House Market Planning Insanity

Two articles which caught my attention last week were Chris Vedelago’s excellent piece on Melbourne’s outer suburban estates where buyers who previously committed to a ‘house and land’ purchase using a ‘holding deposit’ of some $500 – $1000 (or in some cases 5 per cent) were cutting their loses and cancelling projects following an inability to gain finance as a result of the post boom ‘slump’ – an inevitable consequence of short term ‘first home buyer grants’ and incentives.

The other was Roz Hansen’s excellent speech – originally delivered at The Sambell Oration to the Brotherhood of St Laurence”  entitled – “A Tale of Two Melbournes? The Disparities of Place and How to Bridge The Divide” and printed in Property Observer last week.

Chris’s article pointed out the harsh consequence an inevitable ‘rush to market’ induces where foolhardy first home buyer grants are introduced and subsequently scrapped in an attempt to boost new home sales.

 According to the report in which the research was derived from the “specialised urban research organisation” ‘Research4, – ’ developers have had nearly 1800 lots returned this year as plans to build new homes were scrapped.’

 Other data from Research4 indicates that a drop in Melbourne’s land sales accounted for an 83 per cent overall fall in the National number of land transactions from the ‘peak’ of the second quarter 2010 to first quarter of 2012.

On the face of it, the data is shocking, however it’s not surprising – after all, the 2009/10 boom in land sales, was driven wholly by the increased first home owners grant and additional federal ‘boost’ – coupled with a low interest rate environment – which subsequently induced a rush of 7,535 new residents into Melton alone, inflating the median ‘lot price’ by a lofty 60 per cent which – according to ‘Research4’ – made it the “fifth most expensive land market out of 33 submarkets across Australia”

The foolhardy nature of ‘inducing’ so many residents to move into a sparsely facilitated suburbs, lacking in essential infrastructure – and subsequently, ‘abandoning’ them in “never never land” as grants are scrapped causing land prices to fall sharply, seems to be of no consequence to state governments who are busy introducing yet another round of incentives to stimulate (prop up) the construction industry in outer suburbia.

Roz voiced thoughts I have shared in many of my columns for Property Observer – principally the poor planning and failed ‘infrastructure’ promises that equate to municipalities where residents are more likely to suffer health issues such as eating disorders and depression resulting from inadequately integrated and facilitated communities.

As I have previously mentioned, unless we address the core issues behind our new Greenfield estates, recent history will keep repeating itself and the outer suburbs will (for want of a better word) become the relative Ghettos’  of Melbourne town.

 It would be far more sensible to build up already facilitated satellite towns such as Geelong and Ballarat as an example,  and continue to extend our train and public transport amenities, than create ‘new suburbs’ of sprawling Mc Mansions where the trade off of a bigger house is of little consequence once you step outside the front door.

Perhaps Australia wasn’t hit hard enough by the GFC to learn valuable lessons in community innovation and sustainability – concentrating its efforts instead on how to continually prod and poke the housing market under the misguided hope a jump in construction and resurgence of pre GFC booms are one of the ‘economic drivers’ which could rescue the Government’s balance sheets as we enter 2013.

 The HIA on the one hand scream how ‘affordable’ housing is with their housing affordability index showing levels are back to the early 2000’s.  And yet, at the same time inform us that “The RBA must cut interest rates to bolster the chances of a housing recovery in 2013” – is the cash rate the only answer the HIA can give to save a failing construction industry?

What the HIA don’t do, is address how home owners can survive when rates finally rise and the incentives which they advocate ad-infinitum are once again withdrawn? 

Roz mentions that landlocked residents need to turn to “buses, walking and cycling.”  However, in a  recent Study prepared by ‘Adelaide thinkers in residence”  it was noted that in the absence of train lines,  ‘when driving is the only option for travel – then walking and biking are abandoned’ – in other words, they are not preferred modes of transport for our 21 century generation outside of recreational activities.

