You have to question the pure insanity that surrounds Australian real estate

You have to question the pure insanity that surrounds Australian real estate – you have to live here and experience it to truly believe it, because I’d challenge you to find another country where the subject receives the same intense level of pre-occupation.

Firstly, the obsessive and hugely popular renovation shows that populate our screens almost every evening – at peak viewing times – where contestants plot against each other to try and produce a product that will attract a storm of buyers when time comes to ‘flip.’ In this case, I’m talking “The Block.”

Whole episodes are often devoted to mindless discussions as to whether spending an extra few hundred on a 3D television would really reap a benefit. And whilst it may be the deal breaker enabling contestants to win a room ‘reveal’ prize, it certainly won’t make much difference to the end sale price.

Marketing a furnished property intended for owner occupation, or rent has its difficulties – albeit, this is ‘entertainment’ real estate style and judging by the ratings, viewers love it. The first apartment to go online (now followed by others) has been marketed at $1.2 – $1.4 Mil with a Depreciation Schedule of around $1,000,000 over 10 years.

Perhaps my only caution at this stage to potential buyers of ‘The Block’ would be to pull their eyes away from the interior styling and check instead for nearby completed planning approvals – which hold potential to change the landscape, natural light, or views…   Always concentrate on what you can’t change, before you pay attention to the fixtures and fittings you can change. In previous series’, buyers have been tripped up by this very issue.

Then the other week ‘The Living Room’ on channel TEN chipped in with some handy ‘auction advice’ for a couple of first home buyers.

After encouraging them to spend money on a valuation which would not have taken into account any discussion with the agent of the level of buyer interest or vendor expectation – two vital bits of information required when negotiating a property purchase – and clearly without the budget to beat the evident competition surrounding the home, they were given the helpful advice to bid strong from the onset with an “odd” final number.

They lost of course – but never mind eh?  As the program told us – apparently, you have to ‘typically’ fail at 7 auctions (upping your budget along the way) before you graduate to be the lucky purchaser.  Information I wasn’t aware of.

And meanwhile, we’re fed ‘daily’ with house price statistics from R P Data – which could be somewhat relevant if we were monitoring petrol prices – but in the daily index, real estate can ‘boom and bust’ all within a couple of months.

R P Data “ring up agents” to get collect their information, which would be a mammoth task considering most agents are highly unlikely to prioritise the reporting of private treaty sales information as soon as a contract is signed – if at all.

And yet this is what the accuracy of daily index relies upon – prompt agent reporting.  Without it, the results lag until the official ‘settled’ sales data filters through from the government (some 3 months ‘plus’ later) – hence why there is a large ‘pinch of salt’ feeling surrounding their media releases.

Realestate.com.au is another carnivorous operator trying to secure a great proportion of the obsessive property industry pie. As the national number one property website (albeit not in all states) regular rises in advertising costs are all but guaranteed.

Compared to the other portals, REA’s fees are extreme, with a model that now requires agencies to pay a subscription fee plus an additional cost for each and every new listing uploaded – this obviously impacts the smaller and regional agencies fighting to get market share.

Of course, the dollar’s rise further for various feature highlights – which essentially equate to a few frills such as a fancy border surrounding the advertisement which will supposedly stay at the top of the list when searching on a ‘default’ setting – or special ‘emailed’ brochures.

All of the above is typically funded by ‘vendor paid advertising’ and passed on as such by the larger proportion of metropolitan real estate agencies, who recognise the need to run an effective ‘online’ campaign in order to maximise potential demand.

As the old saying goes – ‘you can’t sell a secret!’ However, the anger surrounding the dominance of REA – a company which collects and uses real estate agency data effectively free of charge, has caused outrage in various corners of the industry – and rightly so.

Property advertising is not realestate.com.au’s only inroad into the media landscape.

Their latest innovation is an attempt to promote a ‘twitter’ craze called #propchat – the hash-tag of which was recently run as a ‘paid promotion’ launching it onto the top of the worldwide ‘trending’ table inspiring questions such as

‘what the $%^%$ is #propchat!?!’  – from far off regions.

#propchat has – until now – only been picked up by in any significant proportion by various industry professionals wanting to ‘spruik’ their wares and joins various other social media campaigns such as ‘HOUSENET’ which markets itself as ‘facebook for real estate.’

We’ve had auction tipping models running for some time – such as ‘Property Tycoon’ for which you can ‘guess’ the price of a house or apartment for the grand prize of $1000 for he who gets ‘nearest the pin.’

