Dreams, realities, or just a dotted line in the local Melways?

Christmas has come early to Melbourne this year – the Baillieu Government have opened up a Melbourne sack of goodies and granted the promise of a ‘new’ suburb in the wilderness of Werribee ‘East.’  In case you think it’s going to end up like one of those ‘other’ outer suburban zones, lacking the adequate infrastructure to support the 17,000 new residents, don’t worry!  The planning minister Matthew Guy has ‘promised’ 50,000 jobs and around $10 billion worth of investment into providing a “new freeway interchange, residential areas, and industry hubs.’

The idea is to move jobs out of the city – keeping them ‘local’ – and a sterling idea it is.  All agree, we simply can’t keep everything centralised forever.

Families with children are Melbourne’s biggest buying demographic – they need houses (not apartments) gardens, green areas and local schools.  They need community facilities, a local doctor on hand, good public transport systems and nearby shopping centres – and they need it all at an ‘affordable’ price range.  Could Werribee East be an answer I wonder?

The Victorian Government have got a lot on their plate at the moment.  Aside from Werribee East, they’re in the process of developing the new ‘Fisherman’s Bend’ precinct  – our new ‘high rise’ metropolis which Matthew Guy assures will be more successful than the ‘soul-less’ Docklands which apparently is still only ‘half completed.’

The initial ‘rush’ of investors who bought into the Dockland’s development when it was spruiked on the open market some 10 or so years ago, were left  sitting on a pot of negative equity and expired ‘rental guarantees.’  The development still maintains a high vacancy rate (currently 8.3 per cent – SQM) and as a suburb lacking in family community facilities (schools, churches, and so forth) it only attracts a narrow demographic of professional couples and office workers, which is one key reason the location lacks ‘soul.’

The worrying part of the Docklands development, was the way it was initially marketed.

Purchasers bought in buoyed by the promise of a new 220 hectare site made up of;

“luxury waterfront living, cafes, restaurants, a state of the art stadium, a high technology park, and many other attractions”

‘Financial & property advisors’ pocketed healthy fees from developers who paid them to push unwitting local and foreign investors into speedy purchases.

It’s not an uncommon practice – many still work under the guise of giving “independent” property investment advice principally marketing ‘off the plan’ and new units – the key difference being, if you’re not paying for the information – someone else is – usually the developer.  Hence why ASIC are currently ringing the alarm bells over a new rush of property acquisitions as part of Self Managed Super Fund accounts which all but promise to ‘underperform.’

I don’t have to go into the details of why high-rise developments make poor investments – I have written enough in the past to make it abundantly clear.  As the City of Melbourne aptly described on their website back in 2011, most of proposed new blocks are

relatively small one and two bedroom apartments largely targeted at the student market and owned by investors.”

And judging from the high vacancy rate, they are doing little to provide affordable accommodation for the home buying or rental demographic.  However, in Mr Guy’s own words, high rise is apparently good for the city as;

“”Taller buildings … are a symbol of a growing nation, a strong economy, and they do have the ability to define a city,”

Of this there is no doubt – however, as with many tall buildings, the lights may be on, but all too often no one is home.

Back to ‘Werribee East’ and the Government states it will use the revenue from land sales to build the promised infrastructure.

No doubt this will be achieved via hefty development overlays which disproportionally inflate the underlying cost of the land for home buyers.  The success of the plan requires attracting a substantial round of investment into the area initially and if history is the judge, by the time it gets to individual lot sales, it will be done via a range of incentives which will encourage home buyers to relocate buoyed up on promises that read like a holiday brochure of McMansion delights.

There is absolutely nothing wrong with the main ‘thrust’ to the development – designed through a ‘vision’ of residents working close to home with ample accessibility to their local town centre and community services – (thereby avoiding a 2+ hour commute in nose to nose traffic on inadequate road networks for an eight hour slog in Melbourne town. )

Nothing wrong at all…………… except of course it’s all been promised before.

In a report earlier this year issues such as respiratory problems, abuse of alcohol, depression, and various other mental and physical diseases were highlighted as common problems in poorly designed ‘fringe’ housing estates lacking in community facilities – facilities which were often sketched in on the initial ‘master plans’  but failed to achieve the necessary funding to realise their potential.

