Skyscraper Hubris – Pride Before A Fall

By – Catherine Cashmore

“Bill, how high can you make it so that it won’t fall down?” reportedly asked financier John J. Raskob, as he pulled out a thick pencil from his drawer, and held it up to William F. Lamb, the architect he had employed to design and construct The Empire State Building.

It was the ‘race to the sky’ and it marked the peak of the roaring Twenties. Capturing what is perhaps one of the most exciting periods in New York’s history.

“Never before have such fortunes been made overnight by so many people,” said American journalist and Statesman Edwin LeFevre (1871–1943)

While areas of the economy such as agriculture and farming, were still struggling to gain ground from the post WWI depression, and a large proportion of the population continued to live in relative poverty. Advances in technology, rapid urbanisation and mass advertising accelerating consumer demand, produced an era of such sustained economic prosperity, it led Irving Fischer one of America’s ‘greatest mathematical economists’ to famously conclude that:

“Stock prices have reached what looks like a permanently high plateau.”

“Only the hardiest spoilsports rose to protest that the wild and unchecked speculative fever might be bad for the country.” Wrote historian Paul Sann, in his publication, ‘The Lawless decade.’

“The money lay in stacks in Wall Street, waiting to be picked up. You had to be an awful deadhead not to go get some.”

Land values of course captured the gains, and between 1921 and 1929 lending on real estate increased by 179%, and urban prices more than doubled.

According to research collated by Professor Tom Nicholas and Anna Scherbina at the Harvard Business School in Boston, by 1930 values in Manhattan, including the total value of building plans, contained “only slightly less than 10% of the total for 310 United States cities (Manhattan included) during the same period.”

A staggering figure considering Manhattan at the time, contained only 1.5% of the US population.

Few raised concerns however.

It was believed the Federal Reserve Act, created in 1913 “to furnish an elastic currency” would tame the business cycle and – as the First Chairman of the Federal Reserve Charles S Hamlin put it:

“..relegate to its proper place, the museum of antiquities – the panic generated by distrust in our banking system..”

The National bank runs of the past had been exacerbated because there was ‘no stretch’ in times of crisis, or moderation in the rates of interest.

However, the bulk of lending against real estate over this period was not limited to New York, or to institutions that were members of the Federal Reserve.

Thousands of new banks were setting themselves up in outlying areas and as noted by Elmus Wicker, author of ‘The Banking Panics of the Great Depression

“..(they) were either operated by real estate promoters or exhibited excess enthusiasm to finance a local real estate boom”

It brought with it a period of high inflation, and coupled with speculation in real estate securities, produced an explosion in the value of construction that would not be equalled until the boom and bust era of the late 1980s.

NY construction(Tom Nicholas and Anna Scherbina – Real Estate Prices During the Roaring Twenties and the Great Depression)

By 1925 real estate bond issues accounted for almost one quarter of all the corporate debt supplied – and between 1925 and 1929 alone, a quarter of New York’s financial district was rebuilt and 17,000,000 square feet of new office-space added.

This, prompted the owners of the grand Waldorf-Astoria Hotel at 34th Street and Fifth Avenue to sell.

Arising from a family feud between two competing cousins, the iconic guesthouse had been built at the top of a preceding boom and bust land cycle in the early 1890’s, and as ‘the most luxurious hotel in the world’ stood 17 stories high towering above the surrounding residences.

W&A hotel

By the late 1920s however, the décor had become dated and the social elite had centred themselves much further north.

The owner’s decision to upgrade into the Park Avenue district, and build what was then, ‘the tallest hotel in the world’ allowed John J. Raskob to acquire the site for The Empire State Building for the not so small sum of $16 million.

Raskob needed a further $50 million for construction, which he achieved by way of a $27.5 million dollar mortgage, as well as engaging with a limited number of substantial backers.

“If the amounts seem considerable the backers knew that this was a money maker. The building would be the greatest showcase in the city filled with them.  And tenants would line up to print “Empire State Building” on their letterhead….” wrote Robert A. Slayton author of Empire Statesman: The Rise and Redemption of Al Smith

The location was later criticised for being too far from public transport, but no such concerns were raised at the time.

New York office leases began on May 1st – the sooner the building was completed, the sooner it would bring in an income and notwithstanding, Raskob’s two main competitors also in the race for height supremacy – auto industry giant Walter Chrysler and investment banker George Ohrstrom – had already commenced.

Chrysler had seized his opportunity when gratuitous plans for an opulent office block designed by architect William Van Alen had fallen through due to financing.

He took over the project with clear intentions.

Adjusting the tower’s ascetics to reflect the company’s triumphs, with gargoyles, eagles and corner ornaments made to look like the brand’s 1929 radiator caps. Chrysler instructed the builders to make sure his toilet was ‘the highest in Manhattan’ so he could look down and as one observer put it, “shit on Henry Ford and the rest of the world.”

garg

Around the same time, George Ohrstrom, also determined to set the record, purchased the site that was to become the headquarters of The Bank of Manhattan at 40 Wall St (now the Trump Tower.)

Ohrstrom’s architect was H. Craig Severance, former partner and competitor to Walter Chrysler’s designer, Van Alen – and the bitter rivalry between the two added considerably to the dynamic.

Construction for 40 Wall St start started in May 1929 and no less than one month later, in April of the same year, fearing the competition Chrysler reportedly called his architect in frustration exclaiming:

“Van, you’ve just got to get up and do something. It looks as if we’re not going to be the highest after all. Think up something! Your valves need grinding. There’s a knock in you somewhere. Speed up your carburettor. Go to it!”  Higher: A Historic Race to the Sky and the Making of a City Neal Bascomb

Van Alen subsequently increased the height of the Chrysler tower to 925-feet and added more stories – 72 in total.

Not to be outdone however, Severance added 4 extra floors to his own design, extending the building’s height to 927-feet – only marginally taller than Van Alen’s efforts, but by this stage the steel frame for the Chrysler building had already been completed and in Ohrstrom’s mind, he had already won.

The Bank of Manhattan was finished at record speed, taking just 93 days in total – meeting the May 1st deadline and setting the record for skyscraper construction.

40 wall st

It opened with great celebration – with Ohrstrom boastfully laying claim to the title of “the world’s tallest,” while in blissful ignorance of the final trick Chrysler had yet to pull from his sleeve.

Replacing the original plans of a dome shaped roof, Van Alen enhanced the design with the addition of a 186 foot iconic spire, which was hoisted to the top of the structure in secret and assembled in a mere 90 minutes.

chrysler

This raised the building’s height to 1,046 feet, a total of 77 floors – allowing Chrysler, less than one month later to trump Ohrstrom’s record.

The battle continued long after both blocks were completed, with the consulting architects of 40 Wall Street, Shreve & Lamb, writing a newspaper article claiming that their building contained the highest useable floor and was therefore more deserving of the title.

The Empire State Building however, was to settle the matter.

Hamilton Weber the original rental manager, takes up the story.

“We thought we would be the tallest at 80 stories. Then the Chrysler went higher, so we lifted the Empire State to 85 stories, but only four feet taller than the Chrysler. Raskob was worried that Walter Chrysler would pull a trick – like hiding a rod in the spire and then sticking it up at the last minute” The Empire State Building Book by Jonathan Goldman

The solution to Raskob’s worries was to add what he quaintly termed “a hat!” – marketed as a mooring mast for dirigibles – although never utilised due to the strong winds and updrafts that circulated at the top.

This raised the building’s height to 1,250 feet, easily outstripping both Chrysler’s and Ohrstrom’s efforts, allowing Raskob to scoop the title.

Taking just 13 months to complete, 58 tons of steel, 60 miles of water pipe, 17 million feet of telephone cable and appliances to burn enough electricity to power the New York city of Albany. The Empire State building with 2.1 million square feet of rentable space opened on May 1st 1931 empty – just as the country was entering one of the worst economic depressions in recorded history.

ESB

Dubbed ‘The Empty State Building’ – it did not turn over a profit until 1950 putting Raskob who, in 1929 had penned the famous article ‘Everybody Ought to be Rich‘ by investing in “America’s booming corporate economy,” deep in the red.

The history of this era is a fascinating study.  However as entertaining as the story is, it does not stand in isolation.

From long before the Empire State Building was completed, to the most recent example – the Burj Khalifa in Dubai – mankind’s quest to reach the heavens and demonstrate power through the imposing dominance of boasting ‘the world’s tallest’ structure has – with no notable exception – commenced at the peak of each real estate cycle and opened its doors during the bust.

The pattern is easy to follow:

Improvements in the economy are first reflected in rents, which adjust quicker to market conditions than associated expenses – insurance and utility rates for example – which are subject to contract and therefore typically rise out of step.

This in turn attracts speculative investment, pushing prices upwards beyond the cost of replacement, fuelling a cyclical rise in construction – usually for the purpose of speculation, rather than genuine homebuyer demand.

The steeper land values become, the higher the building must be in order to achieve a profitable return, this in turn increases demand to concentrate both labour and capital around what is usually a centralised core.

There is however a lag in the time it takes for high-density construction to reach the market – usually a number of years – before the extra supply can drive down both rents and values, resulting in the building boom outlasting the boom in prices, and an overhang of vacancies when the fervour dissipates.

Notwithstanding, there are limits to how high you can extend before the whole project becomes unprofitable.