Louis Christopher at SQM recently bought to light “Centrebet” who have begun taking bets on the direction in property prices are heading, and now  Sportsbet have chimed in giving ‘odds’ on the weekly clearance rates across the capitals. Pure insanity.

It’s somewhat amusing because there’s widespread distrust surrounding reported clearance rates. Firstly – a result listed as ‘sold at auction’ makes no distinction between what sells ‘under the hammer’ with heated competition, or what is negotiated on the same day ‘post auction’ (either from a buyer attending the auction, or a participant making a post auction enquiry.)

The auction reporting guidelines state that anything sold in the ‘non cooling off’ period following, should be listed as ‘sold after.’ Those negotiated before the auction are evidently, listed as ‘sold prior’– but importantly, all of the above counts towards the reported clearance rate causing some angst in real estate circles. This is but one of many reasons we have so many ‘unreported’ results lingering on a Saturday evening.

The broad perception remains that ‘sold at auction’ should be an ‘out in the open’ sale for all to see with all other variables being listed as ‘by negotiation’ – and it’s an important distinction.

Whilst a sale ‘under the hammer’ would typically have a similar buyer who – just missing out – was prepared to pay $1,000 less for the home, a good auctioneer can often get more than a few thousand above the reserve when negotiating with the ‘highest bidder’ post ‘pass in.’

This is important particularly from a valuation perspective; therefore I’m of the opinion that whilst agent reporting can’t be completely relied upon, the clearance rate should be comprised of sales that have been ‘knocked down’ only. And if this were to the case – depending on the current ‘cycle’ we could have clearance rates as low as 30 per cent.

But if we’re really talking insanity the biggest miss conception is that high and rising house prices are somehow ‘good for the economy’ – without which ‘small business’ would be unable to operate – as over the years, reliance on using the house as an equity ‘ATM’ became somewhat of a dangerous ‘card tower’ speculative pre-occupation.

Putting aside for a moment the widespread misunderstanding of how banks work or why prices have inflated as high as they currently remain, the shortage of affordable property in Australia in areas of our country where most need to live in order to make a living – in other words, not set in far off un-facilitated nether lands – can have far reaching impacts.

High prices and restrictive development policies put the squeeze on economic growth as existing infrastructure fails to cope with additional demand – local businesses feel the pain as costs inevitably rise – and workers face restrictions on where they are able to move in order to advance their employment ‘career’ – all of which paint just a small fragment of the problem.

A recent study was conducted in London where residents have been forced out due to ‘shockingly high’ accommodation costs resulting in skills shortages with larger companies such as Vodafone who are finding it hard to source staff.  Considering 50 per cent of prime London real estate – the capital of a debt laden struggling economy – is foreign owned it’s scant surprise.

However, we face similar issues here – low vacancy rates, inflated yields, and reports that students are facing periods of homelessness during their studies are shameful. Not to mention the impact foreign investment has on our shores with recent analysis from Citigroup demonstrating the large impact Chinese immigration is having on Australian property values.

Whilst those who purchased early in the 2000’s have seen their assets ‘boom’ the consequences have forced a social divide as those priced out are forced into areas where schools, transport and local amenities have not been funded to keep up with the flood of lower and middle income households in search of affordable options.

Below is a map from the REIV which illustrates the median house price by suburb, relative to the metro median at the end of 2012 which was recorded at $555,000.

The colours coded with the darkest blue indicate house prices which are more than double the metro median, and orange – house prices more than 25% below the metro median.  The white spaces are areas for which there is insufficient data, They also map very closely to the colours exhibited on recently released ABS data which ranks geographic areas across Australia in terms of their relative socio-economic advantage and disadvantage.  The point is aptly made.

map 2

Source: REIV

map 3

Source: ABS

Realistically, a well developed city, which has policies flexible enough to meet the demands of its home buying demographic, should see prices rise track the rate of inflation with growth in household incomes somewhat influential for those areas in greater demand.

Not the well spruiked figures of 9 per cent + per annum we experienced in some cities prior to the GFC – or figures outpacing both wage growth and inflation.

Across Australia, every city faces its own intrinsic economic challenges for which housing policies need to be flexible enough to adhere, local resident voices need to be heard, and councils need to have the freedom to respond.

However, if the only options we offer first home buyers are candy style incentives in a low interest rate environment which must stay at rock bottom levels in order to support the inflated levels of debt it encourages – then over the longer term – our real estate obsession from which so many feed will become a noose provoking far wider concerns.  And that’s insanity.

