and interstate.
3 | Residential Development IndexWhat is the Residential Development Index?
The Residential Development Index (RDI) has been developed by EY using three underlying inputs
including demand, capacity to purchase and supply relative to demand. Based on historical data, an RDI
of above 102 depicts a market that is either operating in line with medium term trends or relative strength.
Demand
40%
Purchasing power RDI =
40% weighted average
of 3 components
Supply
20%
RDI scores
Above 106 = strong market
102 to 105 = moderate market
Below 102 = weak market
RDI Input
Demand (weighted at 40%) Supply (weighted at 20%)
• Considers population growth in Victoria • Considers building approvals relative to
• Calculated as annual % growth over 12 months estimated household formation to indicate
to June as an index relative levels of supply.
• Index = [annual % change + 1] x 100. • Household formation is calculated as
[population growth / the assumed average
Purchasing power (weighted at 40%) household size in Victoria at the time RDI is
• Considers employment growth in Victoria measured].
• Calculated as annual % growth over 12 months • This component is weighted at 20% of
to June as an index the overall index due to the higher level of
variability in supply that has been observed
• Index = [annual % change + 1] x 100.
over time.
4 | Residential Development IndexCurrent Residential Development Index
(RDI) Rating
Making sense of the RDI rating
Based on the last ten years of analysis between June 2007 and June 2017:
1. The index has moderated in June 2017
at 111.1 down from 112.1 in June 2016, CURRENT RDI RATING = 111.1
however it is still at historical highs and
above the ten year average of 107.1.
2. The index was at its lowest point in Residential Development Index (RDI)
115.0
June 2007 (101.6) and June 2009 Forecast
110.0
(101.9) when supply, purchasing power 105.0
and demand was all relatively weak 100.0
INDEX
compared to averages over the period. 95.0
3. Utilising forecasted input data for 90.0
June 2018, the RDI is expected to be 85.0
80.0
110.5. This moderate decline is based
Jun 2007
Jun 2008
Jun 2009
Jun 2010
Jun 2011
Jun 2012
Jun 2013
Jun 2014
Jun 2015
Jun 2016
Jun 2017
Jun 2018
Jun 2019
on expectations of slight declines in
population and employment growth
relative to current trends.
4. The index has also been forecasted to
RDI and its components
June 2019. Demand (population) and 115.0 Forecast 180.0
160.0
purchasing power (employment) were 110.0 140.0
DEMND INDEX
extrapolated based on growth forecasts 120.0
SUPPLY
105.0 100.0
from the State Budget 2017-18 Update. 80.0
100.0
60.0
5. Our RDI forecast for June 2019 40.0
95.0
indicates that the residential 20.0
90.0 0.0
development market is expected to
Jun 2007
Jun 2008
Jun 2009
Jun 2010
Jun 2011
Jun 2012
Jun 2013
Jun 2014
Jun 2015
Jun 2016
Jun 2017
Jun 2018
Jun 2019
continue at relatively strong levels.
However, risks to the overall residential
Demand Purchasing power
market include:
Index of residential activity Supply
»» Strong demand for labour from
competing infrastructure projects;
»» Weak wage growth from buyers of Each input is calculated on an annual basis at a point
properties; and in time subject to the availability of data. It should be
»» Changes in the tax and regulatory noted that employment and building approvals data
environment. is available with limited lags whereas estimates of
population have approximately a 6 month lag.
5 | Residential Development IndexRisks to Industry
Existing and emerging risks to the Victorian urban development
industry
• Inaccurate population data
Planning for schools, housing, services, and related infrastructure must be based on an accurate
understanding of population growth. But there’s been ongoing discrepancies between what
has been forecast, what we’ve planned for and what we’re actually delivering when it comes to
population growth and the amount of new housing and infrastructure required to accommodate the
growth.
In 2031 we will have at least 665,000 more people than what was forecast for that year a decade
ago. This is a major issue considering population forecasts drive critical policy direction and
decisions.
• Competition for materials and skilled labour
One emerging challenge is the strong competition for skilled labour and materials. The residential
development industry is, and will continue to, compete against major infrastructure projects taking
place in Victoria and interstate for many of the same people and materials.
• Unclear urban renewal pipeline
Victoria needs more housing and more housing options located in well-serviced areas. While
we have prime urban renewal opportunities available to us, Fishermans Bend for example, clear
direction on how industry should and can proceed to realise these opportunities has not been
provided.
