Thursday, March 20, 2014

Cattle and Cane

What has this Go Betweens song from the 1980s got to do with proposed changes to the south east Queensland regional plan? Surprisingly, there are some common themes…

In the early 1980s, when Go Betweens songwriter Grant McLennan penned ‘Cattle and Cane’, south east Queensland had a population of around 1.5 million. Today it’s around 3 million and predictions are that this figure will rise to 4.5 million by 2030. Much about the south east – one of Australia’s fastest growing conurbations – has changed in that time, most of it for the better in my view; some of it for worse.

But it’s some of what’s also been protected from change that is somewhat ironic. I’m referring to fields of sugarcane or expanses of cattle grazing land, which remain under a number of planning controls, protected from urban development. These are some of the landscapes McLennan referred to in his song, drawn from memories of the family farm in north Queensland:

“I recall a schoolboy coming home
through fields of cane
to a house of tin and timber”

A resident of south east Queensland when he wrote these words, McLennan would have seen considerable expanses of active sugar cane farms and cattle properties surrounding what was then the urban fringe but what we now know as established suburbs. A drive to the north or south coasts from Brisbane passed through these farmlands, many of which have since given way to housing and non-residential uses demanded by the rising population that now lives here. We need houses to live in, schools for our children, shopping centres, entertainment venues, roads, parks, hospitals, civic buildings and more. It all requires land.

In response to this growth, regulators sought to contain ‘sprawl’ and protect environmental and other features of the region while pushing higher densities of development into existing areas. This became a central plank of what ultimately became the ‘South East Queensland Regional Plan.’  In common with other metropolitan wide plans of the time, it introduced an ‘urban growth boundary’ beyond which future urban growth was virtually prohibited. And even within that boundary, some land uses were protected from development – rural land uses included.

This in many ways is a fine political sentiment for the middle classes of the inner city to ruminate on. The idea of protecting farmlands from urban sprawl hits a nerve with a community who no longer care where their milk comes from, or that buying it for a dollar a litre (less than they happily pay for water or petrol) is sending dairy farmers broke. The hypocrisy of expressing concern for the retention of farming lands while adopting consumer behaviour which renders these enterprises uneconomic is a topic for another day.

Protecting farmlands (as opposed to protecting farmers) needs to be about much more than protecting the view corridors enjoyed by residents en route to their coastal holiday locations, or appeasing the interests of planners who want to see swathes of green open space on their regional plans. If the enterprises are no longer economic, arguing for their preservation is forcing a form of poverty onto farming families that can in many cases only be relieved by the ability to sell the land for a higher and better use. And that use would be housing, which the regional plan prevents them from doing.

Take sugar cane for example. North and central Queensland have large and viable sugar industries (though some farmers in these areas would argue even that’s debateable). They still have operating sugar mills to process the raw cane for domestic or export consumption. But the sugar industry in the south east corner isn’t really viable any longer. Burning cane (described in the song as “and in the sky, a rain of falling cinders”) would no longer be tolerated in a heavily populated south east. Green harvesting is now the go. But the sugar mills long ago closed down, with the sole exception of Rocky Point near Pimpama. A mill at Eagleby closed in 1943 and the Nambour mill closed in 2004. Basically, better conditions for growing sugar cane are found in northern climates and the economic realities of life have a way of taking over. It’s probably why the sugar cane fields found in the 1860s around the Brisbane suburbs of Chelmer, Corinda or Bulimba long ago surrendered to the obvious.

But under our current planning scheme, fields of cane are a protected feature of the landscape. The cane grown on the fields near the Sunshine Coast must be transported to Maryborough for milling. Hardly economic but what choice is there? Are there environmental grounds to support their retention? Perhaps driving past cane fields in your BMW at 100kph gives an illusion of ‘green space’ but in reality, canefields have next to no ecological value. They are full of the appropriately named cane toads (a noxious pest), rats, and snakes and not much else. A hectare of land given to housing would support more native plant and wildlife in people’s backyards than a hectare of cane land.

Cattle country isn’t much different. Much of the grazing land around the outer edge of the urban growth boundary is marginal, at best. Soil types can be sandy or rocky (and not hold moisture) and irrigation isn’t feasible for most given limited underground water supplies and the lack of flowing fresh water rivers. Currently, much of this country is in drought. Take a weekend drive anywhere from Jimboomba through Undullah to Peak Crossing, Laidley, Esk, Toogoolawah or Kilcoy and have a look. Sure this is a seasonal problem and this isn’t a good season, but the country itself – with some exceptions - isn’t the best for grazing. New techniques in raising beef, including the advent of feedlots, new or improved pasture seed types and changes in farming practices mean that in good country with dependable rainfalls and good soil types, more cattle can be raised on less land, faster, than ever before.