William Mitchell, dean of the School of Architecture and Planning at the Massachusetts Institute of Technology, makes the following point in his 2005 publication ‘Placing Words Symbols, Space, and the City.’

… floor and wind loads, people, water and supplies must be transferred to and from the ground, so the higher you go, the more of the floor area must be occupied by structural supports, elevators and service ducts.  At some point it becomes uneconomical to add additional floors, the diminishing increment of useable floor area, does not justify the additional cost.”

In a subsequent publication he goes one-step further.

“I suspect you would find that going for the title of ‘tallest’ is a pretty good indicator of CEO and corporate hubris. I would look not only at ‘tallest in the world,’ but also more locally—tallest in the nation, the state, or the city. And I’d also watch out for conspicuously tall buildings in locations where the densities and land values do not justify it”  ‘Practical Speculation’ By Victor Niederhoffer and Laurel, Kenner

Mitchell’s warning to look for the “tallest” is not to be taken lightly.

The New York Tribune Building for example, one of the world’s first skyscrapers boasting to be “the highest building on Manhattan Island” – opened in 1874 and coincided with the 1873 financial crisis in both Europe and North America.

The Manhattan Building in Chicago Illinois and the Pulitzer Building in New York, boasting the title of “the world’s tallest” – opened between 1890 and 1891 and coincided with one of the worst economic depressions of that time (particularly in Australia.)

The Singer Building and The Metropolitan Life Insurance Company Tower in New York, boasting the title of “the world’s tallest”  – opened in 1908 and 1909 respectively and coincided with stock market panic of 1907 (the Knickerbocker Crisis.)

The World Trade Centre in New York, boasting the title of “the tallest twin towers in the world” – opened in 1973 and coincided with the 1973-75 economic recession.

The Sears (or Willis) Tower, boasting the title of ’the world’s tallest” opened in May 1973, coinciding once again, with the 1973-75 recession.

The Petronas Towers in Malay – surpassing The World Trade Centre as “the tallest twin towers in the world” – opened its doors to tenants in 1997, coinciding with the Asian financial crisis.

The Taipai 101 in China, the first to exceed half a kilometre, boasting the title of “the world’s tallest” – opened in the early 2000s, coinciding with the ‘Dot.com’ bubble and burst.

And most recently, the Borj Khlifa in Dubai, the current ‘tallest in the world’ -, opened in 2009, coinciding the sub-prime crisis, estimated to be the worst economic disasters to date.

Screen Shot 2014-09-11 at 3.41.05 PM

There are numerous examples, and rarely do these structures go up alone.

As we are seeing currently both here and abroad, the rate of high-rise construction globally, stands at unprecedented levels – funded by low interest rates and a wash of easy credit.

Matthew Guy, Minister for Planning in Victoria, has been a staunch supporter of higher density dwellings, but the risks surrounding a boom on the scale we are witnessing presently, cannot be diminished.

The small one and two bedroom apartments, funded in main by offshore speculation, are poorly designed, lack natural light, do not offer value for money, and lay out the reach of most first home buyers who face tighter lending restrictions for dwellings of this type

Notwithstanding, Prosper Australia’s Speculative Vacancies report for Melbourne in 2013, revealed many of these properties sit empty – up to 22% in the Southbank and docklands area – a figure that could well be higher today, considering the rate of what can only be termed, ‘bubble’ construction.

And to make matters worst, there is growing evidence the approved sites for skyscraper construction are being ‘flipped’ prior to commencement, with new owners reapplying to have height limits extended still further.

Screen Shot 2014-09-11 at 1.14.27 PM

(Developers ‘flipping’ projects for huge profits – The AGE September 1, 2014)

The next ‘world’s tallest’ will be the proposed Azerbaijan Tower in Baku, due for completion in 2019 – and projected to be 1km high.

AT

It coincides nicely with the completion of ‘the tallest’ residential tower in the Southern Hemisphere – Australia 108 in Melbourne – which at 319 metres, will exceed the height of the current record holder – the Eureka Tower – and unless we see changes to current policy – will mark another period of financial instability.

Aus108

Only by removing the accelerants that produce this behaviour – contained in our tax, supply, regulatory and monetary policies – can we start to address the boom and bust cycles that lay us open to economic instability, fuelling the boastful passions of financiers at the expense of the rest of the population.

It is these policies that keep us locked around a centralised core, increasing the cost of land at the margin and resulting in decades of dead weight taxes on every worker in the country being clawed back by way of preferential tax treatment for those that speculate on the rising value of land.

Every citizen in Australia would be richer by a significant margin if we collected instead, the economic rent from land, resources, banking profits, government granted licences and so forth, and used these to fund society’s needs rather than progressively taxing productivity to feed an elevated level of rent seeking behaviour.

But until such a time there is only one moral to this story.

Pride comes before a fall.

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“The Marginal Buyer Of Sydney And Melbourne Real Estate Has Changed”

“The Marginal Buyer Of Sydney And Melbourne Real Estate Has Changed”

Investment bank ‘Credit Suisse’ couldn’t have coined it better when they asserted;

“The marginal buyer of Sydney and Melbourne real estate has changed, as have the drivers of property prices.”

The words are taken from their recent report on international investment into the Australian residential real estate sector, with the intention to highlight potential opportunities for future speculation.  And the statement is correct.

Anyone, who is in the business of buying or selling property, is acutely aware how the push and pull of both supply and demand in our property markets, has been markedly shaped by both a change in the local demographics of our nation, along with international competiveness in recent years.

The roll over influence on values in concentrated regions of our largest capital cities has, in some cases, been significant. And whilst it remains the subject of much angst for those priced out, I have yet to meet a seller who did not welcome this increased competition, or stage some sort of active public protest.

However, heated debate in the main stream media, around what has long been known in the industry, as little more than a ‘tick box’ formality, designed to detract from what remains a largely unaudited system of ‘non resident’ investment in Australian property – residential or otherwise – by the Foreign Investment Review Board, has been going on since 2008.

As property editor, Robert Harley recently pointed out in the AFR;

“…even the ‘experts’ find the FIRB annual report…. tardy, lacking in meaningful detail and hard to reconcile with their own experience… “

And as the fictional character “Chodley Wontok” discovered last year, claims in the foreign policy document that applications are reviewed against the “national interest,” on “a case-by-case” level, do not go so far as a mere passport or visa check!

However, the sheer hysteria around this subject needs to be bought under control.  And if we’re to make sure policies are correctly regulated and work in the national interest as ‘spruiked,’ the blame needs to be carefully targeted to areas of influence – namely, policy

Something the Government has to date, repeatedly failed to do.

A policy disaster.

Following the 2008 crisis, when Kevin Rudd decided to put in place measures to prevent any major deleveraging of household debt, one of these was to openly advertise ‘relaxed’ regulations around the acquisition of residential real estate for temporary residents, companies, and developers selling solely to overseas buyers.

Whilst the wisdom of such a move was debatable, what followed was a truly disastrous state of affairs

Attempts by Walkley Award winning journalist, Chris Vedelago, to obtain accurate data under the freedom of information act, to monitor the level of increased demand being widely asserted by industry advocates – was repeatedly frustrated.

According to the then Assistant Treasurer, Senator Nick Sherry, any effort to establish a greater understanding of the FIRB’s compliance system, was not in the public’s “best interest.”

Instead, the Government – then panicking over the consequential effect to their ratings in the polls – came up with the incredibly smart idea of a ‘dob-in’ hotline.

The hotline was designed to enable worried locals, to report those dubious looking foreign nationals, who were cleverly disguising themselves as local buyers and naughtily ‘bidding up’ neighbourhood prices.

That would put a stop to it! *Thought Kevin*

Unsurprisingly, from the limited number of calls received (although, once again, probably not from those vendor’s who were happily selling their properties in the rapid run up to the market peak of 2010,) most turned out to be Australian citizens and long standing permanent residents.  So, it did little – if anything – to stem the core of concern still prevalent within the community.

It is therefore of little surprise, that anecdotal stories from agents, who maintain official figures, are under reported and rules are being flouted, continue to carry more weight. And a debate, which now walks a fine line between being termed racist or otherwise – continues unabated

What’s going on?

Rising property prices – the product of the plot of land that sits underneath the structure – are unashamedly promoted in most modern economies, as the key driver to boost the privatised wealth of its nation, with the hope the payoff effect will feed other areas of consumption.

They are no longer just ‘national’ affairs, but open to international speculation and investment, of which Australia is by no means immune.

When the Federal Government states in its policy document that it “welcomes foreign investment” which

 “…has helped build Australia’s economy and will continue to enhance the wellbeing of Australians, by supporting economic growth and prosperity..”

You can assume toward the top of that list, is the investment into the land market – residential or otherwise.  And as official figures show, few – if any – applications are ever turned down and real estate captures the majority interest.

The recent recessions that have occurred in other countries as a result of their own residential speculative booms, have merely accentuated these international patterns of investment and migration.

For example, following the GFC, the number of foreign-born workers leaving Britain, rose by nearly 30%, as the Government set about removing 300,000 skilled jobs from the list of positions open to workers from outside the European Union – evidently fearing political backlash from somewhat unsubstantiated claims, that this was significantly ‘harming’ British jobs, and thus not aiding rising unemployment or the economy as a whole.