• Production capacity challenges for new housing in Melbourne’s growth corridors
There remains a critical issue with the constraints industry faces in bringing sites to market after
they receive a planning permit. There is a serious need to implement process improvements and
remove unnecessary constraints associated with releasing new, developable lots. The Victorian
Government has begun addressing this issue through its Streamlining for Growth and Smart
Planning programs, but a great deal more work needs to be done before this ongoing risk is
adequately mitigated.
6 | Residential Development IndexDemand & Supply Gap
In this section
Current Demand and Supply Gap 8
Future Dwelling Need – Alternative Scenario 10
Other Market Indicators – Changing Household Typologies 11
7 | Residential Development IndexCurrent Demand and Supply Gap
The RDI estimates the housing demand/supply gap for Victoria and
regions including Melbourne statistical divisions and regional Victoria.
What does the RDI tell us about demand and supply right now?
• In 2017/18, if we can sustain current high levels of building activity, we will achieve a healthy balance
between supply and demand for the financial year, and may even yield a small surplus that would
help address previous years’ undersupply.
• However, the undersupply figure is much higher when we consider the actual supply of dwellings
available for permanent occupation. On this measure, it is projected that an undersupply of up to
3,600 dwellings could occur in FY17/18.
What does the RDI tell us about the past three years?
• There has been a moderate undersupply in Victoria of between 3,800 and 4,700 dwellings in the
last two financial years. This means that despite current high levels of building activity, we are still
facing a demand/supply gap of approximately 1,236 dwellings when considering supply vs. demand
over the past three years.
• The undersupply figure over three years is much higher when we consider the actual supply of
dwellings available for permanent occupation. We consider dwellings available for permanent
occupation if they are available to live in by owner-occupiers or renters. For example, holiday
houses are not considered available for permanent occupation. On this measure, it is projected
that Victoria is facing an undersupply of approximately 8,946 dwellings available for occupation in
FY17/18.
Sensitivity tests
• If the average household size across Victoria declines in FY 2017/18 and in later years, the
undersupply could be even higher than initially estimated.
Note
• The estimates are theoretical in nature and based on a series of assumed parameters including:
»» An average household size of 2.6 people
»» Actual and extrapolated building approvals data
8 | Residential Development IndexAbbreviations
DBA yield Estimated yield of dwellings to building approvals (used to forecast supply)
DSG Demand/supply gap
Current estimates of the demand/supply gap in Victoria
Year end FY15/16 FY16/17 FY17/18* Average
Supply estimate
Building approvals 67,187 65,088 78,000
Assumed DBA yield total 0.78 0.78 0.78
Assumed DBA yield dwellings available for occupation 0.67 0.67 0.67
Estimated net supply of total dwellings 52,406 50,769 60,840
Estimated supply of dwellings available for occupation 45,015 43,609 52,260
Demand estimate
Population growth 146,281 144,357 145,443
Household size 2.6 2.6 2.6
Household growth 56,262 55,522 55,940
DSG all dwellings -3,856 -4,753 4,900 -1,236
DSG dwellings available to occupy -11,247 -11,913 -3,680 -8,946
* Forecast for FY17/18 for building approvals based on actual data to
November 2017 and extrapolated remaining 7 months to June 2018.
Source: ABS building approvals (8731.0) and ABS demographic
statistics (3101.0)
There has been a moderate
undersupply in Victoria of
between 3,800 and 4,700 dwellings
in the last two financial years. Therefore,
despite current high levels of building
activity, we are still facing a demand/
supply gap of approximately 1,236
dwellings when considering supply vs.
demand over the past three years.
9 | Residential Development IndexFuture Dwelling Need – Alternative Scenario
This estimate of future average annual The analysis is depicted in the table and figure on
dwelling need in Victoria and Melbourne is the right and confirms the following under the above
for the three years from FY 2018/19 to FY scenario:
2020/21 and a longer term forecast from FY • Between FY 2018/19 and FY 2020/21 total building
2021/22 to FY 2030/31. approvals will need to average 75,000 per annum to
supply an adequate volume of net additional supply.
The analysis allows for consideration of • In the 10 year period commencing FY 2021/22,
the scale of dwelling production required total dwelling supply will need to be maintained at
if Victorian population growth does not around 75,000 per annum for a healthy dwelling
decline and household sizes decline as per demand/supply balance.
existing forecasts.