Queensland and the NT’s cattle herd is over 15 milllion head, compared with less than 12 million in the mid-1990s. So we are not going to run out of cattle for meat. The question is: do we need to insist on raising it on our urban fringe by withdrawing permission for owners to put that land to alternative uses?

Persisting with the retention of cattle properties on the edge of the urban fringe, only in order to suit some inner urban sensitivities about the loss of nearby farming land, is an unreasonable imposition on those farmers and illogical at best. Plenty of farmers would persist in being illogical and continue to run cattle despite what nature and the economy is telling them even if alternate uses were permitted: but there’s a difference when it’s their decision to do so, or a mandate imposed on them by others.

The same applies for sugar. The same actually applies across a range of land uses where privately owned land is prevented from adopting a higher or better use simply because a planning scheme says so, in defiance of economic logic or even common sense. If the community are so fervently attached to the idea that other peoples’ private land must be retained for these particular purposes, then perhaps the community should buy them out? At the very least, it ought to be the landowners right to seek economic uses for their land, especially if the pre-existing use is no longer economically feasible.

Cattle and Cane may have been a feature of south east Queensland life even as recently as the 1980s when the population was 1.5 million. But to persist with these practices out of nostalgia or to appease shallow and ill-informed community opinion will make little sense in the Brisbane of the 2030s - when the population reaches 4.5 million.

“from time to time
the waste memory-wastes
the waste memory-wastes
further, longer, higher, older”….

Wednesday, February 26, 2014

Office market drivers

There’s a lot of hand wringing at the vacancy rates being reported for office markets at the moment but in more than 20 years, the analysis hasn’t progressed much beyond basic questions of new supply and gross demand. Other factors are at work.

The latest Property Council office market survey reports Brisbane CBD vacancies as ‘the highest level on record’ at 14.2%. That’s up from 12.8% the year before. The report attributes this to weak demand, specifically a “reflection of the impact of the Queensland Government’s continued withdrawal from leased space, coupled with the mining sector’s revaluation of its office space requirements.”

No, it’s not a pretty number and according to the PCA figures it’s at present the worst of major markets in the country:

But these are just headline figures. Sure the Queensland Government has reduced its requirement for space, but that followed a sustained period of bloated public sector growth under the previous government. And sure the mining sector isn’t on fire any more, but no one seriously thought it would ever stay that way. That’s why mining related businesses were only taking space on 5 year leases: they knew themselves this wouldn’t last.

So beyond the headlines, what are some of the other things that might be driving change in the market?

First, remember that a 14.2% vacancy rate is the same as an 85.8% occupancy rate. Most industries with that sort of capacity utilisation would be over the moon. It’s a quirk of history that office markets have always reported on vacancies rather than focus on the occupancies. That’s unlikely to change but what it means to seasoned observers is that this isn’t the calamitous disaster media headlines might have us believe. Plus, take into account that a fully occupied market is generally regarded to be around 95% occupied; that 5% vacancy being required for normal movement. Any less and the market is under supplied. So really we’ve got about 10% of surplus space sloshing around in the market now.

Much of that space is sloshing around in lower grade buildings and what typically happens is that these are withdrawn from stock because they can’t compete with contemporary space and the facilities it provides. Owners can refurbish older buildings, or convert them to alternate uses such as residential or short term accommodation. Expect a lot of both to happen in coming years. Those stock withdrawals will to an extent offset stock additions through some of the new projects under construction.

On the demand side, apart from blaming a downsizing by government and mining tenants, what other factors are in play?

Rents are surely one. Talking about office space demand without mentioning rents is a bit like talking about demand for petrol without mentioning the price. High construction costs, site acquisition costs and development costs mean that delivering new CBD office buildings is not a cheap exercise. Our CBD rents are some of the highest in the world. This Cushman & Wakefield report makes for interesting reading. According to the report, Brisbane is roughly 80% of Manhattan Grade A prices, is more than Melbourne, is 50% more than Houston Texas and three quarters of Sydney rents. Sydney rents are higher than New York. Go figure that one. Ask Holden, Ford or Qantas about the globalisation of markets and what happens to Australian product that is overpriced. Will that affect demand for office space if companies simply shift operations elsewhere, or are they faced with no choice but to pay globally high rents for what are not global scaled cities?

