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Shift To Apartments May Cause Volatility

Australia's taste for housing is shifting and it could ultimately mean more volatility in housing prices.

From the depths of the early 1980s recession - as far back as the figures go - to the end of that decade, 21 per cent of homes approved for construction were in multi-unit buildings - apartments, flats, semi-detached or townhouses.

That's about one in five.

That proportion rose to 28 per cent in the 1990s, then to 31 per cent in the 2000s.

It's gone up again since, with 39 per cent of approvals for multi-unit buildings from 2010.

At last count, in August, the proportion was 42 per cent, double the average for the 1980s and more than two in five.

In Sydney, where land is arguably in shortest supply, the proportion has risen from 27 per cent in the post-recession 1980s to 52 per cent - just over half - since 2010.

That's also close to double the 1980s level.

There are obvious reasons for this.

Australia is a big country, but ever since colonisation by the British over 200 years ago it's had a high percentage of its population clustered in urban areas, mostly big cities with potential for expansion cut off on one side by the sea.

With land at a premium, there's an incentive to maximise the floor space for a given land area.

And the recent increase in immigration from Asian cities has shifted the taste toward apartment-style living.

But whatever the reason, the shift means the residential construction cycle is likely to become more, well, cyclical.

The construction of free-standing homes is more closely linked to demand from a diffuse group of individual buyers, people who decide to build, then arrange finance, tee up a builder, and set the process rolling.

Big blocks of apartments, although many are sold "off the plan", require big investors to make a bet that some time into the planning, approval and construction process, buyers will magically emerge.

This adds another step between the decision to build and the purchase by the ultimate owner.

It means the potential for developers to guess wrongly, build apartments that take an unexpectedly long while to be sold, with the oversupply depressing prices and construction activity.

And it also means the potential for investors to miss the boat, deciding - for whatever reason, whether rational or not - to shelve projects, leaving demand unmet and upward pressure on prices.

That in turn would set the scene for a stronger cyclical upswing than might normally have been expected.

The shift has been slow, taking decades so far, and it will no doubt run for decades more.

But if commercial property is anything to go by, then the increasing dominance of big apartment-builders whose approach must necessarily be speculative, then it should be no surprise if housing prices become increasingly volatile. AAP

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