Does Australia have a housing shortage?

Well – is it any surprise?  Over and over again we see a drop in new homes sales.  The most recent HIA data shows new ‘house’ sales dropped 5.5 per cent in July (barring Queensland) and ‘apartments’ 6.4 per cent over the same period.  As usual, the blame is placed firmly in the real estate sectors ‘go to’ excuse of the year, namely ‘consumer sentiment’ – or to quote HIA “weak consumer – and business – confidence.”

It’s true the housing market has been in the doldrums of late.  However, this doesn’t mean there is no activity.   Only a few weeks ago we were informed by the ABS that “first-home buyers as a proportion of total owner-occupier housing finance commitments” had increased to 18.3 per cent in June – a five month high. However, it’s clearly not stimulating one of the most affordable segments of the market – the new home sector…

In new housing estates, ‘off the plan’ prices start under $300,000 – a price unachievable in inner suburban localities. On top of this, developers have been playing ‘Santa Clause’ offering “new cars, $10,000 cheques” and “free” ‘would you like an extra bedroom with that?’ upgrades.  It’s seemingly a dilemma for the ‘new’ housing market who are rarely willing to shoulder the blame.

Terry Ryder, who last week eloquently pointed out we don’t have a housing shortage in Australia was quick to point out examples of outer suburban ‘affordable’ localities such as ‘Albury –Wodonga.’ “Affordability isn’t a major issue” he cites, clearly expecting home buyers or renters suffering increasing rental yields – (up 50 per cent over the past four years) – to flock to these areas if there’s a so called ‘housing shortage,’ or at the very least, a ‘shortage of affordable accommodation.’

As Mr Ryder briefly touches upon, the differences between underlying demand and effective demand need to be clarified.  The first is assessed from the level of migration and changes in population growth (predictive speculation.)  The second – effective demand – is driven by the buying market and dictated by market forces.  

Terry Ryder is therefore correct in his assumption that the ‘house buying’ market is currently over supplied in the new estates.  If we weren’t oversupplied in these areas, developers would be building and selling more homes.  They are not building and selling currently because no one wants to buy the properties on offer – and more importantly no one wants to buy in an area that offers poor capital growth, where the closest doctor is an hour’s bus journey away!

However, to take the data above and conclude that we haven’t got a “housing crisis” is a little misleading.  As I’ve pointed out many a time – Australia is on her way to becoming a rental nation – which trending statistics detailed across the 2011 and previous census results underline.

Issues surrounding housing affordability are at a peak predominantly because town planners along with state and federal governments have failed to effectively cater to the demands and needs of a rapidly increasing population. If you didn’t know better, you’d be forgiven thinking there’s been a ‘vested’ conspiracy to keep inner city inflation high with everything possible done to prevent a fall in established house prices by way of generous tax incentives for investors favouring ‘old’ over new – and intermittent policies to inflate the prices of new housing by way of Mickey Mouse incentives.

I should think first home buyers are thoroughly ‘fed up’ with all the reports telling them Australia has an abundance of affordable homes just waiting to be snapped up and when questioned, wafting a finger towards the hills as if commanding a dog to fetch a ball.

It’s one of the reasons extending the city boundaries in a senseless urban sprawl is hopelessly flawed. Green belt land or designated city borders, were essentially designed to protect against the sprawl of Noddy style houses across valuable countryside needed for recreation, food production and essential wildlife preservation.  However, even protected areas are not immune from the gruesome  determination of profit driven developers and investors, who aren’t shy of a little ‘lobbying’ all in the name of providing a much needed supply of ‘affordable housing.’ Hence why groups such as the Adelaide Parkland Prevention Association are active in local communities and we have poorly designed high rise ‘towers’ popping up in local neighbourhoods.  

Obviously, it’s essential to locate homes within easy commutable distance to employment centres, shopping malls, schools, and community facilities. However, it’s also essential to cost and adequately fund a timely plan for this prior to building “Leggo Land” suburbs which result in a society of isolated homes, disconnected residents and unhealthy car dependant families.

Yet time and time again the same mistakes are made.  Most recently, there’s been a ‘new vision’ for Parramatta Rd – transforming it from a bleak “inner-west corridor” to a city of apartments – no doubt in ‘Tower’ format.  Parramatta Road has been named the most congested, poorly maintained strip in NSW.  Six lanes of nose to nose traffic on a route you’ll always regret taking. However no new public transport improvements have been timetabled and funded to accommodate the ‘proposed’ new development of 100,000+ apartments aside from on-going ‘promises’ to complete the M4 East extension – which due to budget cuts, is unlikely to occur.  “Hands up” who wants to live there?  ….. no one – and most certainly not first home buyers.

Then, as if to confuse the mystery of the ‘missing buyers’ further, RPData release a free – ‘rent vs buy’ report “in time for the Spring selling season” providing an “in-depth look at the difference between the cost of paying rent and paying a mortgage across each suburb or town around the country.”