Currently our outer-suburban new estates are amongst the fastest-growing suburbs in Australia. Areas such as Wyndam City and Whittlesea North in Victoria, along with Ipswich in Queensland, Camden in Sydney, and Wanneroo in Western Australia are just a few of the fringe localities that are all outperforming in the population stakes.

Point Cook, a suburb of Wyndam –  promised to be a “A thriving neighbourhood … just 22 kilometres from Melbourne” with “convenient access to established schools, shopping, recreational facilities and public transport.”

However, fast forward to 2012 and Bill Forrest – director of advocacy with the Wyndham City Council – is now reporting ”They [the state government] have not kept up with schools, they have not kept up with arterial roads, more than 50 per cent of Point Cook is more than 400 metres from a bus stop,”

Surely it would be a better investment to fix one suburb’s infrastructure woes before ‘promising’ the same delights for ‘Werribee East?’

According to reports, ‘Werribee East” will have new ‘bus connections’ but no rail. Why would they need it? – Questions Matthew Guy claiming it will only get congested.  After all, he comments, the idea is for everyone to have ‘local’ jobs – so no need to travel into the city.

It will take years – if not decades – to attract significant investment to achieve the local ‘employment’ dream for 17,000 new residents.

Furthermore – unless you want a ‘gated’ community of residents without the diversification of young professionals who work in the city, a ‘fast train link’ directly to Melbourne Town would be the one ingredient to attract additional demand over night whilst the “local” job plan was evolving.

Furthermore, a train link to Melbourne opens up the freedom to attend football matches, experience inner-city day and ‘night’ life, and ensures outer suburban home buyers remain ‘connected’ to the wider Melbourne community.

Bus doesn’t work – it’s slower than taking the car and not a viable alternative unless it’s got ‘school’ written in front of it.

Unfulfilled “promises” are a frustratingly common feature of politics. You would never get away with it in a business – the concept of which follows the premise of ‘promise less, deliver more.’

No so with our state governments – how many out there possess old Melways editions full of ‘dotted’ lines where proposed train lines and roads had been ‘promised?’

Some of Melbourne’s non-existent train lines were initially ‘mooted’ as far back as the 1890’s – and following numerous feasibility reports which amount to millions of ‘arguably” wasted dollars, we may as well just watch re-runs of ‘Thomas the Tank Engine’ for a little solace.

Possibility the biggest bone of ‘Melbourne’s’ contention is lack of a direct rain link to Tullamarine airport which – if reports in this week’s newspapers are anything to go by – is already planning a $500 million ‘third ‘runway.

However, once again, the proposed ‘east west’ runway has been ‘dotted’ in the Melways for over 10 years and if/when it does get built, passengers will disembark from the 900 km per hour A380 only to be ushered into a queue to catch the local bus into the world’s most liveable city..

Apparently, a direct train link to Tullamarine is currently in the ‘feasibility’ stage, and a proposed train link Melbourne’s Avalon airport is currently seeking a reported $250 million to reach fruition. Add this to the $30 billion required for Fishermans Bend, the $10 billion to ‘complete’ the Docklands, and the $10 billion for our new Western “wilderness” Capital – coupled with Victoria’s current economic outlook which is suffering from a fall in construction and the high Aussie Dollar – and any vision of thriving new neighbourhoods should probably be more correctly termed pipe dreams.

Catherine Cashmore

High-rise accommodation must be done right

High-rise apartment blocks are already a dominant feature of our major capital city skylines.  It’s somewhat inevitable that an increased population will bring with it greater density in inner-city areas and skyscrapers will bear prominence. The recent announcement of the new “super tower” planned for Melbourne’s CBD – the tallest skyscraper in the southern hemisphere – reaffirms this.

Melbourne in particular has undergone a recent boom in unit construction, leading to record levels of supply in this sector of the market.  Most of the accommodation has been sold to foreign investors who have no restrictions when it comes to purchasing off the plan – and without knowledge of Australia’s housing market and our home buyer predominant preference for detached dwellings, or “boutique” apartment buildings, overseas buyers often see high-rises as an attractive investment venture.