A failure to accommodate this volume of dwelling
Forecasts are prepared on alternative production could have a number of consequences
assumptions including: including:
• Current population growth estimates • A reversal in the expected decline in household sizes
released by the State Government; and (see next slide for more details and impacts);
• Alternative projections prepared • Consistent increases in dwelling prices beyond
by EY that reflect a scenario of expectations – particularly for detached dwellings;
population growth being maintained at and
current levels until FY 2020/21 with a • An erosion in Victoria’s; and in particular
moderation to 1.8% per annum beyond. Melbourne’s; competitiveness as a place to migrate
to or live in.
Victoria forecast of future dwelling needs
225,000
205,000
185,000
165,000
Per annum #
145,000
125,000
105,000
85,000
65,000
45,000
25,000
FY16/17 FY17/18* 3 yr avg to 10 yr avg to 20 yr avg to
FY20/21 FY30/31 FY50/51
Population Households & Dwelling need Building Approval requirement Building Approval actual
Year end FY16/17 FY17/18* 3yr avg to 10yr avg to 20yr avg to
FY20/21 FY 30/31 FY50/51
Popolation growth 144,357 145,443 152,236 151,670 205,129
Households & dwelling need 55,522 55,940 58,552 58,335 78,896
Building approval required 71,182 71,717 75,067 74,788 98,620
Building approval actual and forecast 65,088 78,000
Source: ABS data and EY forecasts / extrapolation.
10 | Residential Development IndexOther Market Indicators –
Changing Household Typologies
The impact of under supply on households sizes and living choices
According to the Victorian Government’s demographic forecasts, average household sizes are expected
to fall due to growing numbers of single person households and increasing volumes of couples without
children. State Government’s current Victoria in Future (VIF) forecasts assume that average household
sizes will decline from around 2.5 to 2.41 between 2016 and 2051.
The reality is that between 2006 and 2016, the average household size has remained relatively static in
Victoria, at approximately 2.6 persons per household. There are a number of possible drivers of this:
• The volume of group households is increasing, essentially made up of single persons renting as a
group. Between 2006 and 2016 group households increased from 3.8% to 4.3% of all households in
Victoria;
• The utilisation of dwellings appears to be rising with the average persons per available bedroom
increasing from 0.8 to 0.9 between 2011 and 2016; and
• Young adults are becoming increasingly likely to stay at home with their parents until they are in
their late twenties and early thirties.
A static
household size;
when all demographic
forecasts point to reduced
household sizes; is an indicator of
a lack of supply of housing overall.
Household size It indicates that living arrangements
2.7 are being influenced by a
2.6
limited supply of affordable
accommodation.
2.6
Household size
2.5
2.5
2.4
2.4
2.3
2006 2011 2016 2021 2031 2041 2051
Source: Victoria in Future, 2016 Forecast Actual
11 | Residential Development IndexTrends by Region
In this section
Trends in Victoria and Melbourne 13
Inner Melbourne 14
Middle Melbourne 15
Outer Ring of Melbourne 16
Melbourne Growth Areas 17
12 | Residential Development IndexTrends in Victoria and Melbourne
This section provides building approval trends by region, highlighting
current hot spots and weakening Local Government Areas (LGAs).
Melbourne Statistical Divisions (SD)
• Overall, building approvals in Melbourne are currently1 20% above the same period in FY 2016/17
and are on track to exceed the FY 2015/16 outcome if trends remain the same for the balance of the
year.
• Townhouse building approvals are also above the same period in FY 2016/17. A total of 5,699
building approvals have been issued compared to 4,069 in the previous year. This represents growth
of 40% year on year compared to FY16/17.
• Apartment building approvals have recovered strongly in the first five months of the year with
a total of 10,309 building approvals issued compared to 7,894 in the same period last year. This
represents growth of 30% year on year compared to FY 2016/17.
• In the three years of FY 2015/16 to FY2017/18, house building approvals have continued growing at a
steady compound annual growth rate of 2.92% to a total of 25,596 by FY 2017/18.
Building approvals - Melbourne SD
• Total building approvals for Melbourne statistical divisions
30,000
in FY 2017/18 are expected to grow by
circa 21% to 62,985 from 52,076 in FY 2016/17.
25,000
Building Approvals Volume
Regional Victoria 20,000
1
• Overall, building approvals in regional Victoria are currently
15,000 14% above the same period in FY
2016/17 and are on track to exceed the FY 2015/16 outcome if trends remain the same for the
10,000
balance of the year.