RPData pinpoint 238 suburbs or towns where “the mortgage repayment is lower than the median rent, based on a principal and interest loan on a variable mortgage rate.”  Obviously the list expands two fold when assessing interest only loans and there are hefty disclaimers explaining how the research was pinned together.  The resulting calculations are derived from the ‘median’ unit price (or house price depending on suburb) and median ‘weekly advertised rental price’ with the ‘buyer’ purchasing on a 90 per cent loan to value ratio at an initial 6.15% variable 30 year loan. (Other examples are calculated on terms of interest only; however the above example is most applicable to the classic first home buyer profile)  

The results however ‘assume’ a great deal – to take median values and use them as a barometer of affordability against a median rental price has significant flaws.  In Carlton for example – Melbourne’s hub of student apartments and one of the suburbs highlighted in the report- obviously the median unit price is comparatively very cheap. However, try and acquire a ‘non’ student residential apartment (one worthy of buying – at the very least, providing 40sqm of floor space) for the ‘median’ price and it quickly becomes apparent you’ll need to pay a good deal more than the ‘median value’ represented in RPData’s report. 

As for the advertised rental – well obviously student apartments command a higher rental yield than residential listings, therefore taking the two figures out of context, will evidently produce the misleading ‘fantasy’ that it’s cheaper to ‘buy’ than rent.  

Similar results can be examined in their other examples and they are numerous.  In fact my own calculations – based on a handful of ‘real’ ‘sold data’ examples in outer lying fringe locations of Victoria, show, although the margins between renting and buying reduce considerably the further from the city you pan, it’s still broadly cheaper to rent than buy – especially if the plan is to re-locate within 5 – 7 years.

Perhaps the only ‘true’ representation of suburbs you can profit from purchasing rather than renting would be suburbs in regional & rural locations where a majority of ‘home buyers’ would not necessarily want to ‘settle’ for an extended period, but would perhaps spend a couple of years renting due to work commitments.  Mining towns, for example – where rental prices are inflated due to the severe shortage of property.

This aside,  until the ‘new home’ market, hand in hand with suitably equipped urban planners, start providing an increasing population of first home buyers with feasible options – we’re not going to see a significant return to growth in construction which is traditionally motivated by this sector of the market. 

Buyers want to locate into suburbs that can provide a lifestyle suited to their needs, and whether you think their demands are un-realistic or not – we’re talking about a consumer market, not desperate, homeless, individuals who are prepared to purchase ‘any old thing’ because there’s a ‘free’ “ipad” thrown in for good measure. 

The only shortage of property Australia is currently experiencing, is a shortage of affordable options home buyers actually want to purchase – and you can’t solve this dilemma with a simple ‘improvement in consumer sentiment.’

Catherine Cashmore

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Home ownership? Has Australia’s dream turned into a nightmare?

What kind of future are ‘home buyers’ facing?

On the one hand – increasing the ability of prospective home owners to get a foot hold in the market is admirable. After all, home ownership in Australia, is all but considered a ‘right’ of citizenship. However – to date, the only way governments have done so, is to encourage greater debt levels by way of incentives, lower LVR’s, negative gearing, low interest rates and so forth.  Consequently, even ‘overpriced’ homes have looked tempting to emotionally lead homebuyers who’ve heavily invested their future wealth and income into the principle place of residence. They – along with investors – were more than eager to take advantage of the pre GFC decade long ‘property boom’ stimulated principally by debt. According to Rate City, from a random selection of more than 2000 home loans in mid-2008, more than a quarter had a loan-to-value ratio of 100 per cent – LVR’s now rarely encountered.

However, the above policies that increased funding, without adequate investment in infrastructure to ease supply, have pushed property ownership (despite the health of the economy) out the reach for an increasing number of ‘would be’ homebuyers. We’re now facing a situation where the cost of living and subsequent debt levels against housing are an issue of growing concern.

For market watchers – reading the terrain ahead is somewhat clouded by the ‘emotional’ aspect to property, hence, why so many ‘mis’ forecast the measure of percentile change in their predictions.  The essential need for shelter, along with our creative capacity to make the home ‘a castle,’ pins a far greater emphasis on ‘consumer sentiment.’ Each sale is the result of a carefully negotiated contract between two parties with differing needs and priorities.  In most cases, it’s a long way from being just a simple ‘business’ arrangement and shouldn’t be classed as such.  Furthermore, because each property marketed has its own intrinsic qualities – which are valued differently from buyer to buyer – trying to lump residential housing alongside stocks and shares for example, leads to errors when reading and analysing statistics.