The other effect of high CBD rents is also force some hard thinking about the relative benefits of CBD over fringe. A lot of companies have recently opted for the latter. This could also be affecting demand for space in key CBD markets.

Floorspace ratios are another factor at play. New tenancies for major business are often being designed around per person space ratios as low as 10 metres per person. Concepts like ‘hoteling’ where staff don’t have their own desk and where personal effects are discouraged, have fad surfers enthralled and financial controllers impressed. Personally, I can’t see this lasting. We’re human beings after all. Plus, it’s only ever a handful of companies that explore the boundaries of these management fads and seek publicity for doing so. The silent majority of office tenants are as inefficient as ever, with spare desks and large common areas so the average in my opinion still works out at around 20 metres per person. Either way, it’s an important factor on the demand side which isn’t discussed much.

Parking costs are another factor. This is more a problem for casual parkers than permanents but both are paying exorbitant prices. If you are CBD based and have clients visiting your office, you should feel some sympathy for the $50 they’ll shell out just for a two hour visit. These are some of the highest costs in Australia and equally some of the highest in the world. Those urban planners wanting to ‘keep cars out the city’ may succeed if this pricing response to limited supply keeps following the same trajectory. But if you keep the cars out of the city, you’ll keep the people out too, and along with them, their business. The very high cost of parking, both for tenants and customers of those tenants, could be another factor weighing against demand for CBD space.

These are just some of the considerations that reach beyond the basic numbers. There are more but the point is that a 14% vacancy rate owes itself to a wider range of market forces than superficial reports deal with. 

Is 14% a cause for concern? That depends on where the vacancies are… in someone else’s building or yours. 

Monday, January 27, 2014

Housing: positive signs but one worrying trend.

The real estate commentariat have kicked off 2014 with broadly positive views on housing markets and house prices. Media reports are running strong with headlines about ‘booms’ but amongst the positive signals in the market lies one worrying trend.

After such a long period of subdued market conditions, you can’t blame people for being positive when signs start to emerge of strengthening demand for housing. Developers, once struggling to find sufficient depth of buyer demand for their product and meeting plenty of buyer resistance, essentially put projects on ice for several years. Now they’re being dusted off, particularly for apartments, as buyer demand re-emerges from a long hibernation.

The recent ANZ-Property Council industry survey reported a significant lift in confidence, particularly in Queensland and NSW, when it came to housing market performance driven by investor demand.  Then there have been other reports equally buoyant about the prospects for growth in 2014. Take this one, for example, by credit reporting agency Veda which glowed about ‘the strongest levels of housing finance in four years.’ The headline finance figures are good, and the dwelling commencement figures will also strengthen during the year – mainly for apartments – as more approved projects move into the construction phase.

So with record low interest rates, which look like staying down for some time, and with rising housing finance commitments and rising prices, what could there possibly be to worry about?

As usual, digging a little below the surface of headlines can be revealing. While total new housing finance commitments are rising and this is a sign of stronger overall demand, that demand is coming almost entirely from investors and upgraders. First home buyers, despite the record low interest rates, remain largely still absent from the market.

The graph below shows the trend since 2000, when First Home Buyers (FHBs) represented roughly half the total finance as investors and roughly a third of that of upgraders. Over the decade, that broad relationship has blown out, as investors and upgraders have become more and more dominant in the market.

By late 2013, investor demand had risen from twice that of FHBs to more than four times that required by FHBs, with upgraders keeping pace with the investors. (The bump in FHB demand in 2009 represents the impact of temporary additional FHB incentives).

The growth in this spread is a clear sign that something has fundamentally changed in our housing markets. First time buyers are becoming an at-risk species of buyer while investors continue to add to portfolios of rental property every time their existing equity increases, and upgraders do likewise. At auctions and open homes, whether for apartments or detached homes, the competition from investors is intense, with first time buyers outbid.

Macrobusiness’ Leith van Onselen described this process as it’s been happening in Sydney as “speculators continuing to eat their young.”

For developers, this is not a market problem. Their role is to respond to opportunities and work within planning frameworks (as dysfunctional as they might be) to deliver a product that sells. It is not the market’s role to be concerned about the absence of first time buyers, or what this means for Australia as a society.  