• House building approvals have recovered strongly in5,000the first five months of the year with a total
of 12,885 building approvals issued compared to 11,677 0in the same previous year period. This
Houses Townhouses Apartments
represents a growth of 10% compared to FY 2016/17.
FY15/16 FY16/17 FY17/18* (projection)
Building approvals - Melbourne SD Building approvals - Regional VIC
30,000 14,000
25,000 12,000
Building Approvals Volume
Building Approvals Volume
10,000
20,000
8,000
15,000
6,000
10,000
4,000
5,000
2,000
0 0
Houses Townhouses Apartments Houses Townhouses Apartments
FY15/16 FY16/17 FY17/18* (projection)
FY15/16 FY16/17 FY17/18* (projection)
* EY extrapolated building approval data for remaining 7 months to June 2018 by using the growth rate achieved in the 5 months
Building approvals - Regional VIC
to November 2017 with the same period previous year.
14,000
1 Comparison between 5 months to November 2017 and 5 months to November 2016
Source: Australian Bureau of Statistics, 2018
12,000
Building Approvals Volume
10,000
8,000
6,000
13
4,000| Residential Development Index
2,000Inner Melbourne
Melbourne’s inner ring exhibited a mix of trends in the first five months
of the FY 2017/18.
• Total building approvals for the inner ring region of Melbourne are significantly above the same
levels in FY 2016/17.
• Apartment building approvals reached 5,993 over the first five months of the year which is above
trends for the same period in FY 2016/17.
• Based on current trends, we expect total building approvals for apartments in FY 2017/18 could
reach more than 12,800 which is 9.4% higher than the FY 2015/16 outcome and well above the level
of 9,556 achieved in FY 2016/17.
Hot spots
• From a location perspective, the City of Yarra and the City of Melbourne are particularly strong.
• The City of Melbourne has had strong building approvals in all traditional locations including
Southbank, Docklands and the CBD. Building approvals - Inner Ring
16,000
• In the City of Yarra a total of 1,278 building approvals have been issued for apartment projects over
14,000
4 storeys. This compares to total approvals in FY 2016/17 of 1,114 in the same category. Key hot spots
12,000
include Abbotsford and Richmond. 10,000
Building approvals
8,000
6,000
Weak spots
4,000
• Maribyrnong and the City of Port Phillip are not doing 2,000so well.
• In Maribyrnong, which includes Footscray, approvals for larger 0 apartment projects have declined
from 1,282 in FY 2015/16 to only 47 units in the five months to November FY15/16 2017.FY16/17 FY17/18*
(forecast)
• In the City of Port Phillip, approvals for four storey plus apartments have declined from 1,594 in FY
Flats units or apartments - Total including those attached to a house
2015/16 to just 92 over the five months to NovemberSemi-detached,
2017. row or terrace houses, townhouses - Total
Houses
Building approvals - Inner Ring Market share growth - Inner ring
16,000
14,000 Yarra (C)
12,000
10,000 Stonnington (C)
Building approvals
8,000
6,000 Port Phillip (C)
4,000
2,000
Melbourne (C)
0
FY15/16 FY16/17 FY17/18*
(forecast) Maribyrnong (C)
Flats units or apartments - Total including those attached to a house
Semi-detached, row or terrace houses, townhouses - Total -20% -10% 0% 10% 20%
Houses Growth in market share of region
Source: Australian Bureau of Statistics, 2018 1 year growth 2 years growth
Market share growth - Inner ring
Yarra (C)
Stonnington (C)
14 | Residential Development Index
Port Phillip (C)
Melbourne (C)Middle Melbourne
Melbourne’s middle ring exhibited a mix of trends in the first five
months of the FY17/18.
• Total building approvals for the middle ring region of Melbourne reached 8,336 over the five months to
November 17 relative to a full year result in FY 2016/17 of 17,042. On this basis we expect building approvals in
the middle ring to potentially exceed the outcome in FY 2016/17 and reach levels experienced in FY 2015/16.
• Apartment building approvals reached 3,511 over the first five months of the year which is above trends for the
same period in FY 2016/17.
• Semi-detached townhouse development is also particularly strong with 3,123 approvals to November 2017
compared to a full year outcome of 5,700 units in FY 2016/17.
Hot spots
• Most local government areas (LGAs) in the middle region are performing well and increasing their share of
Melbourne’s overall housing market, however results are mixed by dwelling type.