The latest data from Residex has indicated, Australia wide, there’s been a marginal return to growth in the ‘house and land market.’  The news is often jumped upon as a positive sign of ‘recovery.’  However, with overall turnover back at levels not seen since the 1990s, how can we herald it as such?  Residex recorded a marginal improvement in transaction figures, however, not significant enough to prove we’ve turned a corner.  Therefore, the figures feeding into the median are representative of a comparatively small composition of properties selling and most likely stimulated by ‘home buyer’ sentiment.  Broadly speaking, buyers are still taking a back seat, first time buyers are hamstrung by stricter lending conditions, and increased supply isn’t providing feasible or affordable options to ease the consequential stagnation.

As an outsider – looking at Australia’s current environment of low interest rates, broadly dormant house prices, coupled with the ‘on paper’ health of the economy – you’d be forgiven for wondering why overall transaction figures are so low?  As a home buyer however, the increasing cost of living, as well as a general unease about the future of the economy – despite Government and RBA insistence of a prospective ‘lucky country’ outlook – is starting to bite.

Consumer sentiment is further hampered when there’s more circulating disagreement regarding the “boom” or “not so boom” cycle in the resource industry, than there is surrounding residential property movements.  It’s not helping “reassure” Australian buyers or sellers of future market stability or job security.

As if we need further evidence of the above fact, the predominant headline from last week – picked up by every major news outlet – was the significant increase of Australian home owners seeking access to their super to fund outstanding home loans.  There’s been a 25 per cent rise in claims between 2011-2012 totalling $99.38 Million. It’s a worrying statistic.

Meanwhile, the ABS has recorded a 0.1% drop in ‘owner occupier housing finance’ for the month of June and Westpac’s “Consumer Sentiment Survey,” indicates a drop of 2.5 per cent in August.

There’s general disgruntlement with the current Government and as far as the property industry is concerned there remains a healthy standoff between ‘un-erring’ vendor expectation, along with few cashed up buyers with which to negotiate. Consequently, those wanting to upgrade or downsize are finding themselves unable to make a move through lack of buyer activity and as our population increases, this is causing a mismatch of ownership as downsizers hold onto property too big for their needs, and families struggle with an inability to find suitable accommodation in which to upgrade.

The recent census proved the continued downward trend of home ownership figures, which – should it continue – could see 50 per cent of the population renting within a generation. Along with this, the current strain on both available and affordable rental accommodation is locking a significant proportion out of the property market for the foreseeable future, with renters struggling to service increasing yields – up 50 per cent on the last census figures.

Home owners are also under pressure – median mortgage payments as a percentage of median household income are also on the rise.  ABS data indicates a 4.5 per cent increase since 2006 currently sitting 3.7 per cent above the broadly accepted stress level of 30 per cent. To cut to the chase – residential property is too expensive for a growing majority – with the cost of shelter depicting more of a ball and chain than a ‘dream.’

Pundits in the financial and property sphere tend to pump the proposal that ‘all’ we need to spike a return to growth, is a lift in consumer sentiment to enable Australia to get back to its ‘pre’ GFC trajectory. However, when you consider the data above, there are some worrying ‘rumblings’ under the surface which are not going to disappear when the clouds clear.

Whether you see the cup as half full or half empty, will no doubt depend on personal circumstance.  We’re not currently looking at market collapse of 40 per cent or so, as witnessed the USA or parts of Europe, due to relatively stable employment.  According to Finch Ratings, default rates are still low by world standards despite a marginal increase Queensland – up 18 basis points to 1.60 per cent. However, the low numbers transacting on property are a concern and producing figures not dissimilar to countries in more dire straits – countries that have witnessed a 40 per cent drop in values.

Whilst a loss on the balance sheet of property prices would cause pain to the economy, the catch 22 is that high property prices are equally unfavourable – increasing the cost of living and leaving less in the pocket for wealth creating projects to stimulate greater economic recovery.

Australia currently has the world’s highest household debt to annual disposable income at around 150 per cent and despite the movers and shakers in Government telling us its ‘OK” based on our ‘lucky country’ outlook and debatable ‘responsible’ lending practices – you have to wonder what will happen when Australia can no longer shelter itself behind a mining boom?

The RBA are not ignorant of the risks outlined above, the fact that they have chosen to address the subject in detail in this year’s annual conference – ‘Property Markets and Financial Stability’ outlines that lessons reaped from booms and bust cycles in other countries, are bringing the risks associated with our highly leveraged housing market to the forefront.

One of the areas addressed in detail is the housing shortage.  It was noted that cities producing an adequate supply of affordable accommodation in the USA had experienced lower long term inflation in house prices.  The example offered in the study was Atlanta – however you could equally cite Dallas Fort-Worth.

In 1981 both cities were of a similar size and a similar population growth trajectory as Sydney and Melbourne, yet both Dallas and Atlanta provided cheap land on the outskirts of their city boundaries and unlike Australia, developed adequate infrastructure at the same time (train lines, schools, hospitals etc) to entice their growing population.