This is, however, a legitimate role for public policy makers. If falling rates of home ownership amongst a younger generation of Australians is not of concern, then no policy action is needed. If we believe it’s not a problem for this generation to reach future retirement with large mortgages or never having owned and saved through housing, and for them to be more dependent on the future  taxpayer, then no action is required. But for a host of reasons, many of which I outlined here, it’s my view that some policy interest in this widening gap – and its consequences for our society -  is long overdue.

Don’t get me wrong. I’ve been hoping to see an upturn for some years now. This downturn has been longer and more frustrating than others I can recall, which were typically deeper but much shorter. The general improvement in housing and construction will generate significant employment, add to confidence, and restore depleted government revenues. So in the main, it’s a good thing. But it is hard not to be concerned about the lack of policy interest in the absence of first home buyers, and what that could mean down the track.

So while the media headlines continue to crow about a housing recovery in 2014 and beyond, it might be worth sparing a little time to question if this dominance of demand through investors and upgraders is a balanced market, and whether it is sustainable. If not, how long before the music stops?

Monday, December 2, 2013

Why our Federal Government needs to get into housing policy

There are many good reasons not to want more bureaucracy in Canberra. For starters, we can’t afford it. Second, more bureaucracy rarely leads to better public policy outcomes – often it makes things worse. Third, just because there’s a Minister and a Department for something, doesn’t mean it does anything (witness a Federal Education Department with no schools, or a Federal Health Department with no doctors). But housing, just maybe, is different – and here’s why.

The engagement of the Commonwealth Government in housing and housing policy has a sketchy history. Traditionally, if anything, the Commonwealth limits its role to some social housing programs and makes grants to the States under the Commonwealth State Housing Agreement. (Why call it an agreement though, when it mostly seems to involve disagreement?).  Labor Governments have been more prone to enter housing and urban policy through initiatives like the ‘Better Cities Policy’ under the Hawke-Keating era, or NRAS under the Rudd-Gillard-Rudd era. Liberal Governments by contrast have tended to consistently argue that housing policy is mainly a matter for state and local governments (which it is) and that the Commonwealth has a full enough agenda as it is (which it does). For this reason, conservative governments typically withdraw from the policy space after Labor Governments expand into it (witness the new Abbott Government’s early decision to scrap the National Housing Supply Council, formed under Labor in 2008).

But this aversion for close engagement with housing policy sits at odds with other areas of national life, where our national governments – irrespective of political colour – are expected to play a role. If petrol prices, for example, skyrocketed overnight to over $2.50/litre, I can’t imagine our Federal Government would leave it with a ‘no comment.’ If health insurance costs rose even faster than they are now, and hordes of people left the private system, you know the Federal Government would be there with its hands on the policy levers.

Housing is for nearly all Australians the biggest single investment they will ever make. Much smaller investments in superannuation are heavily regulated. Relatively small bank deposits and the meagre interest they earn, also heavily regulated. Even relatively inconsequential transactions with retailers arguably have more national public policy focus than the housing market (and of late, the rise of online sales will likely increase this involvement in the chase for GST dollars).

I am not for a moment suggesting regulation of housing markets, just that our national government (irrespective of politics) might want more of an informed say in how the market operates under national, state and local government regulatory controls, for the following reasons:

·      The Federal Government is a direct beneficiary of new housing construction via the GST (which only applies to new dwellings). A typical $450,000 new house or apartment includes $45,000 in GST revenue collected by the Commonwealth (and ultimately redistributed to the states). There are currently (roughly) 150,000 dwelling starts each year in Australia, so multiply that out and you get (even more roughly) a healthy $6.75 billion per annum in GST on housing alone. Housing starts are currently at a 30 year low. To return to the long term average, they’d need to rise by a third. That means another $2billion in potential annual revenue for the Federal Government if the market returned to its long term trend. I’d call that an incentive. (You could argue that the GST is a state tax, which it is. But the original deal by the states promised they would ditch stamp duty in favour of the GST. They didn’t. The Feds may redistribute the GST revenues but they also have a clear interest in how much revenue is generated and economic efficiency generally).
·      Our banks are heavily exposed to housing. Read the financial press and even if you disagree with the World Bank and others, it’s clear that if housing fails in this country, the banks fail too. Now I don’t think housing will fail and I don’t think there is a ‘bubble’ but I do think there is serious malfunction of policy as it applies to new housing. You’d think a connection between a healthy housing sector and the viability of the banking sector would be a good reason for some more formal public policy interest?
·      Our Reserve Bank is concerned. Read the many statements by Governor Glenn Stevens, and even go back to the era of Governor Ian MacFarlane. The Reserve Bank itself understands the importance to the economy of creating new supply rather than inflating existing prices and frequently passes comment on this. The RBA is also acutely aware of the relationship between monetary policy and the housing market, along with the rest of the economy. I’d call something of such interest to the RBA also something that should be of more formal interest to a Federal Government.
·      There’s a clear question of generational equity. Young people are finding it harder to enter the market. Low cost, new housing has all but disappeared. Income multiples for people on low to median wages are too high, so home ownership is either deferred, or abandoned by many. This also increases pressure on social and assisted housing (meaning taxpayer funds).  But as prices rise, those already in the market gain as their equity grows. These people can leverage their equity to buy more housing, as investors. They compete for lower cost housing against first time buyers or lower income households, and win. It is creating a new landed class, which is a tragedy for a nation which prided itself on its egalitarianism. I’d call that a compelling social policy reason.
·      There’s a demographic and retirement funding issue to consider. Research suggests that in the future, a small minority of retirees will retire owning their own home. Some reports estimate that in the future, more than 90% will retire with a mortgage. As our population ages and we live longer, that’s a very unstable economic base for future retirement funding and aged care. It’s looming like a massive demographic sink hole of increasingly welfare dependent old people, with fewer assets than the comparable generation today. Getting young people into the housing market and saving to own your own home has a very strong economic case going for it. I’d call that a good reason for the Federal Government to be more closely involved.
·      There’s evidence it is changing our society. People are deferring family formation, and having fewer children, and mortgages (if you have one) take up more and more of your household income, meaning less to spend on the rest of the economy. Peter Costello wanted us to have one for dad, one for mum, and one for the country. If housing were more affordable, maybe we would.
·      Politically, it’s more than important. Any government which moved to (for example) tax the family home would quickly find the voter sentiment on this issue transgresses all political boundaries. Supporters and opponents alike would turf them from office. Liberal Prime Minister Bob Menzies many years ago wrote of the central importance of home ownership (in his landmark ‘Forgotten People’ speech in 1942). Many national leaders since then have echoed those sentiments (though few expressed them better). If home ownership and housing is so central to our family way of life, and given we’re confronted with increasing concerns that this is being fundamentally changed by dysfunctional regulatory and planning policies, it would seem reasonable grounds for a more formal presence in housing policy debate.

This does not mean we need a Federal Housing department or a Minister for Housing. But it could warrant a small advisory unit with the ‘real world’ knowledge of how new housing supply is affected by the three levels of government, and what sorts of measures should be avoided and which promoted to create a healthier system with less distortion.

Land use and planning policies introduced around much of the country from the early 2000 onwards have had a serious impact on the strength of the new housing sector. That means not only less income for the Federal Government, but less economic activity (ie jobs) and potentially more long term welfare dependency.

In those circumstances, the Commonwealth is entitled to express a say in the efficiency or otherwise of planning and development policies that affect this market. In fact it’s entitled to demand it. 

Monday, November 4, 2013

The design dividend

When money is tight it’s easy to dismiss the importance of good design and focus instead on the lowest possible costs and build rates; the cheapest structures and cheapest materials. Ironically though, good design is even more valuable in difficult economic periods, because it is then that the difference between quality and mediocrity becomes even more apparent. In the year when we mark the 40th anniversary of the Sydney Opera House, it’s worth reflecting on the economic value of design.

If you think back in Australia’s history, some of our most impressive buildings were public structures. Town Halls, Parliaments, and even train stations showed a commitment to design which continues to be valued today because these are usually the structures we are most concerned at protecting. Private institutions like banks, Churches and some schools also invested heavily in design, reflecting their view that these buildings and the businesses within them would be around for a long time.

In the post war period much of this changed, and that change is largely still in place. In the main, government buildings and public structures are now designed to fit increasingly skinny budgets. The Sydney Opera House, opened in 1973, suffered an ongoing storm of controversy over its budget for many years. The final tally was $102 million against an original budget estimate of $7m, and a ten year overrun in estimated program. The sort of public outrage this caused may have left an indelible mark on our psyche, but whatever the cause, government projects today are far more utilitarian in ambition. This often translates into structures which outwardly exhibit little apparent design effort.

On the surface, the reasons are easy enough to understand. Governments, under pressure to meet a growing list of social welfare and other priorities, simply do not have the funds for ‘lavish’ public buildings. Plus, the occupants of public buildings (mainly public servants) aren’t deemed worthy by the media or commentariat of anything more than purely functional space. This can also mean appearing to be penny wise in front of a critical taxpaying public by eschewing ambitious design.