Catherine Cashmore

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The aging headwind.

The aging headwind.

There has been plenty of subject matter on our aging population and its clear Australia faces challenges ahead.

Allowing for a few fluctuations – since 1907 to present day, the fertility rate has fallen from around 4 newborns per woman, to 1.88 (a little above the record low of 1.73 in 2001.)  Significantly, this figure is below ‘replacement level’ which is considered to be 2.1 babies per female.

According to the united nations, life expectancy in Australia is ‘joint fourth’ in the world – coming along side Switzerland for the same recorded period (2005-2010) – and from most recent ABS data, a man and woman can be expected to live well into their 80’s with one in five Australians expected to last into their 90s.

It’s worth noting, the proportion of overseas born ‘Australian residents’ has also added significantly to our age weighted demographic with a median age – as of 2010 – of 44.7 years – a figure attributed to the large number of migrants who inundated Australia’s shores as post war ‘boat people’ when the last major call went out to ‘populate or perish.’

The number of older Australians aged 85 years and over has doubled over the past 20 years and is expected to increase as a proportion of the population, to 18 per cent in 2036.

Add to this the stark reality that in 2012, 250,000 Australians reached retirement age with an estimated 5000 reaching the age 65 weekly – and it’s clear Australia’s capacity to fund its population’s needs as the number of working aged individuals decreases, is being severely stretched.

In this respect, when you lift the blanket on unemployment data the trends are concerning and certainly not as good as the headline rate suggests.

Full time job growth is weak and both hours worked along with levels of underutilisation are deteriorating.  As the mining construction boom unwinds, non mining industries underperform, and we pull in our belts with fiscal consolidation, it’s likely we’ll see little change over the months ahead. The short term data is volatile and somewhat unreliable albeit, the long term trend is clear.

In 2009-2010 financial year 26 per cent of the government’s budget was directed towards age related services (health, age related pensions, and aged care) – however, according to treasury projections, this figure’s expected to increase substantially over the next 40 years “pushing the share of spending to almost half.”

 

As a result, each and every policy decision Australia makes in the years ahead will be – or rather should be – influenced by the necessity to fund an aging demographic.

For those currently reaching retirement, it’s hoped most will be able to provide for their own needs through a combination of superannuation, working past the age of 65, and tapping into their assets – the biggest of which is housing.

Some will downsize, some will look towards various financial products, such as a reverse equity loan for example – but a majority will have the good fortune of doing so in a house free of debt.

There’s no doubt baby boomers worked as hard as any modern first time buyer to purchase their principal place of residence.  They made significant sacrifices in a high interest rate environment often working, more than one job to achieve the dream of ownership – and in this respect, it’s never been easy.

However, they were lucky enough to get in at the beginning of the lending boom.

Over the years – financial deregulation, the emergence of duel income households, and the very real realities of our ‘golden decade’ of growth – which essentially gave purchasers a ‘get out of jail free’ card, knowing they could sell into a rising market if the going got tough – provided a layer of protection against loss of equity.

The outer suburbs were some 10km outside of established job and commercial hubs, not the 40km+ we see today – and as the population went through various phases of rapid expansion and different financial products were created, the number of buyers increased and mortgage lenders reaped the benefits.

However, the family home was not the only property acquisition from which this demographic drew benefit.  By 2009-2010 the total value of investment housing owned by our baby boomer generation was 57 per cent – a majority no doubt purchased with the tax advantage of negative gearing.

Baby boomers hold roughly half of Australia’s housing stock – a mix of owner-occupied dwellings and investments.  If Australia was to experience any significant downturn in house prices – or demand, it’s the generations heading toward retirement that would suffer most.

Thus far, population growth has somewhat supported the economy – however, due to woeful planning on both the part of state and federal Governments, we’ve evolved into a country gripped to its capital cities which play host to the highest accommodation prices in the country.

Furthermore, our environment has changed considerably.  From an atmosphere where a job was for life and family units were formed early, to a set of differing cultural conditions with fairly fluid fluctuation between periods of ownership and tenancy as buyers and renters migrate through various stages of their ‘employment’ career.

As a result, first home buyers purchase later in life, marry later in life, start their family later in life, and significantly, tap into their housing equity to fund rising costs of living and lifestyle, earlier in life.