In Australia, the limited affordable options open to first time buyers have been by way of poor planning policies coupled with a lack of adequate investment in infrastructure. Often, the only way home buyers and investors can be incited to soak up the oversupply of ‘leggo land’ houses or high rise rabbit hutches, is when they’re lured with generous ‘off the plan’ or ‘new home’ incentives. Incentives that a significant number regret taking advantage of, when a few years later they find themselves stuck in ‘nowhere’ land with little capital growth and 3 hour commutes into their place of work.

The debate is both endless and tiring and yet we never seem to move past first post. As always the most venerable to be hit are ‘would be’ buyers and those who reach retirement either renting, or still servicing hefty mortgage repayments.  If we continue on our current path we face some undeniable certainties – certainties an adjustment in interest rates, or ‘talking up’ the economy will not change.

Whilst some maybe satisfied with a life living in rental accommodation rather than opting for ownership, Australia doesn’t have any “long term” rental strategies to provide this security and protect against rising yields. Albeit, undeniably, most would prefer to be outright owners of their own principle place of residence by retirement age.

You can’t solve the dilemma by building new homes first home buyers can’t afford to purchase or which are located in areas not suitably supplied with enough essential amenities to inspire relative demand. Furthermore, according to the Australian Taxation Office, self-managed super funds are now the “largest and fastest-growing segment of the super industry” and corresponding data proves a large proportion of this wealth is invested in established residential property – totalling over $14 Billion.  In light of this, investment policies affecting the housing sector need to come under greater scrutiny, especially as they predominantly encourage activity in the established market rather than promoting regional growth and investment.

Like it or not, a core part of any housing affordability strategy needs to focus on driving down costs in areas prone to inflation due to heated demand via stimulation in the investment or home buyer sector. There’s inevitably going to be a growing need for social housing and therefore this needs to be integrated within the frame work as well as tacking inevitable problems of social residualisation.

Australia once had a dream – a dream for the “right of all Australian people to have access to (land) at fair prices.” However, unless we seriously address the issues above and make serious moves to lower the cost of living and price of housing – that once held dream will become an “un-obtainable nightmare”  – effectively placing a huge burden on government assisted housing and our future ability to prosper and grow.

 

Catherine Cashmore

 

 

Planning, Zoning and More Cock-ups

Forget the house – what about the neighbours?

There’s an old Jewish proverb which simply states; – “Ask about your neighbours, then buy the house.”  It seems sensible enough advice.  After all, even in prestigious zones, neighbours can make life ‘heaven or hell’ depending on how cordial the relationship is.  Yet it seems even with due recognition of the importance of neighbours in daily life – Aussie home buyers spend more time watching the above named television series, than they do investigating a potential property and its neighbourhood surrounds.

A recent survey conducted by St George Bank, suggests little more than an hour is spent inspecting a property prior to a home buyer happily signing on the dotted line. Consequently, over 55 per cent of those surveyed reported experiencing problems once they’d moved in – problems ranging from plumbing complaints to insufficient parking, poor TV reception and unsurprisingly close to the top of the list – noisy neighbours.

To be fair, once a buyer has discovered a property they categorise as being ‘ideal.’ Arranging a lengthy private inspection is not always possible due to work hours and family commitments.  The majority of buyers are often restricted to weekend ‘open for inspection’ times during which the property is decked out in ‘show home’ fashion, hiding the poor paint work or damp patch on the carpet with careful placement of furniture. Hence, why a building inspection is highly advisable even in the acquisition of ‘new’ houses.

But, what about the neighbours – how do you check the calibre of those living next door or within ‘cooee’ down the street?  It’s not an easy task and there’s no full proof answer. However, from personal experience, spending time walking and assessing the local streets outside of work hours should uncover if there’s a ‘yappy’ dog or ‘would be’ drummer residing close by. Knocking on doors, chatting to a resident whilst they’re putting out the bins, asking questions, checking if gardens are well attended and calling council to assess if there are any proposed developments pending, can all assist with risk management.

Of course, once you’re in the house, there’s nothing to stop new ‘less than desirable’ neighbours moving in.  However, if you’ve been careful, and purchased into a neighbourhood predominantly attracting a similar demographic, the chance of a group of ‘party loving’ 20 year olds renting in a family orientated suburb should be reduced.

Another aspect affecting the type of neighbours buyers can adopt is the planning ‘zone’ a residential property falls within.  Purchasers are frequently unaware of the zoning around their property at the time of acquisition.  They often ‘assume’ they’re in a residential zone based on street appeal alone.  However business zones and industrial zones can look just as ‘residential’ in their aspect and under current laws, should council approve, unsuspecting owners can find themselves located next to a McDonalds, factory, or worst still,  an ‘Adult Sex Shop,’ rather than the dilapidated house situated there at time of purchase.

This is one reason banks are reluctant to lend on residential property in a business or industrial zones without a healthier than usual deposit – a matter that oft catches the un-educated buyer off guard if they don’t do their due diligence.  However, all the checks in the world won’t protect a home owner if the ‘movers and shakers’ in local or state Government decide to ‘meddle’ with current zoning laws – or for that matter, change them all together.