But good design isn’t all about aesthetic features or flamboyant structures. And it is here that the value of good design perhaps needs better appreciation. Good design should also mean more efficient buildings: structures that use less energy, allow more natural light, are better ventilated. This leads directly to lower building operating costs, which reduces costs over time and which enhances asset value over time. Plus, we’ve all heard of ‘sick building syndrome’ and whether you believe it or not, there does seem to be evidence that well designed buildings foster happier occupants who take less sick leave and who are more productive. 

Good design has other economic benefits. It can mean that vacancies are lower even in competitive markets when supply is plentiful. Retail landlords know this well. A well designed retail centre will attract more customer support, which translates into more spending at the til, which translates into better occupancy. Retail centres are frequently redesigned for this very reason: they need to remain competitive.

There is also a social dividend from quality urban designs. As a community, we want to feel proud of our built environment. We may not want to see our taxes paying for too much of it, but we nevertheless are quick to express disappointment or outrage when ‘ugly’ public or private buildings appear on our landscape. Quality public spaces which have invested in good design are also some of the most popular destinations for locals and tourists alike. Think Southbank in Brisbane, or Federation Square and surrounds in Melbourne.  This builds a civic pride in public spaces that is hard to value, but places with little civic pride are easy to identify.

Good design also applies to our homes. Architect designed homes (particularly the good ones) hold their value over time, and tend to attract market premiums. Even when the original materials and fittings have dated through time, the structure and the way in which spaces are organised is usually evidence of good design. Materials and finishes can be updated when needed but getting the design right first is what provides the long term value.  

New developments also benefit from quality design. There are many good architects and developers who appreciate this, so it is hard to single any out. But if I had to choose, the Anthony John Group’s ‘Southpoint/Emporium’ project at Southbank in Brisbane is one example. This is evidently achieving a lot of early success in sales, due no doubt to the group’s past reputation for investing in quality design (the developer is himself an architect) and also no doubt due to the design effort that has gone into this development. The market can sense quality, and will pay a premium for it. Other product also on the market which has been more driven more by cost than design isn’t enjoying the same success or achieving the same premium in today’s market.

None of this should be interpreted as a call for public monies to be squandered on aesthetics of public buildings when basic economic services are competing for funds and deficits need to be repaid. It applies as much to private developments as public. But for public or private, maybe we need a rethinking of the value of quality design as something that provides measureable economic benefit and long term civic value.

The Sydney Opera House may have cost $102 million against an original budget of $7m but Deloitte recently estimated that it now contributes $775 million to the Australian economy each year with a cultural value of $4.6 billion. It has become synonymous with brand Australia itself. Imagine that sort of rate of return across our entire built environment?

For some case studies of the Design Dividend, have a look at  and some of the examples there, along with one rather famous supporter. I’m proud to say that I was involved with this campaign and hope it continues to promote the value of the design dividend.

Tuesday, October 15, 2013

Bubble bubble, toil and trouble

Apologies for distorting Shakespeare’s Macbeth, but recent talk of a housing ‘bubble’ in Australia is increasingly reminiscent of Soothsayers with bubbling cauldrons of economic brew.  While dire warnings of impending doom are taking things too far, there are good reasons to be concerned about housing dysfunction in Australia.

The definition of a market bubble is where prices trade at high volumes and at prices which are detached from intrinsic value. We usually only spot a bubble after the event – when prices drop sharply. Australia’s housing markets may be dysfunctional and structurally distorted by taxes and regulation, but to suggest they are in a ‘bubble’ is a simplistic observation based mainly on some recent positive movements in the established house markets of Sydney and Melbourne. 

One of my main complaints with many economists and much of the media is that they treat Australia’s housing market as a single product, equally subject to the laws of supply and demand. Apart from obvious geographic differences, there are very large differences between the established housing markets (trading of second hand homes in established areas) and new housing development. Few commentators, policy makers or reporters seem to understand the significant impact on input prices for new housing of things like complex planning regulations, the long lead times on new supply, the distortions to supply imposed by urban growth boundaries, the differential tax treatments on new supply through the GST and the per-dwelling infrastructure levies - none of which apply to established housing.