At the same time, distressed nations opened their doors to opportune investors from around the globe, who were encouraged to take advantage of now uniquely ‘cheap’ real estate markets, in a vein attempt to kick off a ‘recovery’ in their own local terrains.

It was only a few years ago, stories were littering the main stream media highlighting the surge of demand for USA properties, as ‘spruikers’ made benefit of our strong Aussie dollar, to lure local investors to purchase previously owner-occupied foreclosures, and instead, turn them into investor owned speculative rentals.

None of this has assisted the home buying sector in America’s property market.

Ownership rates continue to fall, and local buyers remain priced out.

But the Government cares little – the gains in property are the ‘silver lining’ Obama needs to maintain popularity. And he had no hesitation in boasting as such when he recently stated;

”Today, our housing market is healing!” (Healing!) “Home prices are rising at the fastest pace in 7 years…”

(Faster even than incomes it seems, with first homebuyers at their lowest level since the crisis began.)

Premium localities in the cities of New York and London are openly marketed as ‘safe havens’ for the internationally wealthy.  Isolated from the local economy, as local workers are forced out, and rumours of homes laying vacant for much of year provoke neighbourhood outrage.

It’s now reported, for every minute you spend on the three Underground stops between Earls Court and Sloane Square, property prices rise by £96,647.

However, (as with Australia,) outside of half hearted central bank ‘don’t spend too much’ warnings, there little rush to limit the inflationary rises.

This pattern is always the same.  It’s allowable to let productivity and industry fail whilst small businesses suffer, but woe to the Government who allows the privatised ‘wealth’ fund of its aging population endure any such demise.

Australia’s changing landscape

Australia is internationally marketed as the ‘lucky country,’ an economic star on the world stage, from which we derive much benefit.

Population growth throughout the GFC was barely dented – and like every other country, we tow away the poor, whilst targeting skilled migrants, or those with dollars to invest.

Over the last census period alone, Melbourne’s population expanded by nearly 355,000 new residents, and continues to grow at pace of roughly 2% per year.

Additionally, its population has grown in diversity, with the traditional European migrants of Greece and Italy falling as a proportion, whilst the growing number benefitting our shores now come from both China and India.

(Settlers = skilled and family reunion migrants, along with humanitarian visas and refugees)

Vic migration census period

The same trend is mirrored in NSW – projected to reach 8.4 million by 2060. Migrations to the famous harbour town also come increasingly from both China and India, as demonstrated below.

.nsw migration census period

When, under Julia Gillard, the Government commissioned a ‘White Paper’ on ‘The Asian Century’ designed to;

“…generate a set of general propositions to guide policy development over the long-term..”

The importance and potential magnitude of Asia’s dominance on the world stage was emphasised, by Julia Gillard when in a speech she asserted;

“We are now seeing the most profound rebalancing of global wealth and power in the period since the United States emerged as a major power in the world.”

No Kidding!

Indeed, it would be hard to over-estimate the economic force Asia holds for our local economy.

It will shape the most important social, cultural, business, domestic and foreign policy implications we will face in the decades to come.

By 2025 the Asian region will account for almost half of the world’s output and also be the world’s largest consumer – and if we play our cards right, Australia is best placed to advantage.

It’s not just the 1% of billionaires seeking out safe haven’s abroad, in what’s been termed the “largest and most rapid wealth migrations of our time.” But the rise of China’s ‘Consumer Class’ – ‘middle income’ individuals, discretionary spenders, whose wealth goes largely under-reported in a  “grey economy” of illegal and quasi-legal activities.

If trend continues, in a few years, China will become the world’s richest country, and India won’t be far in its wake.

The number of Asian students studying on our shores is at record highs.

Trade flows, research and business development, education, tourism, and increased levels of migration have benefitted us significantly in recent years – and the potential to capitalise on the productive sectors of our economy remain.

Whilst the Gillard Government’s white paper – now firmly locked into “archive status,” – remains a useful form of reference.  It was widely criticised at the time, for its vague approach as yet ‘another’ study, which like a PHD paper, is good in content, but lacks any hint of direct action.

It claimed that Australian manufacturing was expected to ‘grow,’ with wishy-washy advice on how firms must;

‘”..adapt by anticipating changes in their markets, building the talents of their people and constantly innovating and lifting their productivity”

Claims, which now seem laughable.

We allowed the profits from the ‘once in a century’ mining boom to fall into private hands.

As Sydney Morning Herald’s Economics Editor Ross Griffiths recently clarified in his commentary on Abbott’s efforts to remove the ‘mining tax.’

“There is a lot of ‘unearned’ economic rent associated with the exploitation of limited mineral deposits,” and countries like Australia would be “mugs not to tax much of that rent rather than letting largely foreign companies walk away with most of it.

‘Mugs’ we are.

But what about land?

Asia’s influence is marketed as positive news, however, the one area that receives the most overwhelming negativity, it its influence on our real estate market, precisely because of the some of the issues hinted in the paragraph above.

We have little, if any, understanding of the accumulated wealth being brought into the country, and recent settlers have little experience with the local market, or misleading practices surrounding real estate price quoting.

This lack of transparency and education within the industry itself needs addressing, however, it’s a subject I’ll explore further in another column.

The geographical location of land is fixed and limited in supply. Therefore we can’t all benefit from economic advantage gained from ownership of the best seats in town, without effective taxation of the resource that is.

A correctly administered broad based land value tax (as explained here – reducing taxes on productivity) would not only encourage the ‘good’ utilisation of land, but if handled efficiently, gains could be fed back into the community to assist increased investment into infrastructure and social services

This would further aid both the expansion and development of our cities, with the flow on effect ideally taking the speculative element out of the housing market, and assist in reducing its destructive influence on prices.

This alone, would go a long way to reducing the wealth inequality currently experienced in our big cities.

Presently, we’re doing a great job of building an abundance of cheap, high density, and no so inexpensive apartment blocks, full of small one and two bedroom flats, often no more than 60 square metres inside. Great for student renters – but do little to meet the needs of our biggest residential sector – family buyers with children.

Therefore, the above issues, all need to be tackled from ground up policy reform – significantly on the supply side.

Offshore investment must be solely channelled into creating new supply – and audited to ensure the conditions stated in current laws, are being adhered to.

I’m not holding my breath, but hopefully some of these will be explored in detail and ‘maybe’ go so far as being implemented following the Senate Enquiry later this year.

We can’t – and wouldn’t want to – stop migration.  But we can ensure wealth invested in our established real estate market, is utilised effectively.

Catherine Cashmore

It’s Time Australian’s were allowed to make an Educated Choice – “Questions & Answers.”

It’s Time Australian’s were allowed to make an Educated Choice 

“Questions & Answers.”

Australia – an economic ‘star’ performer…. but are we happier for it?

By any comparative measure, the Australian economy has performed remarkably well over the last two decades.

Strong gains in the labor force throughout the 1990’s, rapid population growth and a surge in the value of key commodity exports through the 2000s.

Resilient wage inflation duly capitalised into rising property prices, by way of a dramatic and accelerated run up of household debt in the lead up to the GFC.  All of which was buffered and prevented from any significant deleveraging, by the Rudd administration in 2008, when he threw sizeable cash handouts to families along with infrastructure investment to avoid plunging Australia into a technical ‘recession.’

From this alone, our economic platform is deserving of the title “The world’s ‘star performer.”

However, whilst we may stand out in the wealth stakes, we’re not a happier nation for it.

Last week Q&A featured a question from a young Australian and recent school leaver which touched on the sensitive subject of depression asking

  • What can the Government do to “fix it?”

Like every other Western nation, Australia has experienced a sharp rise in the number of people suffering depressive illness over the last decade, with the average onset of the disease moving downwards in terms of age, since the 1990’s.

Organisations such as Beyond Blue report that more than one in five Australian’s experienced depression, anxiety, or both, over last past year, and as the gentleman stressed, he was no exception.

The comments that followed were sensitive in nature – focusing primarily on individual treatment and prevention within the health system. And whilst the cause of depression is both complex and varied, the first acknowledgement on what the Government could do ‘collectively,’ came from Clive Palmer;

“We need to have some sort of vision..”  Said Mr. Palmer “Create an environment that makes people realise the world is not as bad as we think it is… if you cut things, if you cut budgets, if you take things from people, you make them more worried about the future, and more uncertain”

This was reiterated by Ged Kearny, President of the Australian Council of Trade Unions;

I get very concerned when I hear about cuts to public healththey’re just another barrier to person, particularly a young person, getting help..”

They are appropriate observations considering our rising population, skewed toward an aging demographic, which by its very nature will necessitate additional funding over the next decade into both health and education.

So, it was somewhat unfortunate, at the same time panellists were discussing cuts, Prime Minister Tony Abbott was giving a speech to the Australian-Canada Economic Leadership Forum in Melbourne, hinting at just this – as summarised bluntly by Christopher Pyne, Minister for Education;

“[The Prime Minister] said that the current growth in education and health expenditure was unsustainable, and that is true.”

What’s Tony Abbott’s ‘vision’ for economic growth?

“You can’t spend money until you’ve earned it! – Or until you have the means to pay it back!”

Was the cautionary opening statement Mr Abbott posed.