From an owner-occupier perspective, unless the purchase is for one of the “luxury” units in a high-rise block, the relatively small one- and two-bedroom apartments featured as “affordable” tend to fall into the investment sector of the market due to tight lending restrictions banks impose on first-home buyers.

In addition, the high owners’ corporation fees set aside to service the lifts and other security features necessary in tall buildings tend to deter a large proportion of owner-occupiers from downsizing into high-rise accommodation rather than smaller apartment blocks or townhouses.

It’s therefore no surprise that much of the accommodation is set aside as serviced apartments or student rentals and as such, offers limited investment potential for capital growth-seeking buyers.

Anyone who follows my column will know I’m not a fan of high-rise accommodation – however, I concede there is a market for it – albeit a somewhat limited market. The restrictive provision of inner-city land supply necessitates we go up rather than out (although this needs to be balanced with an adequate supply of lower-density inner suburban developments to fulfil requirements from families).

However – if we are really to maintain our “liveable” status – particularly in Melbourne (currently holding top spot on most “best/liveable city” surveys) we must get it right.

Planning Minister Matthew Guy is currently responsible for shaping Melbourne town and he certainly hasn’t resisted getting his hands dirty with some pretty hefty reforms.  To be fair, he hasn’t got an easy job – over the next 40 years, Melbourne’s population is set to expand to some 6.4 million – all of whom have to be accommodated.

In his current role as planning minister, it’s going to be nigh on impossible to please everybody. Years of poor policy have already ensured we have sparse facilities to attract significant numbers to “fringe” suburbs – the price of commuting forgoes any benefit gained from paying a lower price for the privilege of more space and accommodation further from the city.  However, the current reforms being debated are set to change Melbourne’s character dramatically – and it should concern every Australian who cares to maintain the unique attraction our cities hold on the world stage.

The current tabled proposal for Melbourne’s new planning laws will cause residential zone 1, 2 and 3 become “residential growth zone, general residential zone and neighbourhood residential zone”. For each suggested zone, the density restrictions alter.  You can go here to find a full 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.

The plans indicate councils will have some degree of discretion over what they choose to allow, however this is debatable considering Port Philip Council was reportedly “furious” with Guy when he recently took over planning control for the Fishermans Bend renewal contract – an area that will soon be dominated with high-rise accommodation reputedly blocking out many residents’ views, which will diminish the value of their units considerably.

It can only be hoped Fishermans Bend will not be a repeat of Docklands – however at this stage, the prospect is not looking positive.

While I can see the dilemma from both sides of the table – and somewhat sympathise with the economic challenges our housing market present to the “powers that be” – I am increasingly frustrated with poor policy that fails to enforce necessary quality requirements on new accommodation, and more importantly fails to protect existing residents who have purchased their units, only to see an immediate loss of equity when supply is increased disproportionally.

It therefore interested me greatly when I listened to Radio National’sBackground Briefing program on the 28th October, which told the woeful story of  the tallest residential apartment block in Australia – the Q1 building situated at Surfers Paradise south-east Queensland, which it seems, does not comply with Australian Fire Safety standards.

You can download the full program on the ABC website – and it’s also worth logging on to see some of the reader comments in relation to the story.

For example – one viewer writes:

“I have carried out approximately 100 mechanical, i.e. stair pressurisation, air-conditioning shut down and fire mode operation inspections, in Queensland. In three years I have found only one building that complied with the Building Fire Safety Regulation.”

There are other comments from readers claiming to have direct experience of the “incompetence” surrounding Queensland Building Authority, which is worrying – especially when you consider Surfers Paradise is awash with high-rise accommodation and currently has over 1,200 units up for sale (including those off the plan).

If there is any suggestion that the design of any residential tower is “unsafe”, it should concern us all.  The ABC report mentions “a growing concern” in the fire protection industry over current standards and quotes technical director of Fire Protection Australia, Matthew Wright, commenting:

“At the end of the day someone needs to check that the design demonstrates compliance before construction commences.”

Clearly in the case of the Q1 tower this was not achieved and we have to ask, how many others have fallen short of the mark?