This weight of this regulatory and tax burden has largely been created by various state and local governments from the late 1990s onwards. It’s had a dramatic impact on new housing construction, pushing our rate of new dwelling supply per thousand of population to a thirty year low. Anyone looking at this depressing graph would be hard pressed to be talking about a ‘bubble’ in the Australian housing market:

While new taxes and regulation have succeeded in pushing the new housing market to a 30 year low in terms of new supply, the same can’t be said for the established housing market which has largely been left untouched by regulatory or tax creep for decades. It would be political suicide for a government of any persuasion to tamper with taxes or regulation of existing housing. (Somehow though, the same political caution hasn’t been felt in terms of new housing).

So the performance of the established housing market has been in stark contrast to the new housing market. And it is graphs like this which have ‘bubble’ proponents staring deep into their cauldrons:

The latter shows that established house prices in major centres have risen dramatically, relative to measures of economic growth and to average incomes. Does this constitute a bubble?

Certainly, for people on average incomes, entering the housing market via the established house market, especially in inner city or mid ring areas where supply of vacant land has been all but exhausted, can now be prohibitive.  Supply is constrained because established areas are built out. More people wanting to live in these areas means rising demand relative to supply, and when economic conditions permit (as they do now) prices rise.

With median house prices (based as they are on the sale of established houses) hovering around the $500,000 mark in many cities, you would ideally need a combined household income of $100,000 for this to be anything like affordable. $150,000 would be better. Having said that, there are enough families with two incomes bringing in over $100,000 per annum so that housing at this level is still accessible for some. But if your combined household income is less than $70,000 per annum, you’d be pretty much locked out of many housing opportunities in established areas. And there are also plenty of families and individuals who fit that description today.

So while I don’t see a ‘bubble’ I do see a structural problem which needs to be addressed. And that problem is that where once Australian cities offered a ‘pressure valve’ via low cost, entry level housing on the urban outskirts, the price advantage of this option has now been removed by public policy changes.

The arrival of Urban Growth Boundaries (UGBs) in the late 1990s to early 2000s created an immediate shortage of low cost land for new housing. Market pressure built up within these artificial boundaries and vacant land prices shot up, while lot sizes fell – a double whammy. The GST - which applies only to new housing - added 10% to the cost of a new home, and infrastructure levies compounded the problem, adding in many cases $30,000 to $50,000 per dwelling. Soon enough, we reached the point where between a third and 40% of the cost of a new home could be attributed to new policy initiatives delivered via our planning regulators and Treasuries.

Remember, the actual building cost of detached housing has remained largely unchanged for decades – at around $1000 to $1200 per square metre. But the land cost on which that house sits has skyrocketed, as have taxes on new housing, as has the regulatory compliance cost. So the new house and land option, which was once a low cost pressure valve accessible to young families and low to moderate income groups, quickly became just as expensive as established housing in inner city and middle ring areas. Little wonder the rate of new supply collapsed so quickly.

Look again at the graph above. The market distortion took hold in the early 2000s. It doesn’t matter whose graphs or analysis you use, it was around this time that prices for housing started to move well out of sync with incomes or measures of economic activity. It was also around this time that State Governments were busy extolling the virtues of growth boundaries to ‘contain sprawl’ and plan for ‘sustainable futures.’ It was around this same time that State and Local Governments latched onto the idea of per lot infrastructure levies on new housing as a means of raising revenues. It was around this time that the GST arrived, applying as it did only to new housing. It was a triple whammy effect that has so distorted housing markets that there are virtually no low-cost entry-level options left. The pressure continues to build on existing house prices while the new building market continues to suffer. That pressure isn’t coming from first home buyers, but from people already in the market: upgraders and investors. It’s also coming from overseas buyers, and (worryingly) from geared Self-Managed Super Funds.

Talk of an Australian housing market ‘bubble’ is too simplistic but appeals to media appetites for ‘boom’ and ‘bust’ scenarios. The real story behind Australian housing markets is more complex. For those prepared to invest some time looking into it, the signs of markets distorted by inequitable regulatory and tax measures are immediately apparent, particularly as they apply to new supply.

Thursday, September 19, 2013

Older not wiser

Australia has an ageing society and while living longer is good news for many, there are some major economic issues we need to understand to avert a huge problem in the years to come.

According to a recent UN report, roughly half the children born in developed and developing economies after the year 2000 will live to 100. Australia is no exception to a worldwide trend of increasing life expectancy. We are ranked equal fourth in the world, with a current average life expectancy of 82. The number one spot is shared by Japan, Switzerland and San Marino, where the average is just another 12 months (83 years).