• Kingston, Glen Eira and Monash continue to deliver high volumes of apartment and townhouse development.
• Apartment development hotspots include Clayton around Monash University, the Cheltenham Highett corridor
Building approvals - Middle Ring
in Kingston and the McKinnon, Bentleigh and Caulfield North areas in Glen Eira.
25,000
• In Kingston, these precincts are being driven by supportive residential planning controls including Activity
Centre Zones, Growth Zones in Glen Eira, and supportive planning policy around Caulfield Racecourse and the
20,000
Caulfield activity centre.
15,000
Building approvals
Weak spots 10,000
• Many of the LGA’s that experienced strong activity in FY 2014/155,000
and FY 2015/16 have seen activity moderate
over the last year.
• 0
In Boroondara, apartment activity has collapsed in FY 2017/18, particularly in the Hawthorn area. To some extent,
FY15/16 FY16/17 FY17/18*
this has been offset by maintaining strong levels of townhouse development. (forecast)
• Other areas that have experienced a significant decline in apartment approvals
Flats units include
or apartments - TotalMoreland around
including those attached to a house
Brunswick, Darebin around Northcote and Moonee Valley. Semi-detached, row or terrace houses, townhouses - Total
• Apartment activity in Whitehorse, which includes Box Hill, has Houses
also moderated significantly from 1,354 units in
FY 2015/16 to 314 over the five months to November 2017.
Building approvals - Middle Ring Market share growth - Middle ring
25,000
Moonee Valley (C)
20,000
Monash (C)
15,000
Building approvals
Kingston (C)
10,000
Hobsons Bay (C)
5,000
Glen Eira (C)
0
FY15/16 FY16/17 FY17/18* Boroondara (C)
(forecast)
Flats units or apartments - Total including those attached to a house -10% 0% 10% 20%
Growth in market share of region
Semi-detached, row or terrace houses, townhouses - Total
1 year growth 2 years growth
Houses
Source: Australian Bureau of Statistics, 2018
Market share growth - Middle ring
Moonee Valley (C)
15 Monash
| Residential
(C) Development Index
Kingston (C)Outer Ring of Melbourne
Melbourne’s outer ring has exhibited a recovery in approvals in the first
five months of FY 2017/18 after a moderate decline in activity in FY
2016/17.
• Total building approvals for the outer ring region of Melbourne reached 2,464 over the five months
to November 2017 relative to a full year result in FY 2016/17 of 4,866. On this basis we expect
building approvals in the outer ring will exceed the 2016/17 outcome in 2017/18.
• Apartment building approvals reached 667 units over the first five months of the year, which is well
above trends for the same period in FY 2016/17.
• Semi-detached townhouse development is also growing strongly and expected to drive a
significantly higher level of dwelling commencements in the region over FY 2017/18.
Hot spots
• Apartment development hotspots include the Knox and Maroondah LGA’s with Maroondah
Building approvals - Outer Ring
experiencing 371 units approved over the first five months of FY 2017/18. Most of these were in
7,000
Ringwood.
6,000
Building approvals
• Apartment activity in Manningham and Doncaster is maintaining similar trends to a year ago,
5,000
however is down on volumes in FY 2015/16 where 683 apartments
4,000 were approved.
3,000
Weak spots 2,000
1,000
The apartment market is still maturing in many parts of Melbourne’s established outer ring so results
0
are fairly inconsistent and inconclusive. FY15/16 FY16/17 FY17/18*
• The Greater Dandenong LGA has experienced a decline in apartment approvals in the first five(forecast)
Flats a
months of FY 2017/18 as has Frankston which has not had units or apartments
single building - Total including
permit forthose attached to a house
an apartment
Semi-detached, row or terrace houses, townhouses - Total
issued in this financial year.
Houses
Building approvals - Outer Ring Market share growth - Outer ring
7,000
6,000 Nillumbik (S)
Building approvals
5,000
Maroondah (C)
4,000
3,000 Manningham (C)
2,000
Knox (C)
1,000
0 Greater Dandenong (C)
FY15/16 FY16/17 FY17/18*
(forecast) Frankston (C)
Flats units or apartments - Total including those attached to a house
-15% -10% -5% 0% 5% 10%
Semi-detached, row or terrace houses, townhouses - Total
Growth in market share of region
Houses 1 year growth 2 years growth
Source: Australian Bureau of Statistics, 2018
Market share growth - Outer ring
Nillumbik (S)
Maroondah (C) 16 | Residential Development Index
Manningham (C)Melbourne Growth Areas
Melbourne’s growth areas continue to deliver increased levels of
building approvals including over the first five months of FY 2017/18.