I mention this in particular regard to outer suburban locations, as I’m aware than in inner metro localities, biking to work can be faster than driving during peak hour traffic  and therefore is a far more viable option.

However for outer suburbia, we need train lines – firstly because people need a ‘fast’ way of commuting to existing work places and inner cities amenities, and secondly, because factories and additional jobs will not up-sticks and move ‘outwards’ if the only option they have to recruit staff is in a local neighbourhood of falling land sales and poor infrastructure facilities.

 Research4 also made comment that “Melbourne’s first-home buyers could soon be priced out of the new homes market unless the State Government returns a $13,000 grant scrapped in June”

They base their research on the stark reality that outside of an incentive fuelled environment –  which gives buyers un-influenced ‘time’ to think about their purchase decisions -a large majority  opt ‘not’ to buy in outer suburbia for profoundly obvious reasons. 

Therefore, re-introducing the grant would serve no other purpose than to bolster the construction industry and should not be ‘dressed up’ under the guise helping first home buyers.

The Victorian Government is currently reducing stamp duty payments for first home buyers in a time tiered system, that will eventually take the level paid to 50 per cent of the price a second home buyer would normally pay. 

It works far better than a grant in as much as there is no restriction on what or where to buy and the intention is to introduce it as a long term measure.  As for grants and outer suburban ‘incentives’ as history attests it will do nothing more than create more ‘boom and bust’ cycles – hurting construction workers and home buyers over the long term, and providing a great example of Einstein’s beautiful definition of Insanity – “doing the same thing over and over again and expecting different results. “

Melbourne’s market in particular is a concern more so because of the unprecedented boom which has lead to a housing market which is clearly overpriced for a growing minority of buyers.  As if to underline the fact, as other states show modest improvements in their median values buoyed on by the RBA’s interest rate drops and mining activity, Melbourne is still sitting firmly in correction mode – and for buyers, thankfully so.

 Even an uplift in transaction levels as we finish the year with a Christmas rush of bumper auction activity hasn’t spurred values with RPData recording a 1 per cent fall in dwelling medians for the month of November and a -2.5 per cent drop for the year to date. 

A lack of first home buyer activity has been noted by a number of players.  Recently Meriton’s Harry Triguboff commented that the reserve bank would need to drop rates more than a quarter or even half a percent to boost spending.  However, although affordability is clearly a problem if anything I’d suggest a severe lack of affordable and desirable property suited to the first home buyer market is far more applicable to the problem at hand. 

Once again it comes down to poor planning policy.  Back in 2011 when Fisherman’s Bend was first proposed, Matthew Guy  (Planning minister for Melbourne) stressed ‘the project would focus on affordable housing’ – however as a number of us pointed out at the time, in order for the suburb to work for the first home buyer market who are the most price sensitive demographic sand have restrictions on the purchase of high rise accommodation, there would need to be a mix of low density housing suited to a range of buying types

The dream that anyone would take notice of this seemingly sensible advice was precisely that, as it’s now revealed Melbourne’s new CBD zoning has all by ensured the area will be dominated by high rise developments and as Kate Shaw, (university of Melbourne fellow in urban geography) pointed out here, the privately owned land that developers have snapped up with skyscraper 30 plus story blocks in mind, will be anything but affordable. 

They will be fitted out to appeal to the predominant market for high rise accommodation – principally the Asian investor market which compared to Aussie home buyers have cash to burn and prefer this type of accommodation on which are no FIRB restrictions on purchase.

 Catherine Cashmore

The Realities of a Tough Housing Market Terrain

The Realities of a Tough Housing Market Terrain

It’s not been the easiest of times for the local high-street real estate agency over the past two years. 

Following a long period during which healthy transaction figures and 70%+ clearance rates were ‘the norm’ – in the Melbourne market at least – the recent sharp downturn in revenue has seen many in the industry struggling to make headway in a highly competitive & progressively difficult atmosphere.