It’s a somewhat startling assertion considering it comes from the ‘issuers’ of our monetary supply, offset through taxing those who do have to ‘earn’ dollars before they can ‘spend’ it – whilst our Government ‘earns’ nothing – but is rather elected, and charged, to balance the budget in the best interests of its working population to promote economic growth – for which education and health are vital pillars.

Abbott goes onto say – the “best” way to build a “stronger economy” is for Australia to once again; “Enjoy a surplus!”

Which may lead you – (like me) – to wonder how exactly the average private household will “enjoy” this surplus, considering we have the highest unemployment rate since 2003, along with an increase in those registering as “long term” unemployed, up 13.5% since January 2013, and more part time jobs being created than full time?

In Victoria – where manufacturing industries are concentrated – unemployment is at its worst level since 2002, whilst youth unemployment – which represents the demographic driving the future of our economy – has reached a ‘crisis’ point.

Just over 12% of young people between the ages of 15 and 24 are currently out of work.

Regional localities reflect the worst – 20% in Cairns and Tasmania, 18% to 19% in north Adelaide, 17% in Western Sydney, the Illawarra, parts of Melbourne and regional Victoria – with the trade off being the increased cost of metropolitan accommodation for those “job seeking” in capital cities.

Additionally, the latest “ABS labour price index” records wage growth at its lowest level on record – climbing just below the rate of inflation for the last calendar year – whilst the cost for ‘essentials’ such as health, childcare, utility services, and petrol, in some areas, has reached record highs.

Considering our household debt to disposable income has barely deleveraged since property prices hit their peak in 2010 – the very talk of reaching a surplus within ‘3 years’ – particularly by way of cuts to essential services, or even the increased number relying on job seekers allowance – is foolhardy,

When the government tightens its belt, the private sector picks up the slack – therefore  “repairing the [government] budget” with the claim it’s putting Australia “back on the right track” – is not putting the fate of ‘Australian’s’ on the ‘right track.

Austerity, at a time of rising unemployment, does not lead to “productive” economic growth.  And from depression and unemployment statistics alone, it seems Australian’s are not ‘enjoying’ a return to surplus.

They’re are working longer, retiring later and in the face of rising unemployment, the only ‘vision’ the working population seemingly have to hold to, is more of the same.

So what are we left with?

After 30 years of demise, the manufacturing industry is in the depths of recession.

Retail is losing the battle to the “World Wide Web,” and residential construction is still struggling to pick up the cyclical slack created by the mining sector.

Abbotts “infrastructure promise” to speed up the flow of money from Canberra into the states, to upgrade road and rail projects, is positive news and sorely needed, however, remember where those gains will be most acutely felt.

Without effective land value taxation, the investment creates the ‘future speculative hotspots,’ where the improvements will be capitalised into rising land values, rather than fed back into servicing, maintaining, and further extending essential community facilities.

Land is an absolute necessity to all commercial and personal needs, therefore as land values rise; it will affect a continued strain on business and productivity, and once again, we’re stimulating the cost of irreplaceable fixed assets, rather than the employment sectors needed to underpin a longer trajectory of economic growth.

But this is what Australia is remarkably good at – creating a booming land market.  We’re right up there with the world’s best performers.

The housing bubble success story…

Following a rapid 12-month cyclical upswing of housing inflation, residential real estate prices are once again reaching their 2010 peak.

Outside of normal ‘corrective’ downturns, we’re continually lectured by an overcrowded mass of vested industry commentary, our housing market can ‘never fail’ – or certainly not to the extent suggested by personalities such as ‘Harry Dent,’ or respected Australian economist Professor Steve Keen, who are quickly bundled into the same category and labelled as nothing more than irresponsible ‘fear mongers’ for implying as such.

Our commentators waste no time offering their own economic analysis of ‘property cycles,’ which unfortunately missed any prediction of the subprime crisis – but that’s ‘OK’ because the Australian market didn’t ‘crash,’  – they didn’t predict a ‘crash,’ – credibility restored.

Albeit, housing affordability for both renters and homebuyers, has rarely escaped headline news since before the last election, and whilst to a limited extent we seemed to have progressed past the point in which rising prices are marketed as overwhelming ‘positive’ news, it certainly hasn’t destroyed the myth that they’re somehow ‘good’ for the long term health of our nation, as owners leverage off the so-called ‘wealth’ effect – relying on the unearned equity in their housing investments to fund both lifestyle and commercial activities

Australia’s biggest employer – aged related care (the health and social Assistance industries) – derives a large percentage of its funding from people selling their housing, which their children additionally hope to inherit to assist their own journey onto the ‘ladder’ – and the perpetual fear of any downturn in established values has painted the government into a corner.

Is the housing market on Rocky Roots?

Yet, fear mongering or not, we know from the above statistics alone, the estimated $5 trillion worth of wealth contained in the house and land market is sitting on rocky roots.

It’s no longer supported by the boom of productive activity and wage growth that assisted in generating the inflation during the 1990s and 2000s – producing the ‘strong’ monopolised banking sector which capitalised on the mortgage market as a population of buyers and speculative investors rapidly expanded.

Outside of future prospected wage increases, significant gains are only achievable by manipulating demand side stimulants, tapping into foreign investment, (currently driving the inner city apartment and development market,) whilst limiting effective and feasible ‘cheap’ supply – which the Government has successfully achieved to date, by way of policies such as negative gearing, first home buyer grants, and a truly diabolical record of supply side reform.

As mentioned in one of the most recent submissions to the Senate’s Housing affordability enquiry, by Prosper Australia, “It took forty years from 1950 to 1990 for housing prices to double, but only fifteen years between 1996 and 2010 to double again.” And whilst most will agree growth may be more ‘subdued’ as we continue, it’s imperative we highlight the destructive nature of this system, which isn’t assisting making us a ‘happy’ nation, and for a moment, stand back and take stock.

Ask yourself a Question..

Just for the moment, forget the raft of industry commentary and the prospected ‘dates’ for the next ‘crash’ predicted by Harry Dent – and ask yourself a question;

  • What will the next decade bring?

If through manipulation alone, Australia manages to achieve ‘more of the same’ and keep the housing boat afloat;

  • What will the consequential effect be on small business and industry?
  • Who will benefit most?
  • Will it be your Children who have to save even longer to get on the ladder
  • Or their Children who will need to save longer still?

Remember – if we were to have a crash, it’s not the wealthy that will suffer – it’s ordinary working families who are then left in a position where they’re unable to borrow to take advantage of lower prices.

Is the future, long-term wealth inequality?

The ‘boom/bust’ land cycle, better known as the ‘property clock’ – which we’re told by industry advocates, is the ‘best’ way to build the individual ‘wealth’ of its nation, is a system which derives its very existence from a long drawn out process, which ultimately accentuates inequality, always marginalizing those at the bottom of the income stream, whilst advantaging those at the top – as I explained here.

Nowhere is the divide between rich and poor more evident than the speculative land market, – which results in a slow process of social polarisation which in Australia, has given us a segregated schooling system where social disadvantage in education is stronger here than any other comparable western nation.

Whilst inequality in wages and business activity can be equalised through competitive activity, land – by its very nature – is ‘fixed’ in supply, and therefore the only ‘cure’ to rising prices in a soft economic environment, is the produce of ‘additional’ supply.

Meeting that demand by extending ‘upwards’ is a challenge. Land values in the inner suburbs are already high – and although it can assist the needs of apartment dwellers, investors, student renters, and to a degree, downsizers – family buyers (our largest home buying demographic) have no option but to head to the fringe if it’s affordability they’re after.

But, due to ineffective tax and supply policy, the Fringe suburbs, which capture the bulk of our city’s population growth, do not have the funding needed to facilitate ‘urban sprawl’ – hence the process of social polarisation.

They have the highest concentration of mental illness – such as obesity and depression – and prices are further manipulated by larger developers who ‘drip feed’ their stock onto the market, of which the Government currently has no control.

Not politically ‘sellable?’

From the time a child learns to enjoy a family game of ‘Monopoly,’ Australians are nurtured on a system that teaches the key to building wealth, is through the leverage of ‘capital growth’ in land values, therefore, none of this is easy to change.

To do so, requires complete structural reform of land value taxation and housing supply policy – therefore we’re told it’s not politically ‘sellable.’

The most solid prediction of the year? 

The most most solid prediction of 2014 to date, is the one that will result from the Senate’s housing affordability enquiry.

After the numerous submissions have been tabled and discussed. The question I stressed in my own submission will remain unanswered;

  • “Will the Government allow land values to drop?”

Assuming this is correct, then Prime Minister Tony Abbott has a care of duty to explain to the public directly, how the ‘propping’ up of the current status quo, will continue to erode the opportunity of future generations.

He must explain how the Government’s failure to provide effective land value taxation and supply side reform to lower land prices, will lock them into longer mortgages, a life times worth of double income debt, push more into ‘long term tenancy,’ and additionally, point out how the current system enhances poor education and health outcomes, social polarisation, and places a strain on core productivity.

Your choice!

Ultimately the choice lay with the voting population, and in a country that holds to the motto of  ‘a fair go’ – I expect clearly evidencing the consequences of our current housing market, will be a lot less ‘sellable’ than educating how we can establish a sustainable approach which – if handled correctly reducing taxes on productivity – will ultimately make each and every one of us better off.

It’s time we allowed Australians to make an educated choice.