Roughly 3 million people across Australia (estimated to be around one in eight) live in strata-titled accommodation.  Furthermore, contractors of new multi-storey (high-rise) buildings (anything over three levels) are not required to arrange home warranty insurance in respect of their work.  And when it comes to the much advocated “due diligence” of gaining an independent building inspection report prior to purchase, you can guarantee the inspector engaged to assess an individual unit will not be climbing on the roof, checking for cracks in exterior walls and making sure fire exits adhere to safety requirements.

It’s not just safety that should concern us, it is also design.  The exterior of a residential tower can be viewed from miles in all directions and needs to fit into the overall panoramic view of the city skyline.  Additionally, it’s also essential the accommodation provides a quality of lifestyle that lasts long after the initial shine has worn off and fits in with our environmental responsibility to build “green”. This means incorporating items such as solar power, rooftop gardens and ensuring each unit gets a daily proportion of natural light.

This is a challenge – and not one currently front of mind for developers cashing in on the high-rise craze.  Recently The Age featured an article that demonstrated the level of demand from Asian property developers, all with their sights well and truly fixed on transforming our cities in to Hong Kong-style metropolises.

In the report, Jeff Xu, a young Chinese developer, suggests Melbourne needs to learn the “Asian” approach and “enable high-density housing to bloom”. In this respect, he makes it clear that Docklands (our biggest “underperforming” high-rise suburb) doesn’t come close to the vision holds for the world’s most liveable city!  However, unlike China – where in some areas buildings of more than 30 storeys are completed on average one every 12 days – our population demands are comparatively insignificant.

As the report correctly pointed out, the Chinese buyers who reach our shores with property investment in mind easily outbid Australian developers who struggle to get finance and cannot match the wealth Asian investors currently sport.  Moreover, our current requirements for planning approval pale in comparison to some cities in China, which in order to do as Xu suggests and enable high-rise to “bloom” – demand each building obtains a standard number of hours sunlight in the winter months along with good “air” and/or a good view.

In Melbourne, the suggestion from one developer – which plans to build an apartment block just three metres from its next door high-rise neighbour, thereby causing the balconies opposite to fall into constant shadow – is to incorporate mirrors to reflect sunlight onto the windows.

This requires developers to incorporate it into their initial design and town planners to guarantee it will remain so when neighbouring buildings are constructed.

The developer obviously assumes this is an adequate solution, however, can you imagine how you would feel if you had purchased one of those units, which is set to have its once sunny outlook obscured and natural light beamed down via a leaf-shaped mirror?!

Hours of natural Aussie sunlight, air to breathe, a view of a little more than a neighbouring wall, and most importantly, safety, are standards a home buyer would consider basic when purchasing into a large development. However, when it comes to the nuts and bolts of providing or guaranteeing the above list, we are clearly falling short.

It’s important not to paint every developer that hits our shores in a bad light.  Some actually want to build what Australian’ home buyers wish to purchase – smaller boutique blocks, in which all the above requirements will be taken into account.

If we’re going to protect the “liveability” of our cities while making skyscrapers part of the solution for any proposed population boom, it’s vital we have the correct regulations in place to ensure eagerness from developers – which understandably want to fit as much accommodation as possible on small CBD sites – does not risk undermining the standard expectations of every Australian home buyer.

If we don’t get it right now, years down the line Melbourne and other Aussie capitals risk becoming residential ghost towns – plenty of office foot traffic during the day, but an abundance of poor-quality high-rise apartment blocks, which fail to attract anyone other than short-term renters.

Catherine Cashmore

Is buying really cheaper than renting? Not so fast

RP Data’s Rent vs Buy report flew into my email box this week, and already bold claims are being made across the internet and in print media that it’s currently cheaper to buy in 388 suburbs for those servicing a principal plus interest home loan using a variable rate.

Hurray! I hear you all cry – with the joyous voices marginally overpowered by the stampede of renters’ feet as they rush into their local real estate agency, chequebook in hand.

RP Data claims to be “Australia’s leading property data and analytics company”, and for the most part, I enjoy their market insights, updates, and media releases – all of which provide a valuable service for those of us not privy to direct data collecting software.