The primary purpose of zoning is to prevent over development altering the character of a suburb or interfering detrimentally with residents and businesses residing there. Buy in a heritage protected area for example, and it’s unlikely you’ll end up with a tower block overshadowing the back yard.  However, if you purchase a house situated in a business or ‘capital city’ zone – it’s far more likely a high-rise monstrosity may be constructed next door.

Any change to a property’s zone can have significant consequences on the price and future potential it holds. In Perth for example, large swathes of land have been re-zoned to allow for greater density in major activity centres. This could mean a house sitting on a block of land with the potential for a two-storey seven-metre-high development, could easily become next month’s six-storey unit site! Obviously the affect it has on any area will advantage some and disadvantage others – but at the time of acquisition, none would have been the wiser.

Similar changes have been suggested in Sydney – and the Victorian Government is also revising their zoning guidelines.  Like Perth, the changes have the potential to affect individual property prices, not to mention the lifestyles of those unfortunate enough to draw the short straw.  Neither are the zoning alterations suggested in Melbourne by any means ‘subtle.’  If you’ve ever been to a Melbourne auction and heard it spruiked in the ‘pre amble’ that the property to be sold is in the most desired ‘residential 1’ zoning category – brace yourself!…  Because it’s all about to change.

As a brief rundown, the state government aims to delete the nine existing zones and merge them into five categories.  Residential zone 1, 2 and 3 will become “Residential Growth Zone, General Residential Zone and Neighbourhood Residential Zone” For each the zone, the density restrictions alter.  You can go here to find a rundown of the changes – however, in most instances, planning controls are loser, maximum height restrictions have been removed or increased (with the proviso they can also be exceeded) – and the size of land needed for subdivisions reduced.

Whilst some areas will be protected, don’t be fooled by various articles which claim the changes will increase land values or protect back yards! Even the assertion by Minister Guy that;

“The Victorian Coalition Government’s sweeping reform of planning zones, will return certainty to our suburbs and towns and in particular to councils, residents, and the development industry”

is broadly misleading.

A close reading of the proposed ‘guidelines’ for each category leaves a lot to the imagination as far as ‘set in stone’ height limits, subdivisions, facades, are concerned.  In some cases, it’s not even necessary to specify a ‘future build form.’ The submissions are ‘wishy washy’ with statements such as

higher or lower maximum building height can be set by a council” and

“a permit to exceed any height limit may be granted”

To be fair – the Government are giving the public a ‘right of reply’ to express opinion – however who thinks they’ll listen? They’ve made it abundantly clear in their 2030 plans, the idea is to increase density rather than facilitate outer suburban locations with infrastructure.

Maximum height limits for the CBD have already exceeded ‘reasonable’ levels – with 14,000 apartments due for construction through the course of 2013 alone. However, it’s fair to suggest areas with Heritage significance will still be protected from over development.  So, homebuyers and investors should take heed of this before they lock in a purchase.

And whilst we all understand the need to provide feasible options for a growing population of migrants, you would expect, at the very least, Governments would learn from previous planning mishaps and avoid repeating the errors.  Melbourne’s Docklands – a suburb built out of high rise tower blocks – is widely known as a city lacking soul.  With “the sky’s the limit” height restrictions and overzealous developers, the suburb has struggled to attract any diversity of resident. There are few family homes and apartment sales have been dominated by the investor sector – many of which remain vacant for much of the year.

Improvements have been made since – however with more ‘high-rise’ currently under construction, any improvements will be limited in what they can achieve.  I met a Dockland’s advocate at a recent party I attended.  Whilst discussing future development in the suburb, I asked ‘what about schools?’  ‘Oh! We conduct many school trips” he answered.  However I wasn’t talking about trips – I was talking about primary and secondary schools – the focus of family and community life.  You can build as many parks as you like, however if there’s no one to play on the swings, no children running around playing footy – something’s missing.  The ‘soul’ of any community focuses on the family.

This is why it was disappointing to read this week of another Docklands in the making.  One I highlighted months ago as being a potential disaster. And now, it’s coming to fruition – that of “Fisherman’s Bend.”

Once again Government have taken it upon themselves to alter the zoning to “Capital City Zone” giving developers all but a ‘cart blanch’ guarantee they can capitalise on ‘high-density’ tower blocks maximizing the residential capacity the land has to offer. However, as evidenced by the Docklands – high-rise accommodation does not offer affordable solutions for renters or buyers – or solutions they would necessarily take advantage of even if it did.

In the Docklands development, Selling agents were paid high commissions to flog ‘off the plan’ apartments to unwitting investors.  This usually came with rental guarantees, which once expired, left the purchasers unable to achieve the same return.  Unit growth charts for Docklands read like a day’s trading on the stock exchange, with sharp rises and plummeting dips proving anything but stable capital growth. Averaged out the growth has been little more than 5 per cent per/annum and worst following the GFC – a level currently exceeded by many long term deposit accounts and a dim shadow of what other properties in Melbourne historically achieve.