Catherine Cashmore

 

 

 

The Tale of One Auction – and its impact on the ‘Welfare State’

The Tale of One Auction – and its impact on the ‘Welfare State’

A few weeks ago, I attended an auction in a popular suburb of Melbourne’s inner east

The home was an attractive four-bedroom townhouse on roughly 260 square metres of land, and initially quoted at $700,000 ‘plus’ – very typical of the type of accommodation featured in the area.

As is commonly the case in Melbourne, the quote was ‘stepped up’ in the final week of the campaign to ‘$750,000 ‘plus’ – albeit, the listing agent informed me more than once he had $800,000 “covered” and a mere blink at recent comparable sales, indicated a price well in excess of $850,000, or even $900,000, considering the level of demand and lack of comparable listings being marketed.

This was confirmed during the auction, when a neighbour I’d casually interacted with, leaned over, and in little more than a whisper, told me “I know the vendor – she wants $1 Million” and considering the property didn’t reach its reserve until $900,000, I suspect she was correct.

With competition from nine bidders, the property sold in front of a crowd of 100 or so for $1,011,000, and the agent, delighted with the result, wasted no time swooping in on the ones who missed out, to share information of ‘similar’ listings currently for sale.

Needless to say, it’s a story that drives many Australian’s irate, with the focus inevitably aimed at the misleading way in which it was quoted – which is an issue I’ll explore further in another column. However, this isn’t what should drive our sense of injustice to kick into gear.

The Undeserving Poor..

Debate is currently rife in Australia surrounding the ‘relentless’ costs of our welfare system, with social services minister Kevin Andrews heralding it ‘unsustainable,’ whilst looking for ways the government can cut entitlements to the ‘undeserving’ poor.

The review has concentrated primarily on disability payments, and Newstart ‘job seekers’ allowance, which keeps the ‘income-less’ in relative poverty.

“Work is the best form of welfare!” was the statement Mr Andrews used, and considering the uptick in unemployment, with industries such as Ford, Alcoa, Qantas, SPC, Sensis, Telstra, Shell and Toyota, moving jobs and business off shore. A fall in the participation rate – due in part, to an asset rich, income poor retiring population – and a rise in part time and casual positions over that of full time, concerns are warranted.

In the 2013-14 Budget, the Government correctly stated that, “Australians value a fair society” and underlined its commitment to a tax system that provides a strong and stable funding stream for important public services such as “health, education and, Disability Care” whilst “rewarding innovation and productivity,” for economic growth.  And on an international scale, our tax-transfer system is perceived as ‘comparatively’ generous.

According to the OECD, Australia’s ‘Robin Hood’ economy redistributes more to the poorest 5% of the population than any other member country, whilst the much-criticised policies of ‘middle class welfare’ are seemingly the lowest.

We’re deemed to have the most “unique” and “target efficient” social security benefits in the OECD, apparently yielding “significant gains” to both the economy and society, and when compared to the USA which has the highest income inequality amongst the ‘rich’ nations by some significant degree, we look comparatively ‘healthy.’

Yet, despite its many reforms, and varying degrees of success, shaped in part by demographic changes (more women entering the labour force for example,) and a small reduction in high end salaries during the GFC – widening disparities between incomes have continued unabated since the mid 1990s, and as the labour market struggles, there’s nothing to suggest the trend will stop.

Mind the Gap..

There are all sorts of reasons to narrow the gap between the rich and poor, and prevent an ever-widening chasm – significantly, the way that income is invested into the economy and the roll over effect to society.

Income inequality and economic growth can only work hand in hand, when individuals are enabled to strive for greater heights from a foundation of equal opportunity – the basis of which is education.

As economist and inequality expert Andrew Leigh commented late last year;

“Education is the greatest force that we’ve developed, not only for boosting productivity, but also for making Australia more equal” ensuring “the circumstances in which you’re born don’t determine the circumstances in which you die.”

Yet our schooling system is becoming increasingly segregated. The correlation between poor performance and social disadvantage are stronger here than any other comparable western nation.  If our tax and transfer system were meant to offset this, you’d have to assess its been an abject failure.

Why?

Australia has enjoyed a period of economic prosperity, which over the last 23 years has been nothing short of remarkable.  According to Credit Suisse ‘Annual Global Wealth Report,’ we’re the “richest people in the world,” with a median wealth ‘each’ of US $219,500.

Over the past year alone, Australia added an estimated 21,000 millionaires to the population. Yet, contrary to what the textbook version of economic theory would have you believe – household savings, reaped from an economy surfing the wave of a commodity boom, have not flowed into business investment, or nurtured productivity and education standards in the young.

As noted in the Credit Suisse assessment, our ‘riches’ are “heavily skewed towards real assets” a manifestation of “high urban real estate prices” acquired and generated through the destructive cyclical impacts of a property market, which, as I emphasised last week, sees the gains from income growth and investment, flow directly back to the land.

Both homeowner and speculator..

Home ownership is seen as one of the great pillars of our collective culture.  It’s assessed to improve health and school performance in children, activate social engagement as well as reduce local crime.

However, the way we go about promoting ownership, is to nurture a system that teaches rising land values – outside of any productive activity such as renovation or effective utilisation of the resource – is due reward for having saved hard and got onto the ‘ladder’ in the first place.

Our tax system is skewed toward ownership, with policies, that according to last year’s Grattan report, provides potential benefits to homeowners worth $36 billion a year, or $6,100 on average per ‘household’ through items such as capital gains and pensioner eligibility test exemptions. Investors (or those choosing to rent and invest) reap $7 billion a year, or $4,500 on average ‘each,’ by way of negative gearing rules and the capital gains discount introduced in 1999. Whilst renters, one in four households, see no gain – unless their income is low enough to require welfare assistance.

In effect, we’re an economy that relies on ever-rising values of irreplaceable fixed assets, to fund the individual wealth of its nation – and this is only achievable if policies are in place to ensure values remain high and climbing, and debt levels ‘affordable.’

Capital growth..

Speculation and investment are two sides of the same coin. When we assess a good business model for example, we speculate that the productive activity that flows from that investment, will build on a growing base of demand, and through competition and diversity, go onto produce a profit.

Yet the ‘Capital Growth’ in land values does not occur by way of some abject force of nature. Everything that makes our cities ‘liveable’ comes from the collective ‘investment’ of our taxpayer dollars – which we ‘grudgingly’ pay in the first place, to provide the social amenities needed to form the base from which we can all progress.

This would include, community services such as, transport, parks, roads, trains, trams, medical facilities, and most importantly, schools.

Yet, it is also these facilities that produce the needed demand for real estate that pushes values upwards.  Not through the efforts of the individual homeowner, but the productive efforts of the taxpayer – renter, homeowner and investor alike.

Housing on its own is worth nothing without the infrastructure that surrounds it and rising land values are ‘reward’ for nothing other than unwontedly buying into a system that – under the current structure – promotes inequality and forces social polarisation.

Unlike our business model above, we can’t ‘make’ more land in a particular location to fulfil the demand produced from the facilities our tax system both funds and maintains.  Therefore effective utilisation of the resource is vital.

However, the speculative process alone, along with the added impact of a tax system that impedes turnover by way of stamp duty at one end, and capital gains at the other, simply feeds a process of hording.

This is because most advantage best from investment into housing through the process of “buy and hold” – leveraging the ‘equity’ to produce needed funds, rather than selling. A system that drives underutilisation and ‘land banking.’

But land is fixed in location; therefore we must always ‘hop’ over it to find the next predicted ‘hot spot’ to raise our families, until this too becomes out of reach through the process described above – like a cruel game of musical chairs.

Back to the beginning. 

Let’s go back to the case study I cited at the start of this article.  The reason the four-bedroom townhouse attracted such strong demand in the first place, is because it’s located in a top government school zone.

Only high-income earners can afford to live in this zone, and no doubt they feel – through their income tax contributions alone – they pay their fair share toward facilitating the opportunity for their children to obtain that higher education. As the OECD said, our tax and transfer system is high progressive – the “rich” pay more.  Or do they?

Allowing for stamp duty, the new owner who purchased the townhouse would have paid $1,066,605 yet despite two years of effectively ‘stagnant’ growth in 2011/2012, the median price in the suburb has escalated close to 60% from $850,000 in December 2009, to $1,355,000, therefore they probably assess it a ‘worthy’ investment.

As for those who arrived early in the process, to paraphrase what one homeowner relayed to me some time back – she has earned more from the ‘capital growth’ of her home over the past 10 years or so, than she has in earnings.

Outside of a ‘crash’ or the demise of the education facilities provided, there is nothing to suggest prices in this school zone will drop. From the tight zoning regulations alone, and rising population of immigrants and local buyers looking to advance their children’s education, the very ingredients to attract a consist source of buyer demand are set in place – and rents will rise accordingly.

The taxpayer continues to subsidise the school, whilst the gains are capitalised in rising land values, which flow directly to the individual homeowner not the school or community, keeping values high and placing further pressure on the public purse to fund additional services, whilst underfunded schools, in the over populated ‘fringe’ suburbs, start to produce an English style education ‘class divide.

Under such a system, we are not subsidising the ‘poor,’ we are ‘paying’ the wealthy.  Yet, it’s clear, if we’re to navigate the structural changes ahead and keep unemployment low, whilst at the same time, reduce the projected burden on the ‘welfare state,’ our economy is reliant on maintaining a highly skilled work force, and for this to occur, an elevated level of tertiary education and business investment is vital.

