NSW could close its borders tomorrow and it would still take three years, at current construction rates, to build enough homes to fill the state's unprecedented housing shortage.
The state's housing shortage will top 100,000 homes next year for the first time.
There is still a lot of unsatisfied demand for housing.
ANZ senior economist David Cannington
Despite a boom in apartment building in some pockets of Sydney, demand for new homes is outstripping supply, a new analysis by ANZ Bank has revealed.
NSW is still failing to build enough homes to keep up with rising demand, a new ANZ Bank report reveals. Photo: Erin Jonasson
Amid fears of a housing price bubble, ANZ senior economist, David Cannington, said the analysis suggested any price falls would be limited.
"The question of whether the market is in a bubble is really about whether there is significant downside risk to prices," Mr Cannington said.
"What this analysis says is there is still a lot of unsatisfied demand for housing. So even when prices do start to fall, that creates opportunities for potential households who are priced out of the market."
"This is part of the reason why house prices are able to be supported at the high level that they are at the moment."
NSW's resurgent economic fortunes are adding to demand for housing, helping to attract more migrants and stem the outflow of interstate migration.
"Even with some of that strong growth in new housing construction, population growth is still quite strong and steady," Mr Cannington said. "NSW generally tends to have a negative net interstate migration, with people coming into NSW or Sydney and then migrating elsewhere. But that outflow has actually been a lot weaker."
The ANZ analysis shows NSW is on course to build 56,000 new homes this financial year, after demolitions are taken into account. This is more than double the number of new homes added six years ago.
But underlying demand for new homes is also expected to grow, by 63,000 new homes, leaving an annual shortfall of 7,000.
This will add to the existing housing shortage, bringing it up to 99,137 homes this financial year, 106,424 next financial year and 114,428 the year after that.
Mr Cannington said the housing shortage was frustrating the ambitions of many young Sydneysiders to form a new household.
"What it means is that there is an involuntarily high number of people per household. Where you see it is in shared rental properties and mature-aged kids staying at home longer with their parents. A lot of people say they're priced out of the market and unable to buy. While they'd like to form their own household, they can't."
NSW's shortage of housing has been growing each year for the last decade.
The last time the state's supply of housing met or exceeded demand was between 2002 and 2006. During that time home prices fell slightly.
Over the decade since, Sydney home prices have almost doubled, rising by 88 per cent. This included periods of falling prices in 2008, 2011 and currently.
A supply shortage did not mean prices could not fall, Mr Cannington said, "but it does say that the amount of downward pressure in prices will be limited by this significant under supply of houses."
Nationally, ANZ puts the housing shortage at 250,000 homes, but this is expected to ease slightly over the coming three years. For the first time in a decade, there are enough homes being built nationally to meet supply.
But the story is different in NSW.
"On current construction levels in NSW, and if there were no additions to the underlying requirement for households, then you'd still be building for three years before NSW was in balance," Mr Cannington said.
Underlying demand for new homes is calculated based on population growth, adjusted for the number of people per household. ANZ's analysis assumes about 2.2 people per household.
Economist Saul Eslake, a former chief economist at ANZ and member of the Rudd Government's National Housing Supply Council, said estimates of the exact size of the housing shortage varied, but ANZ's estimate was "reasonable".
"There's little doubt in my mind that there is a shortage of housing in Sydney," Mr Eslake said.
This was a strong argument against the suggestion that Sydney house prices are in a bubble, he said.
"In order for house prices to fall, there are two criteria that are necessary. You need to have a material volume of forced sellers and those forced sellers need to be selling into an over-supplied market."
The property bubbles that burst in the US, Ireland and Spain were not just price bubbles, but quantity bubbles.
Mr Eslake blamed "dopey" planning laws for Sydney's relative inability to build homes. "Local councils in Sydney are much more restrictive, particularly in terms of the opportunities they give for people in established areas to make time consuming and vexatious objections to development."
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