An increasing number of first home buyers are rummaging into mum and dad’s ‘equity’ pot – reducing the retirement income stream of the current middle aged populous, and evidently -as census results project – it’s now expected future generations will reach retirement still paying down this principal debt with superannuation used to fund the difference.  Subsequently, the age at which most folk can easily retire, will extend well into the 70’s.

It’s all very well making the call to ‘populate or perish’ as some of our industry commentators regularly do however, it is notoriously difficult to predict changes in both natural and migrant fluctuations in growth.

In an excellent study by Jessica Brown and Oliver Hartwich entitled “Modelling Australia’s Demographic Future” it was found that increased migration on its own could not provide a viable solution to our aging population – significantly, it’s our falling fertility rates that are the biggest cause for concern.

As the paper points out, the current European Union average is 1.5 children per female – and if we were to match it with the downward trend in fertility rates, under the best case scenario (with continued high migration growth) the median age today – currently 37 years – will rise close to 46 years with the number 80 year olds set to reach around 2 million by 2050.

Furthermore, as mining investment scales down – unless there’s a considerable uptick in other areas of our economy – a scenario which is looking increasingly dire as manufacturing struggles and job losses continue to filter in from in various regions, it’s highly likely we’ll see a drop in net migration which will exacerbate the problem.

All in all – is it doesn’t matter what we do – whether we throw open our boarders (unlikely under current political opinion) or take a sustainable ‘steady as she goes’ rhetoric – which in essence means little, because even with a strict migration policy and a further fall in the birth rate, Australia’s population would still lead to over 29 million bodies by 2050 – we’re heading toward an aging tsunami.

Evidently, this presents significant challenges.  In years when house prices were booming, it followed that the level of consumer spending increased and credit growth was strong.

In a study by Australian Housing and Urban Research institute in 2007 (the height of the boom) it was found for every $100,000 increase in housing wealth, there was a bounce back in consumer consumption of $1000 to $1500 per annum.

It was all going swimmingly whilst the market remained rampant.  However, following the backdrop of GFC, households are saving more – spending less – and a marked proportion of those who purchased at the ‘peak’ of 2010 remain in negative equity.  As it stands, national turnover of sales remains weak.

The reducing number of first home buyers as a percentage of the buying market is significant.  As noted from a recent QBE LMI survey – and certainly shared by my own anecdotal evidence – first home buyers perceive prices ‘too high.’ Their budget is typically around $300,000 which will barely purchase a one bedroom inner city apartment in either Sydney or Melbourne, and is less than the average ‘new’ house price on the fringe ($400,000.)

They also recognise they will need to hold their properties for a longer period of time to advantage from an increase in equity. In other words – it will take longer, before an ‘upgrade’ is possible.

For those looking to downsize, the challenges are also evident.  Retirees don’t generally look at the apartment market when downsizing. Evidence shows most preference low maintenance single level, independent units, close to transport, shops, doctors and hospitals, ideally with space enough to hold the lifetime’s worth of accumulated memories.

However, the majority stock currently being developed consists of high density ‘squeeze as many on the block as possible’ apartments, double story townhouses – or new house and land packages – hence why the tendency to remain in their principal place of residence is strong.

It’s clear the property needs of home buyers must be addressed by urban planners if we’re to free up the market stagnation which will increasingly affect city dwellers as the population expands.

Adequately funding infrastructure for our fringe suburbs to boost the construction sector as well as reducing hefty development overlays which are passed onto the buyer, addressing policies to constrain investor and foreign acquisition into the established sector which does little to increase supply, not to mention the recent trend of land banking vacant blocks which could be subdivided into homes ideally suited to both the downsizer and young family buying demographic – all need addressing.

But the bottom line remains that politicians are not going to be able to control the inevitable – In the future-the dependency ratio (the relationship between the working age and non working age) is projected to be roughly 60 per cent – therefore we need to foster improvements to workforce participation if we stand any chance of offsetting this imbalance.

Demands on the tax payer will be immense, and with one in seven Australians a property investor, and one in ten, negatively geared it remains a key drain on revenue.

It won’t be politically popular, but this – along with other poor tax strategies – should be reviewed if we’re to survive the inevitable.

All in all – we’re playing ‘catch up’ as we head toward our aging headwind.

Catherine Cashmore

Is it ever OK to say it’s not a good time to buy? Quite clearly, “yes!”

Is it ever OK to say it’s not a good time to buy?  Quite clearly, “yes!”