A better model of ‘Welfare..’

Notwithstanding, the correct way to fund local schools would be via broad based and effectively administered land value taxation, which in its purest form – as advocated by the Classical Economist, Henry George – would result in a single tax on the unimproved value of land to replace all other taxes, which hamper productivity – significantly income tax.

George’s ideas won favour amongst many, including the great economist and author of “Capitalism and Freedom” Milton Friedman as well as other influential figures including Winston Churchill, Adam Smith, and more recently, Chief economics commentator at the ‘Financial Times’ Martin Wolf, and author and economist Fred Harrison – aalthough, notwithstanding, a single tax would be unlikely to hold water in current political circles.

The Henry tax Review commissioned by the Government under Kevin Rudd in 2008 concluded that “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases” proposing that stamp duty (which is an inconsistent and unequitable source of revenue) be replaced by a broad based land tax, levied on a per-square-metre and per land holding basis, rather than retaining present land tax arrangements.

Whilst arguments over school funding will likely continue, centred in the political battle over funding of the suggested Gonski reforms. Unless we narrow the gap in education, we’ll never narrow the broadening gap in income, and consequently, the growing burden on our welfare state.

Therefore – when times comes that the ‘chatter’ around affordability, finally evolves into ‘real’ action – a broad based LVT should form an important part of both the debate, and solution.

Catherine Cashmore

Regular journalist, blogger, advocate, policy thinker, and well know media commentator for all things property. www.catherinecashmore.com.au, @ccashmore_buyer.

 

Australia Day traditionally flags the end of the real estate ‘vacation’ period – but what of the road ahead…. ?

Australia Day traditionally flags the end of the real estate ‘vacation’ period – but what of the road ahead…. ?

Australia Day traditionally flags the end of the real estate ‘vacation’ period with the long weekend being the last chance most agents have to take a breather before the auctions begin, and weekly clearance rates once again come under intense scrutiny.

Predictions for the remainder of the year are generally undivided. Most conclude the upward trajectory to continue – with particular focus on some of our largest capital cities, Sydney, Melbourne and Perth (with the first and last already past their previous peaks in non-inflationary terms.)

Whilst the pace of growth will differ for each capital with a correction expected in 2015, it’s a conclusion I generally agree with – despite the talk of a sooner than expected rise in rates.

The momentum that has built up throughout 2013 has come primarily from investors, driven in large by local speculation.

In Sydney, where city supply has been hampered by stringent planning requirements, allowing larger developers with a greater financial capacity to hold the upper hand, – the shortage of stock to cater to the needs of a market share of over 50% investors, has resulted in a spike in prices which has diverged considerably from other states, and continues to drive the herd mentality.

Louis Christopher, managing director of ‘SQM Research,’ suggests Sydney will have its strongest start to the year in more than 15 years, and even assuming the prediction is too bullish, it’s unlikely to be far from the mark.

The extra boom of apartment supply will assist in cooling demand and boosting the number of rental dwellings, but it will take more than one interest rate hike before we see the evidence translate into lower median values, hence why the run will last the duration.

Whether you celebrate or commiserate news of a continued increase in house prices will obviously depend on circumstance, – with investors benefitting most. However, the higher entry cost will continue to impede first time buyers and low-income earners, and with no immediate solution by way of a structural reform to housing policy, the debate won’t move far from headlines.

I made clear in my column last week, why we have an affordability problem and how that translates across the different demographics, and see little advantage detailing the evidence once again, which to any reasonable mind should be overwhelmingly obvious.

In our most populous capital cities, house prices have gone from three times median income to nine times, and the impact on low-income families – in particular those renting, or teetering on the edge of ownership due to divorce or job loss – is particularly disturbing. In Melbourne alone, from 1991 to 2011, metropolitan housing CPI rose by 50%, compared to 188% for rents across the LGA.

The swell of concern coming from the ground up is the best chance we have to push significant reform forward, and therefore it’s encouraging to see results from a recent Ipos poll, conclude that most Australian’s disagree that rising prices are a ‘good thing.’

Notwithstanding, a huge portion of private debt for the appropriation of business and commerce is secured against residential real estate. It’s Australia’s largest domestic asset class with an estimated aggregated value of over $4 trillion, pinned to a banking sector, which has the highest exposure to residential mortgages in the world.

From homeowners counting on their principle place of residence to fund retirement, to Governments chasing the popular vote.  The sensitivity to maintain high prices is evident not only in the NIMBY style practices that protest at all attempts to either increase density, or assist development, but also in the inability politician’s have to move ahead with structural reform to housing policy.

Consequently, Governments tend to treat affordability issues reactively rather than proactively.  Words always mean more than the actions, demand side policies are favoured, and when supply is released, it’s done in such a way that it feeds a monopolist culture – designed to maximise profit over the delivery of land at ‘affordable’ prices.

To illustrate the point – economics ‘101’ suggests the most effective way to reduce prices is to simply increas supply, and in Melbourne, planning minister Matthew Guy was joyful last week, in announcing the city has “decades worth of land” more than “400,000 potential house lots in growth areas” of which 5 new precinct structure plans have been approved for development (amounting to 19,000 ‘potential’ bocks,) and a “potential” 180,000 apartment blocks (more than enough keep all our off-shore investors happy.) Clearly – we’ve got supply in spades!

Furthermore, broadly speaking, population growth in the outer suburbs of Greater Melbourne – predominantly in the newer greenfield developments to the west, north and south-east – continues to be faster, and larger, than anywhere else in the greater Melbourne districts – so demand in theory, should not be lacking.

But what Mr Guy fails to mention, is, in a five-year period from 2006 to 2010, the median land price in outer growth area suburbs jumped from $136,000 to $212,750, a difference of $76,750, according to Oliver Hume Real Estate Group, and with the typical starting price for a house and land package on a compact 450sqm block of land, now transacting for a little over $400,000 – where is this cheap supply?

Of course, it all comes down to the development process. As soon as the urban boundary was implemented speculation began; existing landowners were able demand a premium for land now potentially available for residential purposes. Of those who decided to cash in, hectares were duly auctioned off to the highest bidder – resulting in a massive inflationary boom in values,

Precinct structure plans must be finalised before construction can commence – a process of which takes 2 to 3 years.

Funds for the provision of infrastructure – arterial roads, kindergartens, child health centres and so forth, are passed onto the buyer (initially the developer, who simply factors it into the final cost.)

However, there is no timetable for the construction of this infrastructure. Councils can wait years for the funds to arrive because they are usually only payable upon subdivision, and notably land within PSPs can be held by landowners, who have little incentive to bring it to market unless it’s financially beneficial to do so. The result is homeowners pay for infrastructure, which they may never receive.

Any areas of land a developer unwittingly acquires which is subject to ‘biodiversity conservation’ must be set aside.  Ten precent of their land must be donated for ‘community open space.’ Add to this GST, along with sales and marketing, costs – and you begin to get the idea of why supply does not immediately equate to lower prices.

Developers with a desire to maximise profits, time their releases carefully. A process over which the government has no control – in other words, the state has auctioned away any chance of a plentiful supply of cheap fringe dwellings – and in light of the evidence, Mr Guy is unable to claim otherwise.

Meanwhile, whilst inner city development may assist renters, to what extent is debatable.  Of the new supply constructed, most is high-density, and there is strong anecdotal evidence from agents that off shore Asian buyers are driving the apartment pre-sale market, with rumors of random Melbourne auctions conducted in Mandarin.

Investors seem undeterred by the higher vacancy rates in Melbourne, which have hovered around 3% for the past 12 months – and we can see from work undertaken by Philip Soos at ‘Prosper Australia’ last year, that a percentage of newer units are allowed to sit vacant for much of the year – unclear whether they are being used for speculation, or as temporary vacation homes.

Building approvals data for apartments do not indicate commencement – the process of approval, to release (off plan pre-sales,) and finally completion, takes a number of years.

Charter Keck Cramer track each project from start to finish – and using the data as a forecasting tool, estimated back in July 2013 that 39,155 apartments will be added to the stock in Melbourne during the three year period of 2013 to 2015 (not including those for which subsequent planning approval has been granted.)

To maximise yield and meet financial requirements, most apartments are small one and two bedroom dwellings (no more than 70sqm in size.) Unsurprisingly, they offer little attraction to the vast majority of local homebuyers – being far more apt to meet the needs of student renters.

All in all, it’s an appalling state of affairs.

Conclusion.

Australia is now entering its 23rd year of continuous GDP growth – the history of which is outlined briefly in HSBC’s recently released global research paper “still in second gear.”  And in light of the above, it should come as no surprise that, land is always the eventual beneficiary from the wealth of a burgeoning economy.

As productivity increases, jobs are created, the population grows, infrastructure is built, areas gentrify, land values increase, and owners benefit. The uplift in values finances additional development and so the speculative process continues.

From the trough of 1996 to the peak in 2010 land values have roughly doubled as a percentage of GDP – and the policies we have in place simply fuel the cycle.