• The volume of new houses built in Melbourne growth area LGAs equated to over 17,000 in FY 2016/17 up
from 10,100 in FY 2012/13. The outcome for 2016/17 is higher than the record year of 2009/10.
• The result for the first five months of FY 2017/18 points to another record year with more than 8,600
building approvals for houses in the five months to November 2017. Note: This result includes projects in
established areas of growth area LGAs.
Hot spots
All LGAs are performing well but key hotspots include:
• Wollert and Doreen in the Whittlesea corridor where house and townhouse style development is on track
to exceed volumes in FY 2016/17;
• Mickleham in the Hume corridor where 560 building permits to November 2017 have been issued, which
is 63% of the full year outcome in FY 2016/17; Building approvals - Growth Area
• Beaconsfield / Officer and Pakenham South in the Cardinia
25,000corridor are also ahead of trend relative to FY
2016/17 with more than 650 permits issued in the five months
20,000 to November 2017;
Building approvals
• Rockbank / Mount Cottrell in the Melton corridor, with 332 building permits to November 2017, is already
15,000
at 75% of the full year outcome in FY 2016/17; and
• 10,000 Wyndham Vale, Point Cook East and South
Most release areas in Wyndham including Tarneit, Truganina,
and Werribee West where over 2,300 lots received building
5,000permits in the five months to November 2017.
0
Weak spots FY15/16 FY16/17 FY17/18*
• (forecast)
None of Melbourne’s growth areas have seen a significant drop in lot development, however building
permits in Whittlesea in FY 2017/18 are at levels below Flats
peaksunits or apartments
achieved - Total
in FY including
2014/15 those
and FYattached to aIt
2015/16. house
would be expected that this situation may reverse withSemi-detached,
the openingrowoforthe
terrace houses, townhouses - Total
Mernda rail link in 2019.
Houses
Building approvals - Growth Area Market share growth - Growth Areas
25,000
Wyndham (C)
Building approvals
20,000
Whittlesea (C)
15,000
10,000 Melton (C)
5,000 Hume (C)
0 Casey (C)
FY15/16 FY16/17 FY17/18*
(forecast)
Cardinia (S)
Flats units or apartments - Total including those attached to a house
Semi-detached, row or terrace houses, townhouses - Total -6% -4% -2% 0% 2% 4% 6%
Growth in market share of region
Houses
1 year growth 2 years growth
Source: Australian Bureau of Statistics, 2018
Market share growth - Growth Areas
Wyndham (C)
Whittlesea (C)
17 | Residential Development Index
Melton (C)
Hume (C)Methodology & Assumptions
In this section
Data Sources and Glossary 19
Geographical Study Areas 20
Estimating the Supply / Demand Gap 21
18 | Residential Development IndexData Sources and Glossary
Abbreviations Data & Information Sources
ABS Australian Bureau of Statistics In completing components of this report
EY Ernst & Young we have utilised existing sources of data
BA Building Approvals including the following:
LGA Local Government Area • Australian Bureau of Statistics
UDIA Urban Development Institute of Australia • Victoria In Future 2016
VIF Victoria in Future
• EY proprietary data and research
DSG Demand and Supply Gap
• DTF Budget Papers including forecasts
RDI Residential Development Index
of population and employment
DBA yield Estimated yield of dwellings to building
approvals (used to forecast supply)
Census Census of population and housing
DTF Department of Treasury and
Finance (Victoria)
DELWP Department of Environment, Land,
Water, and Planning (Victoria)
State Budget Budget Papers released by DTF
Study Areas & Usage of Data
For the building approvals analysis we have made the following assumptions:
1. Each geographical catchment has been referenced against defined LGA’s.
2. For the Melbourne geographical catchments (also shown on the following page’s map):
»» Inner Ring // This term throughout the report refers to Melbourne’s inner ring LGAs (20km from CBD). LGAs analysed within outer ring Melbourne include; Nillumbik,
Maroondah, Knox, Greater Dandenong and Frankston.
»» Growth Areas // This term throughout the report refers to the defined Melbourne growth
areas. LGAs analysed within Melbourne growth areas include; Hume, Whittlesea, Mitchell,
Casey, Cardinia, Melton and Wyndham.