Once again, Melbourne is producing ‘healthy’ results with the clearance rate ‘year to date’ now residing at 70 per cent (up from 68 per cent in April) and the latest REIV house price index posting a 1.4 per cent increase for the month of May.

According to the REIV, this is the eighth consecutive month of ‘house price’ increases, with unit prices also showing a moderate boost – up 0.9 per cent for the month – which is the third consecutive monthly rise.

Not surprisingly, the biggest gains have been recorded in the inner and middle regions of the city – principally, the ‘auction dominated’ terrains – with the outer suburbs remaining stable.

Most sales in Melbourne are conducted private treaty with a rough 80/20 percentage split – 80 per cent being private sales and 20 per cent ‘for sale by auction’ and although as a percentage of total sales, the ‘share’ of auction transactions is down on this time last year, in raw numbers we are marginally ahead – when I last checked, year to date there have been approximately 11,719 auctions thus far, compared to 10,742 for the same time in 2012.

When confidence improves and auction results start to ‘openly’ surpass their reserve, the number of vendors opting to sell using this method increases. As reported by the REIV – by the end of June approximately 3,175 auctions will have been held. Only once in the past decade (2010) have there been more auctions in June, and in the inner and middle ring suburbs there is no perceptible sign of the market weakening, if anything the reverse is occurring.

Evidently, the majority of auctions I watch are selling under the hammer. However, it should be noted I filter the auctions I attend, concentrating primarily on listings which attract a wider buying market due to location and type – albeit, in some instances, those sales are exceeding reserve by as much as 10 per cent, and on occasion more.  As we’ve seen previously, this cannot be sustained over the longer term.

It’s not quite the rampant atmosphere experienced in 2007 during which the ‘lending frenzy’ leading up to the GFC was pushing excessive amounts of easy credit into the market. Prices are still well below their peak and results patchy.

Albeit, whilst the aggregated data shows only moderate gains, – in areas where auction sales predominate (such as Bentleigh, Hawthorn, Glen Iris for example) a number of economic and social factors have combined to push it well and truly into a sellers domain.

The somewhat robust turnaround has produced a point of confusion in recent media articles.  Confidence is still waxing and waning, with the ‘Westpac-Melbourne Institute Index’ down 7 per cent in May to 97.6 – below the ‘critical’ 100 point bench mark – and although a bounce back in June was welcomed, we’re still on a rough equal split between those who think the cup is half full, or empty.

Also, news of job losses have been filtering in over the past few months, initially from Ford and Holden and most recently Target – not to mention some of Victoria’s fruit growing regions following cutbacks by SPC Ardmona.  All of this will produce a drag on Victoria’s employment data over the months to come, with unemployment currently sitting at around 5.6 per cent (in trend terms.)

The recent drop in the cash rate, provided buyers will a little more spending power, however the 70 per cent year to date clearance rate with overall turnover increasing and prices swinging past the reserve, is more to do with the effect public auctions have on buyer confidence than anything else.

I written about the chain reaction this method of sale has on the market as a whole previously. The last time we had an auction rally was back in 2010 during which clearance rates were in the 80’s.  I’m still coming across buyers who, to date, having bought at ‘peak’ under competition, three years later, cannot sell for purchase price.

In other words, regardless of low interest rates and ‘improved affordability,’ their property sits in negative equity with new data from Melbourne Institute’s federally-funded “Household, Income and Labour Dynamics in Australia survey” backing it up. It shows one in every 40 families with a mortgage in 2010 owed the bank more than their home was worth, with senior economist Shane Garrett commenting that negative equity rates were likely to be the same now as in 2010.

Is it ever OK to say it’s not a good time to buy?  Quite clearly, “yes!”

The physiological impact when bidding against competition for an emotional asset has been well documented – and when confidence improves, this method of sale does result in higher prices – prices which would be extremely difficult to negotiate in a private sale scenario during which there would be no undisputed evidence to the ‘leading’ buyer that a competitor is willing to pay more.

Not unlike sports gambling – a well staged auction actively encourages buyers to lose a sense of considered rationality, with a trained auctioneer pushing the ‘players’ to stretch their budgets past their pre-established limit, which when combined with a strong desire to ‘win’ at all costs, can result in a potentially dangerous set of circumstances.

Without adequate knowledge of where we started, taking full advantage of sales data for the duration of the ‘to-date’ 12 month time span, the possibility of overpaying on the back of a short term auction ‘rally’ is ever prevalent and the resulting rise in vendor’s expectation as they see neighbouring properties sell at a higher price, is not quickly corrected.