How many of these apartments are currently sitting vacant is hard to assess, however SQM have the vacancy rate above 11%.  Considering our population growth and previous surge of single-person households, you’d expect these developments to be busting at the seams, however clearly they’re not attracting the level of demand that’s oft been spruiked.

All in all the warning is loud and clear for the homebuyer or investor.  You can’t avoid the planning changes currently underway, however you can minimise risks when purchasing. Take my advice and inspect the neighbourhood before you inspect the house.  Or “love thy neighbour” could present more challenges than you’d expect.

Catherine Cashmore

Reading between the lines

Reading between the lines

Was it the Greek tragedian Sophocles who said “no enemy is worst than bad advice?” If he’d lived in the 21st century, he’d no doubt be aiming his words at media reports from the property or finance industries. He may have followed his words with “no bad advice, is worst than ‘expensive’ bad advice.” Because in both these industries, the consequence of bad advice costs exactly that – a good deal of expense.

It has the power to make or break an individual – the latter it will do quickly, the former it will do slowly – but undoubtedly, a bad mistake made on bad financial or property advice alone is not easily, or painlessly, undone.

Both industries are hard to control and even if the current level of regulation increased, it would be difficult to restrict what can and can’t be published in the media altogether. The best option seems to be by way of education – teaching readers to ‘source that which is hidden’ – or as commonly phrased, ‘read between the lines.’

It starts with a broader understanding of the base motivation lying behind the authorship – although in the age of digital media, ideally it should start in school.  This aside – the reader should question everything, because currently the landscape of ‘hype’ is littered with mis-information.

Like other professionals in the industry, I’m contacted weekly regarding submissions to various property magazines and websites.  Sometimes I’m given the freedom to write on a subject of choice, other times I’m asked to comment on current newsworthy items.  However, I made a personal commitment some time ago to remove the ‘party line’ from my articles and write from an independent viewpoint – a viewpoint not always shared, or welcomed, by those I work with.

This past week, a request came from what many would ‘assume’ to be a respected property investment magazine wanting to ‘beef up’ the content on their website. As with many property outlets, they sent out a mass e-mail requesting material from ‘area specialists’ in return for some free promotion.  Obviously the idea is not just to attract readers but more importantly advertisers – the greater the content, the greater the number of ‘hits’.

In this instance, they wanted information on ‘hotspots’ – where the market’s heading and which areas would outperform and so forth. Obviously if you ask any selling agent to identify a hotspot for the sake of free promotion, they’re going to spruik the suburb they specialise in. The advice is not independent or unbiased, and the word ‘expert’ should come with a large disclaimer attached. If they sell in Doreen, Victoria for example, they’re hardly going to advise a purchase in East St Kilda! However, it’s fair to suggest a broad spectrum of readers will be influenced by the data.

The information carried in local and national newspapers holds the potential to portray a more balanced viewpoint.  However, unless the reader has foundation of understanding about the subject matter at play – mis-conceptions can easily occur.

This, leads me to a brief mention of a report a few days ago in the Herald Sun claiming ‘house prices’ had risen some 125 per cent in Melbourne over the past ten years. Before vendors dance around in glee, it’s important to draw a distinction between the term ‘house prices’ and ‘median values’.

The term ‘house prices,’ suggests every property and every vendor has experienced the windfall, however we know this isn’t the case.  Common sense alone dictates that areas close to city centres and major transport hubs, where the available residential land has been utilised and the population continues to increase, has inevitably underpinned established property prices over the last decade. Therefore, the vendors who purchased carefully a decade ago, would no doubt have attracted healthy growth – growth that could be in excess of 125 per cent in some cases!

However, there are plenty of vendors who wouldn’t have benefitted from a 125 per cent windfall. They may have purchased the first rollout of apartments in Melbourne’s Docklands for example, or ‘on the fringe.’ They may not have taken due care with the type of property, price paid, or buyer demographic in the near vicinity when choosing.  Consequently, it’s important not to buy into the hype that all property – no matter what or where – has experienced post inflationary growth.  It’s simply untrue – property prices rise and fall as they do with any other asset.

Another report – “Property experts blame the GFC for dud forecasts” – demonstrates the foolhardy nature of trusting respected analysts without a good deal of due diligence or risk management.  In this instance, the article points out how previous rather ‘bullish’ forecasts, regarding the outlook for Perth’s growing prospects pre GFC, were a little more than ‘off the mark.’

It’s true, few could have predicted the ‘x factor’ event – but it also highlights how a complex the arena has become and importantly, how wary any investor should be prior to accepting predictive reports – (especially considering eruptions from the international landscape, play an increasing role in consumer sentiment.)