There is no secret to why this should occur – in countries that have promoted home ownership both a means of ‘saving’ for retirement and valuable asset to leverage against to accumulate additional assets, along with tax strategies, and inelastic supply side policies that have encouraged speculation in rising land values (with both the monopoly and restriction of the resource stagnating effective and affordable supply) – the eventual consequence is always the same.

Until any sharp ‘correction’ is experienced (and eventually it will be,) the advantage lay with those who hold the appreciating assets above those who don’t – particularly if acquisition was early on in the cycle, as suburbs initially gentrified.

However, whilst gains over the period wax and wane spurred on by low rates or intermittent grants, the party can only continue whilst there is consistent demand at the entry level – hence why so much attention is focused on mortgage ‘serviceability’ rates, rather than the overall level of ‘affordability’ by way of calculating the gross amount borrowed.

It is possible to create a stable housing market that doesn’t subsist on ever rising prices, however, it can only be achieved by significant tax reform moving toward a broad based land tax, as was advocated in the Henry Tax Review – coupled with structural changes to the way we manage supply.

Without such reform, the social cost to our country and welfare system as a whole, will only worsen.

Catherine Cashmore

 

The debate over whether housing is, or isn’t ‘affordable’ continues…

I’m know I’m not alone in feeling an immense amount of frustration at the circular debate amongst commentators in the mainstream media, that surrounds our first homebuyer demographic, and the question of ‘affordability.’

Last week, the November 2013 housing finance data was released showing continued strong demand in the mortgage market, with owner-occupier commitments 15.3% higher than they were a year ago – their highest level since December 2009.

Unsurprisingly, demand from investors continues to increase, rising 1.5% in November, and up by 35% over the course of the year – the highest level on record – whilst on the other hand, first homebuyers remain at record lows, with a recorded market share of just 12.3%.

Whichever side of the coin you sit, “first homebuyers” like “housing bubbles” make a good headline, and therefore, instead of productive advocacy into improving the housing market so it’s equitable for all – we’re left once again battling a ‘Looney Tunes’ debate over whether housing is, or isn’t ‘affordable.’

Denalists

For those in denial all sorts of excuses are found – the most common of which is the accusation that first home buyers are just ‘spoilt and picky’ – or as was sent to me in email last week by a fellow contributor on “property Observer” – “you just have to save hard and start with a flat – isn’t that how it’s always been?

Well to some extent ‘yes’ – when there’s a budget, compromises need to be made. But how it’s always been? “No.” It’s not how it’s always been.

  • Whilst in the late 1990’s a typical first homebuyer’s budget would have secured a modest family home, in a reasonably facilitated suburb, for 3 times median income. Today you’d be hard pushed to find accommodation on the fringes of our capital cities for a similar expense.
  • Thirty years ago the land component of a house and land package represented 20% of the total cost – today it is more like 60%.
  • Forty years ago, housing policy ensured land was ‘readily available at fair prices,’ with commonwealth funding provided for essential infrastructure. Today land prices have soared; unduly inflated by constrictive urban zoning policy, with infrastructure prices, loaded onto the upfront cost.

Furthermore, a CIE study commissioned by the HIA, demonstrated how imposed taxes on developments, when added together, come to 39% of the marketed house and land price.

By the time you add “necessary” ‘energy and safety standards,’ coupled with the cost of labour on top of already inflated land values, developers find it increasingly difficult to provide ‘affordable’ accommodation whilst still making a profit.

Glenn Stephens, Governor of the RBA, summed it up best in 2011, when, he addressed a Parliamentary Committee and exclaimed how he could “not understand why a country as big as Australia seemingly had a shortage of land” and could therefore not provide ‘cheap’ housing.

Notwithstanding, ‘we don’t’ have a shortage of land – we have poor housing policy driven by vested interests to keep inner city land prices high.  I cannot find any other reasonable explanation.

Asking first home buyers to purchase into a market where, capital city house prices have been artificially inflated, from three times median income to nine times, should not leave us scratching our heads wondering why they don’t feel ‘OK” about it. It’s perfectly understandable.

Who is a first homebuyer?

According to the ABS, the average age of a first homebuyer is between “31-33 years,” and due to high entry costs, “partnering often precedes home purchase” (the majority of which already have children.)

Therefore unsurprisingly, only a relatively small proportion (19%) make up single households, and outside of those who pit themselves against stronger financial arm of the investment sector, to purchase an apartment, the options we’re currently providing our first homebuyers, fall dismally short of where that main demand centres – demand which often calls for more than tiny apartment which will last no longer than a year or so before an upgrade is necessary.

The data must be wrong…numbers can’t be this low?

Others challenge the data, with various claims that first home buyer numbers are only ‘significantly’ reduced, because a percentage are ‘slipping through the net,’ perhaps entering ownership as ‘investors’ or – due to dated brokering software – not being entered as first timers, unless applying for a state based grant or incentive.

On the latter point, I did speak to the ABS department of financial statistics directly about the notion that ‘significant’ numbers are missing, and further investigation is underway which I’ll follow up at a later date.

Albeit, currently they deny the implication, claiming it doesn’t accord with APRA’s instructions to lenders when collecting statistics – which stresses that a first home buyer, must be one in which ‘none of the borrowing parties has previously borrowed housing finance for owner occupation’ – making no distinction between an investor, or one who does, or does not, apply for the grant.

Therefore, outside of colloquial evidence, the above ABS statistics are the most accurate ‘current’ indicator we have of a downward trend in first homebuyer numbers – and for most ‘reasonable’ minds it should come as no surprise, considering we’re in an environment where the entry cost to obtain ownership is further impeded by rising prices, transaction taxes, and an uptick in unemployment raising concerns over job security.

Housing is ‘affordable’ because mortgage rates say so…

As Michael Janda pointed out in his excellent report last week – housing affordability should not be confused with mortgage serviceability.  

Mortgage rates are set up with different structures, dependant on circumstance, and subject to interest rate changes influenced by the macro environment.

  • They do not take into account the up front cost of a home and expenses incurred from associated utility costs.
  • They do not question rising rental prices, falling vacancy rates, wage growth, unemployment figures, or changes in household demographics and structure.
  • They make no distinction between the cost of building a home and the underlying value of land, or analyse constraints in supply, or make mention of the limited options available for low or single income households and families.

To assume on interest rates alone that housing is ‘affordable’ is lazy reporting and generally only applicable to existing owners

Those who fail to make the above distinction commonly come from the standpoint of vested interest – or entered ownership at the beginning of the lending boom (in the early 2000s or before,) and have benefitted considerably from a rapid period of inflation – which unsurprisingly enough, includes most of our politicians.

Housing is affordable because data from other countries says so…

Neither is it complementary to compare ourselves to international terrains which – having been through somewhat harder lessons than our own – are also battling to induce first home buyers out from underneath their ‘rental’ blankets.

Yet this is what Stephen Koukoulas attempted to do last week in Business Spectator when he ‘favourably’ compared Australia to Norway, Canada, Sweden and New Zealand.

All of these markets have suffered from large increases in levels of private debt whilst at the same time limits were placed on supply.

In Norway, Sweden and New Zealand, central banks have recently employed capital constraints in an effort to moderate demand, and Canada, with a household debt to income ratio of 163.7%, is being watched closely, as investors and economists start to voice alarm.

Letting house prices escalate, funded by a colossal amount of private mortgage debt, can be a dangerous game.

As I pointed out last week – in the USA prior to the sub-prime crisis, the median income in California was not enough to afford the average Californian home, or even a starter home.  Once the financial crisis hit, rapidly falling prices quickly eroded any equity homebuyers had achieved.

Whilst on the other hand, states such as Texas, where house prices did not deviate from three times median income, values fell by only -2.5% (from the peak of 2007 to the trough of 2011,) and the state suffered far fewer foreclosures.

….The renters that Terry Ryder rudely labelled ‘generation whine’

Renters, on the other hand, have not benefited directly from low interest rates. Roughly 33% of Australia’s housing market is made up of tenants and since, 2006, rises in the median cost of rental accommodation has outpaced both wage growth and inflation.

In Sydney, where supply is particularly constrained, APM recorded a 5.4% yearly increase to the median rental price, and according to a new report compiled by the Northern Territory Council of Social Service (NTCOSS,) the average cost of rental housing in Darwin has risen by 7.9%.

Before we get into a further debate over whether or not rents are ‘affordable,’ it’s worth turning to a previous report from the now disbanded ‘National Housing Supply Council’ to highlight the real impact demand side policies like negative gearing have, when coupled with a gradual erosion of supply.

Reports highlight that the increase of rental accommodation in the private sector has not outweighed the decline in social housing – and from the stock added, most have rents outside of the affordable threshold for lower income households.

To assess this, the NHSC broke income groups into deciles, and demonstrated of the ‘affordable’ private accommodation available,’ supply is quickly soaked up, leaving 60% of low income groups, paying more than 30% of their income on rent, and 25% paying more than 50% of their income on rent

In Conclusion

Gains from high land prices, do not trickle down they flow up. This is what the ‘National Housing Supply Council’ was trying to emphasise in their reports, and what I went to great pains to point out last week in trying to answer the questions over what exactly a ‘housing shortage’ means.

Our market is not just about buyers, it’s about renters too – and our Governments are elected to ensure that the price of land is not unduly inflated by either the monopoly of this resource, or undue restrictions placed on its development.