Furthermore, in some of these key regions stock is dropping – particularity good stock – which is fairly typical of a rising market.  After-all, who wants to sell when the perception remains that a vendor can get ‘more’ if they hold and wait for further gains? Especially as additional rate cuts are still widely anticipated.

Therefore, considering the clear reality that the market shows no current sign of weakening, it’s somewhat of a surprise to find RP Data’s ‘daily index’ for the Month of May posting a -4.4 per cent drop in Melbourne unit prices whilst at the same time, there has been a 3.7 per cent ‘rise’ in house prices for the same period. Overall, R P Data’s recorded monthly drop for Melbourne is -2.1 per cent and in light of the information above, it should be questioned.

It’s not the only surprise to be found in R P Data’s monthly index. Take Canberra for example – according to R P Data, dwellings were up 3.8 per cent for the March quarter – yet just 2 months in to the second quarter they have dropped by – 1.5 per cent.

Hobart’s unit market has all but ‘crashed’ with prices – 8.5 per cent – whilst on the other hand; the housing market has posted a rather ‘healthy’ rise of 3.4 per cent.

Overall, the combined capital city index declined 1.2 per cent over the month of May after falling by 0.5 per cent in April.  In other words, we’re on a downward slope with Rismark’s CEO Ben Skilbeck commenting that it could be “driven by vendors reducing their initial expectations in order to meet buyer offers.”

However, to come to this conclusion, you need to do more than simply theorise on the results as they’re set out on a spread sheet.

I’ve had the advantage of negotiating with vendor’s over the past 6 months, and can quite confidently confirm, there has been no such decline in expectation – unless the property is compromised by location or interior design, most are enjoying a relative windfall in relation to last year’s expectations. And according to SQM’s weekly “vendor sentiment index,” asking prices are – if anything – trending upwards which once again suggests there is demand in the market currently meeting expectation.

I’ve cautioned previously about this short term approach to statistics and I’m by no means alone in doing so. There has been plenty of criticism aimed at R P Data’s daily index for the apparent ‘mis match’ with other market indicators.

It seems the general consensus of opinion revolves around ‘lagging’ results which are collected and shuffled into the index at a later date.  This would make sense in light of the strong gains that were posted in the first quarter, but not immediately evident ‘on the ground’ – and it should be remembered that the ‘daily index’ is not seasonally adjusted, so data can be ‘noisy.’

R P Data have recently claimed they “ring up agents” to get information of private sales, which would be a mammoth task considering most agents are highly unlikely to prioritise the reporting of private treaty sales information as soon as a contract is signed – if at all.  And yet this is what the accuracy of daily index relies upon – prompt agent reporting.  Without it, the results lag until the official ‘settled’ sales data filters through from the government (some 3 months ‘plus’ later.)

With this in mind, the degree of concentration given over to the index should be questioned.  Furthermore, until missing results have been collected, correlated and adjusted for seasonal distortions, it’s clearly not a reliable or timely indicator.

However, it’s fair to suggest the underlying fundamentals of our “to date” ‘market recovery’ are at best – weak. Credit growth has been hobbling along (in part due to the trend to ‘pay down’ debt) and although ABS April data shows the highest monthly uptake of home loans since November 2009, Westpac best summed it up best when they suggested the gains to be ‘underwhelming,’ commenting on the 0.7 per cent decline (excluding refinancing) for owner occupiers, albeit year to date, they are up 11.4 per cent (not a great result in light of the current low interest rate environment.)

Data from the Department of Sustainability & Environment shows more mortgages in Victoria are being discharged than lodged and turnover – although moderately up with 168,029 transfers taking place in the year to May 2013, up from the record low 167,200 transfers in the year to March 2013 –remains 13 per cent below the decade average.

So what’s the fuel pushing both clearance rates and prices past reserve? Well – in a word (or two) – primarily speculation and a rush to invest anywhere that provides a greater return than stashing cash in a long term deposit account.

It’s clear, investors remain the most active demographic, with the value of investor finance commitments up by 1% in April, and 18% over the year – the highest level since January 2008, which would have a beneficial roll over effect for those relying on sales to ‘upgrade’ (which it should be noted, increases spending power without the need to increase borrowing levels.)

In a recent survey conducted by Mortgage Choice of a sample 1000 mortgage holders, 83 per cent (roughly four out of five) voiced consideration to use the equity in their principle place of residence to purchase an investment property – the trend is strong.