IBISWorld – “Australia’s largest provider of industry-based research” estimates revenue for the real estate agent industry will decrease some 4.3 per cent through 2012-2013. Furthermore, according to their report, over the past five years, industry revenue has fallen by 1.6 per cent and currently stands at an estimated $8.9 Billion – revised downwards from a previous estimate of $9.61Billion.

Although there was a pickup in annual sales turnover in 2009-2010 principally buoyed by various Government stimulus packages such as the ‘first home buyer boost,’ 2011 and 2012 have hit the industry hard – taking the overall number of transactions back to levels not seen since the mid 1990s.  And although the trend is slowly improving as the year draws to an end, it’s still a bleak remnant of that achieved in the few years prior to the GFC.

The job listings promising potential sales agents commissions amounting to and ‘in excess’ of $100,000 per year which attracted so many into the industry whilst the market was bursting with confidence, would seem a distant dream to a number of less experienced employees who have recently left in search of riches elsewhere.

 IBISWorld estimate an annualised drop of -1 per cent in employee numbers as agents, not used to working in a harder market terrain, head for the hills.

 It takes a lot of skill negotiating with a reluctant and unconfident buyer who will only show an interest ‘if the price is right.’ Sales success in the industry is often underestimated by those looking from the outside in who tend to assume agents do little more than stand outside ‘open for inspections’ handing out brochures.

Competition in some suburbs of Melbourne has seen commissions being lowered to ‘flat rate’ figures.  In Victoria it’s not uncommon to find some agents prepared to list a property at 1-1.5 per cent (including or excluding GST) – or signing a general authority to ‘share’ the listing with another agency.  It’s something I happen across at least once or twice a week.  

Although it’s hoped – particularly by the Government, who plan to replace a diminishing mining boom with another property boom – that investor confidence will return during 2013/2014 spurring a new decade of growth, there are no such certainties in a world that is arguably struggling to recover from the brink of economic collapse.

 It may not ‘seem’ as such in Australia – however this was – and is – the continuing reality in many areas of Europe and the USA and we’re not immune.  At the very least, it alters the investor mindset. 

As ‘The Australian Mortgage Report 2013’ by the Global consultancy Deloitte pointed out, growth in Australia’s mortgage lending market is slowing – particularity for the big four – and “property prices will remain either flat or (only) grow in the order of 1–5% into 2013.” 

Future drops in the RBA cash rate are less likely to be passed on as banks struggle to protect existing margins and although I’ve read more bullish reports in regard to property prices of late – as a whole, I expect the above prediction to fall closer to the mark.  We’ve entered a new era ruled by cautionary sentiment and it’s not going to change overnight.  

Other Reports of households taking advantage of lower interest rates to stack more onto their mortgage is also a concern with the OECD estimating our household debt to income ratio currently sits at a lofty 183.7 per cent

We may have population issues and a widely accepted housing shortage, however this doesn’t mean growth in the industry or market prices is a foregone conclusion.  The elastic band of debt only stretches so far – especially when it is hamstrung by a reluctance to borrow through fears of further capital losses.

However, as with any industry, the need to ‘pump’ the market and keep the dollars circulating under the premise that ‘everything’s rosy’ is – as one agent expressed to me – ‘absolutely vital’ – especially in a sector that’s heavily dependent on behavioural economics.  It’s one reason you’ll rarely hear a mortgage broker or industry professional tell you now is ‘not a good time to buy.’  It’s akin to a shop keeper advising his customer to leave their credit card at home – it’s simply not going to happen.

Aside from feeding the media with positive messages, another weapon sales agents have to inspire uplift to the real estate sector and improve overall revenue is by way of marketing initiatives such as broadening their affiliations with off shoots in the industry. 

For example, it’s not unusual to see a brokerage within a high street agency or organisations offering ‘one stop shops’ with a range of services including buyer advocacy, vendor advocacy, finance, renovation and property management all under one roof.