However, once in a while, I dearly wish RP Data would spend a little time thinking about the headlines it is creating before jumping in with the bold claims made on this report.

Median values – while a good barometer of the price point the predominant buyer demographic in any one suburb is purchasing – should always be used with caution when assessing if an area is “affordable”. The median price is only the middle number of all properties sold within a single period and therefore not helpful when it comes to assessing individual property prices.

RP Data stratifies its median prices between units and houses – and when producing detailed reports, usually breaks this data down listing other relevant information such as the number of bedrooms and so forth.

However, for the purpose of this report, the median values are simply divided between the two major property types – unit and house – therefore median “unit” value could mean a one-bedroom apartment or semi-detached three-bedroom townhouse. There is no distinction.

In its last report, RP Data pinpointed 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 is pinned together. In the latest report, due to lower rates and flattening prices, more suburbs fall into the bracket they use for assessment.

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% loan-to-value ratio at an initial 5.9% 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. For example, in Victoria’s list, you will find the popular suburb of Abbotsford – located a hop and a skip from Melbourne’s CBD.

Abbotsford is a favoured area for home buyers looking north of the city, so it may surprise readers that the median value is listed as $360,868. There is currently only a small handful of properties listed for sale online in Abbotsford that you could comfortably purchase for the RP Data median value (or less) of $360,868. One of the listings is a small one-bedroom flat (roughly 40 square metres) situated on a main road.

There is nothing wrong with the unit – it would suit a first-home buyer – however probably not on a 90% LVR variable home loan (the formula used by RP Data.) Due to its internal size the lender of choice would probably require a larger deposit – however, we’ll put this to one side and assume otherwise.

The median rent in Abbotsford according to RP Data’s Rent vs Buy report is $475 per week – yet in reality, this is the price you’d expect to pay for a small house in “original condition” – not a one-bedroom apartment!

If you’re a renter currently paying $475 per week for a one-bedroom flat, of course it’s cheaper to buy! Yet for the one-bedder that I used as an example, the rent would be roughly $270 per week – cheaper to buy? Not on your Nelly is it cheaper to buy – in fact it’s far cheaper to rent in Abbotsford than it is to buy.

Let’s take another example –Docklands – Melbourne’s favourite underperforming high-rise metropolis. The median value is listed as $493,185 – the price will buy a standard two-bedroom apartment most likely servicing high owner’s corporation fees due to the high-density construction.

Furthermore, borrowing for high-rise accommodation would likely present problems for a first-home buyer who may encounter lending restrictions for this type of accommodation – especially if borrowing on a 90% LVR. However, once again for the sake of the analysis on this report, we’ll put this to one side.

The median weekly rent is listed as $963 per week – if any renter is paying over $900 per week for a two-bedroom apartment in Docklands I’d suggest they seek help. For roughly $900 per week, it’s possible to rent a fully furnished three-bedroom penthouse with views of the city and beyond! Is it cheaper to rent than buy? No! It’s not!

It may be advantageous for some in the industry to spread the rumours spruiked in the report and encourage buyers to make the move and go see a mortgage broker. Hopefully even those who don’t follow the market closely will be a tad more educated when assessing the analysis.

Rental prices in Australia have risen over 49% over the past five years, and the number of renters is up from 27.2% to 28.7%. Along with this outright ownership is down from 32.6% to 31% and of those figures, 34.5% of 30- to 39-year-olds now live in rented accommodation and clearly struggle to save a deposit while servicing rising rental costs.

Families with children in particular are suffering, recording a decrease in their ownership rates from 79.5% to 77.2%. If it were cheaper to buy than rent, these figures from the ABS census data would be – at best – questionable.

Although Australia may still possess a good proportion of owner-occupiers to renters – enabling some in the industry to close their eyes to distress calls coming from the increasing numbers locked out altogether – both state and federal governments would be foolhardy to ignore the downward trend in ownership and the reducing pool of first-home buyers. Meanwhile, any myth that it’s cheaper to buy rather than rent in some of our most desirable inner-city locations needs to be taken with a degree of mistrust until data can be analysed at a deeper level.

Catherine Cashmore

The housing shortage debate is one that gains regular media traction yet is rarely understood

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Catherine Cashmore