With this in mind, you have to wonder how long the current ‘recovery’ in Melbourne (and for that matter some of our other states) will last – especially as questions of ‘over supply’ still hang on the horizon. Or perhaps Steve Keen best summed it up when he termed it a ‘suckers rally?’

All in all let’s face it, as it stands, the market is imbalanced – a proportionally lower percentage of first home buyers, a desperate bid from investors to advantage from short term gains, and a construction industry calling out – somewhat desperately – for another rate cut.

Catherine Cashmore

Musings on a Future plan for Melbourne

Musings on a Future plan for our capital city municipalities.

This week I read with interest Melbourne’s newly released ‘discussion paper’ produced by the City of Melbourne entitled ‘Future Living.’

Once past the ‘holiday brochure’ inspired pictures designed to give the impression that a diverse range of attractive multicultural individuals are happily enjoying life in their rather ‘grand’ looking inner city studio apartments, the ‘vision’ is set forth.

Lord Mayor Robert Doyle opens with a commendable statement;

“As Melbourne continues to evolve and attract more residents, good quality homes will be crucial.”

The phrase ‘good quality’ deserves to be emphasised – as does ‘homes’ – as these are two areas of importance which have arguably been ignored in recent years.

He goes on;

“Our aspiration is for an inner city where housing is affordable, well-designed and meets the diverse needs of our residents. New housing must also be well planned and developed in ways that create safe and welcoming neighbourhoods, close to where people work.”

You’d be hard pushed to argue with the noble intentions stated above.  Despite my many criticisms of Melbourne’s development projects, we remain an enviable ‘walkable’ city in the eyes of those who visit either locally or overseas.

However, it has been clear for some time that Melbourne is undergoing a growth spurt which threatens exceed what both housing and services are able to comfortably deliver. And in response to an ageing population’s needs, the city is under pressure to provide a broad range of additional services to shelter a forecasted increase in the municipality’s population, from a current 100,000 to an estimated 180,000 by 2031.

The paper invites discussion and should be applauded for the detail contained within its chapters.  It addresses issues such as minimum sizes for apartments, needed storage space for an average couple or individual (a big issue for apartment dwellers,) parking facilities for a resident populous unwilling or unable to give up their vehicles. It also makes mention of critical points I have directed at current high-rise projects in previous columns, principally the difference between designing for investors/student renters, and home buyers.

In my opinion, this is an important requirement.  For too long, the ‘squeeze as many on the block as possible’ mantra has dominated our skylines.  I doubt Melbourne’s Lord Mayor has the time or opportunity to visit many of the completed high-rise blocks created to address the much spruiked housing shortage in which quality is often lacking. For want of a better term, much of it is ‘overpriced rubbish.’

I’ve walked through many of the new developments, and from an owner-occupier perspective, unless the purchase is for one of the “luxury” units designed with the professional city worker in mind, the relatively small one and two bedroom apartments featured as “affordable” tend to fall into the investment sector of the market not just because of tight lending restrictions banks impose on first-home buyers for this type of accommodation – rather high owners’ corporation fees set aside to service the lifts and other security features, a lack of natural light, poorly thought out floor plans, and low quality appliances, place the units currently being updated by the rookie renovators on “The Block,” a far more desirable proposition.

Therefore it’s no surprise to find many are sold off plan to overseas buyers who are never required to set foot on the premises.

And as the paper points out, it’s likely we’re going to see ‘more of the same,’ as the new growth will be predominantly apartments, which have already accounted for 93 per cent of the builds in the municipality over the past six years.

With any city plan, it’s important to get the ingredients right, because one of the reasons vacancy rates are so high in many of the already established buildings in the Docklands or Southbank (as an example,) is due to a significant number of buyers who find the current standard of accommodation, neither desirable, nor affordable. Put simply, our consumer market doesn’t want to buy it – or rent it, and therefore the exercise so far, has failed to fulfil its purpose.

Design and raising the standards of our inner city developments to ensure they last decades not years – employing good natural light, adequate private outdoor space, quality assured safety standards (something I have addressed previously,) and the ability to live side by side without fear of waking in the middle of the night to hear the next door neighbour’s television ‘insomniac’ watching activities, is very important.