Other more innovative ideas have been by way of real estate ‘apps’ with the Common Wealth bank even developing a ‘property’ mogul “ Investorville”  game, in which you can imagine your way to a multimillion dollar real estate portfolio.

Obviously the idea is to inspire a feeling of confidence that a consumer with the ability to ‘tap’ a screen and buy a fictional listing with monopoly like dollars can navigate the world of property acquisition with as much success as Donald Trump.  I’m doubtful it can translate into markedly higher transaction figures; however, ‘feel good’ motivation is clearly the idea.

Recently a story hit the press of a type of Facebook site for real estate devotees marketed as ‘social media for real estate.’  The idea is to give buyers and sellers a forum to communicate with other like minded people (including real estate professionals) along with the opportunity to list and sell their own properties.  

However, whether Australia’s infamous house market obsession will develop into a ‘viral’ atmosphere of ‘likes’ and ‘favourites’ is debateable.  After-all, the last thing you want when listing a property is buyers discussing between themselves how much it’s worth and the potential ‘downsides’.  No one trusts a price quote – most have a well accepted perception that real estate agent’s ‘play games’ – and any sales patter, no matter how accurate, is seen as ‘spruiking’ the market.  Therefore, I remain somewhat sceptical that social media is the ideal platform for a sales campaign.

However, in a few cases it has been successful. Earlier in the year individual vendors took the lead developing Twitter accounts for their homes – some of which turned out to be incredibly popular.  Agents have tried the same tactic – however it was the vendor’s love and emotional attachment to their property which translated ideally across the internet domain to produce a ‘feel good’ atmosphere for interested buyers.  They were able to create the ‘perception’ of homely bliss, and unlike Facebook, where negative comments are displayed openly on the home page, Twitter conversations are somewhat less obvious.

Any social campaign can only be successful if it manages to personalise an inanimate object, thereby inspiring buyers to ‘fall in love.’  Think ‘Thomas the Tank Engine’ or named number plates on cars for example. It’s the same concept.

 Time management and lack of market experience deters the majority of vendor’s from selling their own homes – and although I don’t see this changing any time soon, vendor marketing can clearly achieve something the all too often ‘despised’ real estate agent – automatically labelled as ‘dodgy and dishonest’ – can’t.  I often wonder what would happen if real estate agents had the same ‘feel good’ reputation they have in Singapore where 8/10 consumers expressed that they were ‘satisfied with the service’ from their local real estate agency.  Perception is such a powerful force in the world of finance – it really is a true demonstration of behavioural economics.

The game of perception is most clearly demonstrated at an auction.  Traditionally, auction sales push median prices higher than those sold by private sale, however this is generally only the case by any significant percentage when two buyers are openly demonstrating their ‘desire’ to purchase in a heated frenzy of testosterone induced activity.

 If you attend an auction where buyers are waiting around for ‘someone else’ to start the ball rolling only choosing to bid when it’s clear the home’s about to pass in – confidence in the worth of that property can fall like a stone.  Should it pass in without a bid, the most common question I get asked is ‘what’s wrong with it’?

It’s one reason agents will opt to sell ‘prior’ to auction if they can negotiate to meet vendor expectation.  If the property fails to sell ‘on the day’ it’s far harder to achieve the vendor’s ‘wish price.’

So whilst the HIA may be spruiking that ““Housing affordability has been improving on the back of steadily growing incomes, falling interest rates, and easing dwelling prices,” and is consequently back at levels ‘not seen since the early 2000’s” – and we’re all busy telling potential purchasers that ‘now’s the time to buy!’ it’s doing little to inspire the consumer who is not motivated by indexes or charts. 

For the purchaser who still ‘feels’ in the midst of a rocky terrain, housing affordability may as well be back at the extremes of 2007 because the plain perception and stark reality prevails, that housing is still ‘unaffordable’ for a growing minority of renters and potential home buyers – and I expect it to remain as such for some time to come.