»» Regional Victoria // This term throughout the report refers to parts of Victoria excluding
metropolitan Melbourne.
19 | Residential Development IndexGeographical Study Areas
Geographical study
areas utilised in report
Inner Ring
Middle Ring
Outer Ring
Growth Area
Macedon
Ranges
Whittlesea
Hume Nilumbik
Melton
Moreland Banyule
Brimbank
Moonee
Darebin
Valley Yarra
Manningham Ranges
Maribyrnong Yarra
Melbourne Maroondah
Boroondara
Hobsons Whitehorse
Stonnington
Bay Knox
Wyndham Port
Phillip Monash
Bayside
Greater Kingston
Geelong Greater
Dangenong
Cardinia
Casey Baw Bw
Frankston
Mornington
Peninsula French
Island
Bass
Coast
20 | Residential Development IndexEstimating the Demand and Supply Gap
Introduction and background • Excess price growth for existing dwellings;
• Households living in a non preferred location
The first UDIA Residential Development Index or a house that is not suited to the family
(RDI) report released in August 2017 provided structure;
initial estimates of whether the supply of new • Rental price increases; and
dwellings being released in Victoria was at levels • Potential reduction in the competitiveness of
equal to or less than demand. Demand was Victoria as a place to live for interstate and
calculated as a function of forecasted household overseas residents due to the cost of housing.
growth.
In regard to demand, historically the State
This report has prepared more detailed estimates Government has faced challenges in accurately
of whether a demand/supply gap (DSG) exists forecasting population growth over the medium
given the recent strengthening of Victorian to longer term. Typically a conservative approach
population growth and in turn household has been taken where forecasts are in line with
formation over the last three years. longer term trends and do not assume significant
changes in growth drivers.
This issue is of importance as a prolonged
mismatch between demand and supply leads to If changes in assumptions are made over a
market distortions. In any year that undersupply forecast period it has generally been assumed that
exists excess demand will flow through to growth drivers will moderate.
following years with consequences including:
12,000,000
10,000,000
Population Victoria
8,000,000
6,000,000
4,000,000
2,000,000
0
2021 2031 2051
VIF current VIF 2012 VIF 2008
• Government’s population forecasts for 2021 have increased by 273,000 persons between
2008 and 2016 estimates
• Forecasts for 2031 have increased by 665,000 persons between 2008 and 2016 estimates
• Forecasts for 2051 have increased by more than 1.8 million people between 2008 and 2016
estimates.
21 | Residential Development IndexVictoria in Future (VIF) refers to population forecasts
prepared by the State Government.
The analysis above confirms how even relatively minor
In 2031, we will have at least increases in population growth above initial projections can
665,000 more people than drive dramatic variations in outcomes.
what was forecast for Regardless of the outcome that eventuates, ongoing
that year a decade ago. changes in projections present a challenge for planners who
are sequencing the release of land supply in Melbourne and
Victoria’s growth areas and urban renewal precincts. It also
presents a major challenge for infrastructure planning.
Estimating the demand and supply gap –
The historical dwelling yield to building approval ratio
Calculating an estimate of current dwelling supply
The most challenging aspect of calculating a demand/supply gap is preparing a current and forecasted
estimate of supply. While the net supply of dwellings is released in the Census every five years, there
is no up to date count of dwelling numbers released each year which makes monitoring supply a
challenging exercise. An alternative methodology beyond the Census therefore needs to be utilised to
estimate current increases in supply.
What we know (historical data)
Based on current information, we have the following inputs to develop a forecast of supply:
• Between 2011 and 2016, the Census estimated that the number of private dwellings in Victoria
increased by 222,945 from 2,297,967 to 2,520,912. Occupied private dwellings increased by an
estimated 187,000 from 2,038,000 to 2,226,000.
• Over the same period in Victoria there were 287,670 building approvals and 286,500 dwelling
commencements.
• This means that on average over the period between 2011
and 2016, a net yield of 7.8 dwellings per 10 approvals or
0.78 was observed (Dwelling to building approval yield = Not all building
“DBA” yield). In relation to occupied dwellings the DBA approvals turn into new
yield was 6.6 dwellings per 10 approvals or 0.66. housing supply. Between
• This average DBA yield varies significantly in different 2011 and 2016, there was an
LGAs across Melbourne depending on the mix of dwellings average net yield of 7.8 dwellings
being built. In LGAs where a large volume of townhouses per 10 building approvals. In
and replacement homes are built, the DBA yield between relation to occupied dwellings
2011 and 2016 was as low as 0.6 for all dwellings and as low the net yield was even lower
as 0.5 for the supply of occupied dwellings. In growth area at 6.7 dwellings* per 10
LGAs where the bulk of dwellings approved are houses on building approvals.
new lots, the DBA yield is as high as 0.9.