Various social studies have shown, even without a change in financial status, an upgrade in living standards provided primarily through wise and well thought-out development which in principal, shouldn’t increase the capital cost, is enough to improve the health and wellbeing of residents, lowering the propensity for depression and other related illnesses,

And it’s fair to suggest, we’ll be seeing a greater proportion of renters opting for apartment living not only represented by a falling share of First Home Buyers who have been termed ‘generation rent,’ but also home owners who are finding work related activities require periods of tenancy as excessive stamp duty charges deter any feasibility of a quick ‘profitable’ move. In other words, we also have a growing demographic of ‘generation invest’ – those who own, whilst renting their principle place of residence.

However, at present, no matter how many apartments are built, there is no getting away from the fact, that home owners prefer low density – it’s been shown the elderly overwhelmingly downsize into medium density accommodation thereby avoiding high density developments – in fact latest figures show the proportion of elderly residents living in high density housing is on the decline.  Currently 5.6 per cent of our population reside in high density accommodation, however, only a meagre 4.1 per cent of those aged over 65, and there’s nothing to show a change is underway – if anything, the reverse is the case.

Younger generations in their 20s and 30s have a better propensity towards high density housing and the proportion is increasing; however figures still only peak at around 14 per cent at the age of 27 and the trend across all age groups is marginal, with only 1 in 20 choosing this form of accommodation nationwide (as of 2011.)

This issue isn’t just a symptom of inner city development.  I’ve written previously about the need to establish quality housing for a larger proportion of buyers who will accept townhouse living, but reject high density developments and it is possible to accommodate an equal number of residents in medium density dwellings without building to the skies as movements such as Create Streets in the UK, and Robert Dalziel – the London-based architect for Rational House, who visited nine cities around the world, including Mexico City, Shanghai and Berlin, to examine how to make high-density living agreeable for a broad demographic of home buyers, has shown in his book – commissioned and published the Royal Institute of British Architects: entitled A House in the City — Home Truths in Urban Architecture.

I’d suggest the construction industry would improve two-fold if we placed the same level of intelligence and innovation in Australia’s future design. However, at present, there’s little hope because it’s far more ‘profitable’ to build apartment blocks or multi-story dwellings, aimed at investors and housed by student renters, than it is to increase the supply of new accommodation for our home-buying demographic. And herein lays the problem.

Architectural design – is something that is often missed in the race to develop.  Too often it’s been claimed that planning departments sit in the pockets of developers who are under pressure to cut all possible corners in an effort to maximise profit.

It also needs to be understood, that whilst a push to increase underling supply is top of mind for city planners, developers are currently having tremendous difficulty financing proposed projects – There has been plenty of suggestion that banks won’t lend for a site, unless there is 100% debt cover – and in certain cases even more.

In light of this, developers are pressured to pay vastly inflated commissions to achieve the pre-sale targets set out by the banking system – which as we’re all aware, lacks competition and is limited to just 4 major avenues.

And therefore, even with a fancy research paper such as Melbourne’s ‘Future Living,’ investigating a ‘wish list’ of ‘wants,’ as far as a developer is concerned, if requirements become inflexible, producing an increase in the capital cost thereby resulting in a stagnation of sales for which they are unable to profit, it will have a roll on effect to supply.

There are ways to solve the conundrum – but once again, it means thinking outside the square, attacking the system on a number of fronts (easier access to funding being one area of importance,) and perhaps taking a clue from international markets which are centuries down the line in terms of inner city innovation.

For example, as well as the ‘low density’ frameworks I cited above, there is method employed in Argentina in which architects construct apartment buildings funded directly from the ‘clients’ which rather than being a single developer, are a consortium of home buyers/investors who often end up being the eventual occupiers.  The method employs a “Fideicomiso” legal trust and works well in medium density projects on sites in which larger developers often overlook as being unprofitable – allowing smaller architects a leading edge in this field.

One person at the forefront of the research is Elias Redstone – editor-in-Chief and co founder of the ‘London Architecture Diary,’ – therefore there is plenty of information already available on the popular ‘self build’ model which can potentially help to increase ‘quality’ supply where there is already an existing problem of in-completed projects.

I said above, in Sydney – where standards are arguably better, the market is under supplied due to increased capital cost and a stricter enforcement of regulations, and in Melbourne, the CBD is over supplied with an arguable abundance of low grade ‘rubbish’ – therefore planning successfully for a larger population – fulfilling the wish list of future residents – thereby ensuring developments are sold and remain fully occupied, is not going to happen under the current model of thinking.  We need to explore other avenues.

Catherine Cashmore