However, it’s not just ‘pre’ GFC reports that get it wrong – a post GFC “off the mark” example can be viewed here…BIS once again, who predicted in a report in 2009 that house prices in Melbourne, Sydney and Adelaide would increase up to 22 per cent over the following 3 years – or here – data providers in 2009 predicting 7.6 per cent growth per annum in Sydney over the next decade.

Granted, we still have a while to go before we can calculate the accuracy contained in some of the above information, however all are based on median house prices which as previously mentioned, have little relevance for individual property prices.

With overall sales turnover still lagging behind that of previous years, any rise in median value is only representative of the particular composition of ‘good’ properties selling.  Buy well, and you may sell well and get an average 7.5 per cent per growth per annum.  One the other hand, purchase into one of the high-rise blocks currently under construction and based on the level of supply alone, you’ll probably get the opposite.

This aside, reading reports on future hotspots is all well and good.  However, they tend to feed the concept that money can be made from property short term.  To do so, would need more than a crystal ball or an investment ‘property millionaire’ e-book. Therefore, it’s important to balance the message with an understanding of the motivation – good or bad – lurking behind the words. This aside – boom markets, (hotspots,) have a habit of ‘correcting’ rather sharply.  The risks are always greater if due diligence isn’t taken initially. Be warned!

I don’t expect anyone to think politicians can be trusted on the ‘face’ of the information they provide.  Even the most innocent of minds will be educated in this regard.  For those living in Geelong Victoria, who read in their local rag – “Home buyers in the Box Seat”  – citing RPData’s assessment that their region had remained ‘flat’ with minimal growth over the past 12 months. Will be none too surprised to hear – when it comes to council rates – property prices are soaring!

According to the latest rate assessments, values in Geelong have increased 10.2 per cent over a two year period.

“The property value increase, a jump of 10.2 per cent over two years, follows an 11.2 per cent increase in values during 2008-10.”

The article – (notably in the same newspaper that convinced readers it was a ‘buyers market’) – quotes a ‘spokesman’ for City Hall stating

“While most householders assume their rates will rise on the back of increases in their property’s value, this is not always the case”

However, before readers get too comfortable, the article goes on to say;

“The average residential rate rise for the City of Greater Geelong this year will be 5.1 per cent.”

So in other words, ‘not always the case’ should more accurately be termed – ‘generally the case’.

In truth, no matter what percentage the increase, once the budget has been assessed and amount to be raised averaged out, if one suburb has experienced a greater perceptible rise in property values compared to a neighbouring suburb in the same municipality – owners may find themselves paying more than the ‘average’ 5.1 per cent rise per property.  The rate valuation is only used as a method to ‘guide’ how councils redistribute increases. Albeit, I think there’s enough independent data indicating flat market prices over the previous two years, to ensure they’ll be plenty of quibbles over the assessments when received.

I said at the beginning of this article ‘common sense’ plays a large part in predicting where values in property will increase or decrease – hence why careful purchases of established property in inner and middle ring suburbs facing consistent solid demand, have thus far been the safest bet for an investment portfolio.

The lessons gleaned from all of the above should ring clear – it’s only through careful researching and an element of self education that you can really buffer against a risky environment. Don’t blindly accept the advice of a ‘property expert’ or ‘journalist,’ any more than you’d trust that of a politician without investigating the reliability of the data they provide or motivation behind the sales pitch.

Be wary of uncertain house-and-land packages

Be wary of uncertain house-and-land packages

By Catherine Cashmore
Tuesday, 07 August 2012

Readers of Property Observer may be well attuned to purchasing property.  I’m sure many have attended numerous free seminars and property shows, read industry websites, commented on property forums and so forth. However, think for a moment about the first-home buyer – the buyer with few assets aside from hard-earned deposit and (in the current atmosphere) work that may not be all that secure over the long term.

With little experience in the property industry, and from my own findings, woeful ignorance regarding the transaction process, they are the ones who need the most protection when purchasing.  A first property is unlikely to be a buyer’s last, therefore it’s essential to have investment as part of the criteria as well as consideration of lifestyle needs.

Governments have taken an active hand in pushing first-home buyers towards the purchase of new house-and-land sales by way of various incentives and handouts to aid increasing supply.

It’s not hard to see where the attraction lies – the advertisements look beautiful and tempting.  Developers also have their own gift spree to encourage sales – sometimes including plasma TVs or in other cases aholiday or car.

But when it comes to property – whether buying established or new – the approach to any advertisement should always be cautionary. They’re designed to show the best aspects of the home, but the information that’s really important is the information you can’t see – most of which is written in black and white on the contract of sale.

The risks are often not highlighted in detail and in many instances, the contract for house-and-land packages are often not available until some level of commitment (application fee) from the home buyer has been received.