*Dwellings are considered to be available for permanent
occupation if they are available to live in by owner-occupiers or renters
22 | Residential Development IndexFuture forecasts of supply
Given the recent relationship between net supply and building approvals, as measured by the DBA yield,
we can use this measure to forecast estimates of dwelling supply in years where Census results are not
yet available.
There are several reasons for the DBA yield being significantly less than 1 including:
• New houses built in established suburbs leads to demolition of existing stock. While they add
bedrooms, they don’t increase the supply of dwellings; and
• Townhouses increase the yield of stock but still involve demolition of existing dwellings.
In addition, many dwellings that are built in coastal and ‘tree-change’ areas as well as other dwellings,
are not available for long-term rental accommodation which leads to a further reduction in the DBA
yield of dwellings available for occupation. This is driven by growing wealth and the ability to afford a
home that can be provided as short term rental to third parties as tourist accommodation.
Between 10% and 20% of dwellings are unoccupied depending on the region / LGA assessed which
means that the actual supply of dwellings available to buy or rent is lower than many estimates.
Based on this analysis, EY has developed a DBA yield that can be applied to building approvals over an
analysis period to act as an estimate of net supply.
The historical average DBA yield in Victoria equates to approximately 0.78 for all dwellings.
The DBA yields estimated at a regional level are as follows:
• Victoria overall – 0.78 total supply and 0.67 available for occupation
• Melbourne statistical division – 0.81 total supply and 0.72 available for occupation
The DBA yields calculated above are utilised in the report to calculate estimated levels of current and
forecast supply based on existing and forecast volumes of building approvals where:
Estimated supply = Building Approvals for assessment period * estimated DBA yield for region
• A buffer or higher yield (equivalent to 1 to 2 percentage points to allow for changes in dwelling
profiles over time to higher density development) is used to ensure supply is not underestimated.
23 | Residential Development IndexEstimating the demand and supply gap – Summary
Summary of approach Supply:
There are no regularly updated estimates of net • Calculate the historical growth in supply of
dwelling supply released annually in Victoria (1). dwellings using Census data on actual supply
In addition, population forecasts and expected of dwellings including the supply of dwellings
household formation (demand) needs to be available for occupation;
assessed to confirm whether they reflect current • Compare the historical supply of dwellings
trends. (including occupied and unoccupied
dwellings) with building approvals to allow for
Estimates of a demand/supply gap are made the calculation of an average ratio of supply
based on a series of assumptions. to building approvals (DBA yield); and
• Utilise the historical DBA yield over the
The following steps are undertaken in calculating assessment period to forecast current and
a current and future demand/supply gap in future levels of supply based on current
Victoria: trends in building approvals.
Underlying demand: Demand/supply gap
• Estimate household formation between 2016 • Compare the estimated supply of dwellings
and 2018 and forecast household formation (including dwellings available for occupation)
between 2018 and 2021 using demand drivers with forecasts of demand based on household
including population growth and estimated formation; and
household sizes; and • The variation between demand and supply is
• Undertake sensitivity tests on population used to determine housing undersupply vs.
growth and household sizes as required based oversupply.
on current trends.
Summary of methodology
• Calculate current and forecast household
formation as a measure of demand
Demand • Household formation driven by assumed
population growth / changes to household sizes
• Utilise current building approvals as a measure of supply
Supply • Calculate supply estimate whereby supply = Building
Approvals * DBA yield for occupied and total dwellings
• Demand/supply gap calculated
Demand
based on estimated variation for
supply gap assessment period
24 | Residential Development IndexURBAN DEVELOPMENT INSTITUTE
OF AUSTRALIA (VIC)
udiavic.com.au
+61 3 9832 9600
info@udiavic.com.au
Level 4, 437 St Kilda Road,
Melbourne VIC 3004
Disclaimer: The material contained within this
report has been prepared for general informational
purposes only and is not intended to be relied upon
as accounting, tax, or other professional advice.
Please refer to your advisors for specific advice.
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