Worrying still – the arguments over affordability encourage us to lose sight of the real issue – which is not localised to the first homebuyer sector, but the general crowding out of low income residents across all demographics – some of which drift in and out of ownership

Reform is never easy, but there is a way to break the cycle and ensure land is fully utilized for the purpose intended, without prices blowing out to levels that can only be sustained through keeping interest rates low, or household debt high.

One way is through freeing the barriers hampering the type and supply of accommodation offered, and the other is through imposing a broad based tax on the underlying value land – of which I went into more detail here.

The focus of attack should be not those individuals who have advantaged from the system, but on the law that allows the system to operate – and in response, the commentary should not focus on defending what is plainly obvious, but advocating the policies we need to fix it, and ensure our house and land market is equitable for all.

Catherine Cashmore

Debating the ‘housing shortage’…..

Debating the ‘housing shortage’…..

Do we have housing shortage?

It’s a well spruiked ‘fact’ that Australia has a ‘housing shortage.’  I frame the word in italics because of the general misunderstanding that surrounds the concept.

People imagine a shortage of housing at an aggregate level, to mean not enough homes to meet the demands of an active buying market, and whilst this may be evident in various tightly held localities – in popular schools zones for example – the evidence used to substantiate a national housing ‘shortage’ means nothing of the sort.

Last week the ABS released its dwelling approvals data for the month of November 2013, showing modest fall of 1.5%, which follows a similar decline of 1.6% in October.

On a ‘trend’ basis, the overall direction of dwelling investments is positive – some 22% higher over the year – the highest level since September 1994.  However, as Callam Pickering corrects asserts in Business Spectator, on a population-adjusted basis, approvals are at best, weak.

For example, between 1947 and 1961, housing stock increased by 50% -compared to a 41% increase in Australia’s population, and between 1961 and 1976 there was a further increase of 46%, compared to a 33% increase in Australia’s population

This was a continuing pattern until the early 1990s, after which the growth in dwellings started to slow, and since 2007; the former has outpaced the later.

Did a shortage cause the rise in house/land prices?

1996 was the point at which land prices started to rise, and from 2001 onwards they skyrocketed.  Whilst it’s hard to draw an exact correlation between the fall in stock and a rise in prices, supply, when produced must be suited to need – being both affordable and well serviced with infrastructure. Get the ingredients wrong and a surplus can quickly amass. Therefore, it would be wrong to assume a shortage of effective supply means a shortage of ‘roof space’ – it doesn’t.

However, when evidence shows a gradual reduction of demand for new dwellings, during a period in which population growth and a resilient economy should have dictated otherwise, coupled with land values that have grown from 3 times median income in the early 1990s, to their current 6-9 times median income in 2013 – (dependant on location of course,) alarm bells should be ringing in the offices of our housing ministers.

So what does the term ‘housing shortage’ mean and can it prevent a housing bubble?

Obviously there cannot be more households than homes, and whilst in the private sector, homes can only be constructed if there is demand from the consumer market, it is important to understand what a housing ‘shortage’ means.

Firstly, it covers total housing system, both private and public, therefore, it should not be used – as it so often is – as evidence Australia can’t suffer a significant downfall in prices, or produce a ‘bubble.’ It certainly can.

In fact, it should be fairly obvious that the effects of a housing crash are far more severe in areas where high levels of private debt have been used to service inflated home values, due to a shortage of affordable home buyer supply, coupled with heightened speculative activity – as is the case in the most populated areas of Australia

To be clear – it’s not a shortage of homes that prevents a housing crash, but a shortage of buyers – buyers unwilling, or unable to service high household debt due to broader economic conditions.

There are plenty of international examples of this  – most recently in the USA, in states such as California and Los Angeles.

Both areas had a ‘critical housing shortage’ in the early 2000s, with speculative demand and lack of affordable supply disproportionately inflating values in the lead up to the sub-prime crisis.

When the (unforeseen) bubble burst, rapidly falling prices quickly eroded any equity homebuyers had achieved, and for those with non-recourse loans, where the mortgage balance greatly exceed value, there was little incentive to avoid foreclosure.

On the other hand, states such as Texas where – despite rapid population growth, – had structured housing and supply policy to maintain prices at no more than 3 times median income. Values fell by only -2.5% (from the peak of 2007 to the trough of 2011,) and the state suffered far fewer foreclosures.

What was the role of the National Housing Supply Council and was it needed?

When Rudd established the National Housing Supply Council in May of 2008, just prior to the last Senate enquiry into housing affordability in June of the same year, it should have been a step in the right direction, however the council’s role was broadly mis-understood by many main stream commentators who often failed to read the reports in full.

(For those interested, thanks to the Brown Couch blog, here’s a link to the archived website)

The council was given the role to assess the difference between supply and ‘underlying demand’ – in other words, the amount of extra housing needed per annum over the past decade, ‘if’ (using ABS data,) Australia had continued to produce enough homes for a rapidly growing population of home buyers and renters, based on existing household composition figures.

Whilst the findings showed a dramatic shortfall of 228,000 dwellings (as of 30 June 2011) the figure was hotly debated and in many cases, concerns were justified. However, in the council’s defence, it should be noted that planning for population growth is not an easy task, it’s predictive in nature and makes many assumptions along the way.

Whether you agree or disagree with the methodology or the resulting recommendations contained within the report, it’s essential we undertake some type of detailed analysis, if only to chart demographic changes and readdress growing community needs.

This is no different to studies conducted in other countries suffering similar concerns.  For example – the latest UK data shows 221,000 additional households are formed in England annually, yet only 108,000 homes were built in the year to September 2013.

If the goal is affordability – a vital part of which is supply side policy – we must address the reasons ‘why?’  Only in doing so, can we have a valid base for discussion on housing policy initiatives within the political arena.

However, supply wasn’t the NHSC’s only area of concern, it also instructed to produce a comprehensive evaluation of Australia’s affordability problems which included the status of those impacted most – homeless, renters, first homebuyers, low wage families, and tenants in the public and social housing system.

For example, reports showed utility costs such as electricity, gas, water, and sewerage, have been increasing at more than 10 per cent per annum. They gave a good statistical overview to show a dramatic shortfall of affordable rental accommodation for low-income families – (details of which I’ll examine in another column) and clear evidence that our housing crisis is embedded within the fact that we don’t produce enough affordable and feasible options for low-income households across the sector – both public and private.

Despite this, the Abbot government – with the rather weak excuse that its role is ‘no longer needed’ – recently disbanded the NHSC along with their website and archived findings, and in doing so, have made it quite clear that affordable housing is not part of their political agenda.

Why do we have a shortage of affordable supply?

Issues surrounding housing affordability are at a peak predominantly because town planners, along with state and federal governments, have failed to adaquatly cater to the demands and needs of a rapidly increasing population.

If you didn’t know better, you’d be forgiven thinking there’s been a “vested” conspiracy to keep inner-city inflation high, with everything possible done to prevent a fall in established house prices by way of generous tax incentives for investors favouring old over new – or intermittent policies to inflate the prices of new housing by way of Mickey Mouse incentives.

Infrastructure sparse fringe land prices are inflated due to ‘false scarcity’ imposed by constrictive urban zoning policy.

However, it hasn’t always been this way – in the post-war population boom, the Commonwealth ‘State Housing agreement’ was concentrated on building rental accommodation and affordable housing for low-income families.

Under the Whitlam Government, land commissions were set up in each state and territory, and in agreement with the commonwealth, were instructed to ensure land and housing was ‘readily available at fair prices,’ with commonwealth funding provided for essential infrastructure.

However, in the 1990’s (the point at which demand for new housing started to diminish and prices began to balloon,) the game plan changed, key infrastructure agencies once corporatised were required to show “a return on investment.”

Stricter zoning regulations were imposed in the name of, ‘urban consolidation,’ land values increased, and larger developers needing to maximise profit, carefully controlled the timing of newly released plots in response to consumer demand (land banking.)

I know sprawl is not a popular word with many Australian’s – however it should be understood, that to create affordable supply in inner city brownfield land, is extremely difficult when land values – already high – prompt the chase of profit over community need.

Hence why we have so many poorly constructed high-rise monstrosities, with 2 bedroom apartments, offering little more than 60sqm in floor area, with high vacancy rates (in excess of 10% in some cases) and banks unwilling to take a gamble and provide first home buyers with finance due to fears of oversupply.  This is why they are generally marketed to investors fooled (by rental guarantees) into thinking they can get a positive yield.

Further more, they do nothing to produce affordable accommodation for our largest demographic of buyers, families with children who require 3 bedrooms and some resemblance of a private outdoor area. If anything, this is an appalling and inappropriate waste of valuable inner city land.

In the NHSC’s final report in 2012/2013 it stressed  “Underpinning much of this work will be the understanding that tackling the housing shortage is not simply about increasing the number of homes being built; it is also important to build a diverse range of dwellings. Producing the right mix of homes contributes to developing sustainable communities that work for the population at large.”

As I’ve said previously – it’s not about creating endless sprawl, it’s about building communities and this can only be achieved with investment into infrastructure supported by long term funding measures, which include consideration of bond financing and a more equitable tax system that assists the cause.

The subject deserves deeper analysis, but the above touches on some of the issues that should be debated and acted upon.  And it can only be hoped, that any future senate enquiry into housing affordability, endeavours to do so.

Catherine Cashmore