Here’s a quick rundown:

  • Imagine a large block of land – perhaps once used as farmland – recently purchased by Mr Smith (owner of a development company). Mr Smith has decided he wants to divide it into lots and sell each as a house-and-land package to potential home buyers. However, he’s not sure if he’s going to have the money to complete the project and he wants to be sure potential home buyers would be prepared to buy into the development before he proceeds.
  • Mr Smith puts together an advertisement, showing the proposed lots, complete with artist’s impressions and floor plans of homes purchasers can choose from. Along come the home buyers, lured in by “generous stamp duty savings” (which are discounted prior to construction or before construction is completed). They’ve seen the artist’s drawings, which perhaps include “quality carpet, tiles, Blanco appliances, double-glazed windows, locks, flyscreens, recycled-water facilities” and so forth.
  • The costs seem low considering the inclusions, so they gingerly choose their design – which can require an application fee – (without yet seeing a contract) – mentally locking themselves into the purchase. Once the contract has been prepared with the desired prospective floor plans and so forth, they sign on the dotted line and look forward eagerly to the date they can move in.
  • Mr Smith now has the ability to get a loan to fund the development and can proceed with the project as planned.

It all sounds like a dream, until you consider the risks involve, because to this point they have purchased simply that – a “dream”. The developer may – or then again, may not – acquire approval for the subdivision and even if he does, once obtained, there’s no guarantee the house will represent the depicted drawing on the advertisement.

Should the council find fault with the developer’s plans, Mr Smith has every right to alter the specifications of the purchaser’s future home (with or without permission) and with a signed contract in place, there’s nothing concrete the purchaser can do to protest.

Imagine for example, the council disagree with the placement of the north-facing window in the downstairs living zone or want to alter the boundaries of the land.  Unless Mr Smith can resolve the issue or draw a compromise with the town planner, the whole project is under threat of demise.  Considering the amount of investment Mr Smith has made in this project, he can’t risk a fussy purchaser withdrawing from a contract based on this alone.  Therefore the contract puts in place “special conditions” to protect the developer – conditions that can’t be altered by the purchaser and lock them in for the duration.

Most contracts will state a time during which the developer will apply for the “plan of subdivision”. However these periods are generally long (sometimes in excess of 18 months), and the developer has the entire period to resolve any disputes, during which the purchaser is tied in.  Should the plan of subdivision not arrive within the stated period, the contract will be rescinded and deposit monies refunded – however the

Any new home looks great at the start of its cycle, however 10 years down the line will reveal whether it was a quality product or equivalent of a factory mass-produced item.  Developers obviously build with a guaranteed seven-year period in mind – and unless you’re familiar with the builders’ work and long-term reputation, don’t expect the property to last without fault for 10 years or more. Furthermore, it’s not unusual for significant defects – sometimes established at construction – to go “unnoticed” until after the specified period expired and age begins to kick in. The time and expense involved in legal battles of this nature is often enough to deter complaint.

When purchasing an established dwelling, it’s possible to make offers subject to a building inspection, however this option is not applicable to new home sales.  Furthermore, if there are any defects at the completion of construction, it’s not necessarily going to be an easy ride getting the issue resolved.  By the time defect has been discovered, the builder may be working on another development therefore typically hard to contact or worse still, he may have suffered bankruptcy in the interim.

Furthermore, it’s important to note that the bank cannot not provide a carte blanche guarantee they will lend against the home until construction has been completed.  Even with pre-approval the final box isn’t ticked until a valuer can inspect the finished product.  During the period of construction – which can easily take in excess of 12 months or more – the market may have fluctuated downwards and therefore there’s a significant risk the valuation could fall short of the contract price.  The purchaser may have to come up with an extra $10,000 or $20,000 to complete the contract of sale or risk losing their deposit all together.

As I specified at the beginning, all house-and-land sales come with risks attached.  This doesn’t mean a purchaser need rule them out all together – however it’s essential to walk in with eyes wide open and minimise the liability involved. A good developer will generally aim to please and complete the contract as promised, however there are no guarantees and the purchaser must allow for this.

Before you buy into the government incentives read the tips below.  You may well decide to stick to the security of real estate you can touch before you buy.

  • If possible, check the builder’s previous developments and get a feel for the quality and finish.
  • Allow for the worst-case scenario.  Should the master-planned community fall through or fail to settle within the specified period, make sure there’s a back-up plan that won’t leave you homeless while searching for a plan B.
  • Read the fine print – get the contract checked – and understand the worst of the risks involved before signing on the dotted line.
  • Try and negotiate a “deposit bond” rather than cash.  Should the developer become insolvent or disappear prior to construction, tracing a cash deposit may be difficult.

Ask lots of questions!  Can you visit the site prior to construction?  Will you be consulted if changes occur to the specified plans?  Where will the deposit be held? (Usually a deposit sits in the real estate agency’s trust account and doesn’t accrue interest; however this isn’t necessarily the case with off plan developments.) Can you exit the contract if the development fails to be completed on time?

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.