To put this into some perspective, the global average life expectancy in the early 1900s was just 31 years. In early modern Britain (from 1700 to around 1900) is was somewhere between 25 and 40 years. In Classical Rome and Greece, it was 28. Most of you reading this now would have been long dead after 40 if you’d been borne at any time prior to the late 1800s.

But modern diets, standards of healthcare and higher quality of life in developed economies mean that we’re all now living longer, on average. The only problem with this is that we’re still working on a pre-industrial model of employment, with an expectation that we’ll all retire sometime around 60 or 65. So if we’re going to start living on average well past our 80s, that’s going to mean a longer period without an income. For children being born today who might live to 100, that could mean a working career of 40 years, and a retirement period also of 40 years.

Compounding the basic maths of this problem for Australia is the baby boomer ‘bubble’ which has tilted our demography toward the older end of the scale. This means there are fewer and fewer people of working age, paying taxes to run the country, and also (somehow) to support an increasingly geriatric population.

Few of us it seems believe that superannuation is going to come anywhere close to supporting ourselves in retirement. Repeated surveys reported in the media point to a sceptical view of even semi prosperity in retirement. And the high cost of housing could make this all potentially much worse for Australia for two reasons.

First, fast forward 20 or 30 years. Fewer Australians are going to own their own home on retirement. At present, roughly 78% of retirees own their own home at retirement age. This report tips that could plummet to just 2% by 2050.  That could be a touch on the alarmist side but the consensus of these sorts of forecasts tends towards a gloomy view. Rates of ownership are falling and, as policy makers continue to fiddle with failed planning dogma, there’s little prospect of that changing. So at the oldies end of the scale, not only are there going to be many more of us aged over 65 (there were 2.5 million over 65s in Australia in 2002 and this will rise to 6.2 million in 2042) but for the majority of us, we may no longer even own the home we live in by the time we stop working. That’s a pretty fundamental component of today’s retirement planning up in smoke.

Second, at the younger end of the scale, the prohibitively high cost of new entry level housing is seeing more and more young people rent rather than enter the market. I am talking particularly here of new house and land packages on the urban fringe, the supply of which has been artificially restricted under land use policies introduced since the mid 1990s, and the supply of which was also discriminately taxed since around the 2000s (the GST combined with infrastructure levies and other charges apply ONLY to new housing supply).

There’s a growing class of investors who applaud every increase in house prices. But their enthusiasm should not be shared by sensible policy makers because this generation of today’s young people are not only being denied low cost entry level housing, but they will also be expected to pay a disproportionately high burden of tax. That’s because they’ll be among the minority of the population with jobs, supporting the rest of us without them. On top of this, they’re going to live a lot longer. Maybe to 100. So for some of them, their working lives will be spent renting other people’s property, paying higher taxes to fund a disproportionate number of old people, and then somehow fund a 40 year retirement.

It’s not sounding pretty, is it?

To me, this makes it all the more imperative that today’s policy makers understand the primary importance of promoting home ownership for all Australians. As an enforced means of saving, it beats superannuation, it promotes long term wealth generation and continues a long and successful tradition of home ownership for all in a prosperous and egalitarian society, as Australia has been.

That promotion of home ownership should not come through failed grants or financial stimulus to the demand side, but removing barriers and costs from the supply side. The rigid urban growth boundaries and densification policies which became fashionable under a succession of Labor State Governments since the mid 1990s are proven failures and should be abandoned. The discriminatory system of taxing only new supply through both the GST and per dwelling infrastructure levies is highly distortionary and has meant that between one third and 40% of the price of new house and land package can be attributed to taxes introduced only just over a decade ago.

Not only is it distortionary, it doesn’t even work: to the best of my knowledge, these upfront per lot levies account for only around 3% of local government revenues and there’s no way of linking the money raised to the things it’s supposed to be spent on (local infrastructure). Plus, it’s all but killed off the new home building industry, which is now producing fewer dwellings per thousand people than any time in the last 40 years, with the economic signals (unemployment being one) to show for it. Some achievement.

In summary, there’s almost no disputing that we’ll all be living longer, or that there will be more aged people as a proportion of our population than ever before. This can be cause for celebration, but it will also mean that the importance of home ownership as a broad social and economic objective for Australians needs to be returned to a central place in policy thinking, not shunted to the periphery of fashionable planning ideology as it has been.

Wednesday, August 21, 2013

Immigrant nation

Australia’s history is one of immigration. Many came, ironically given the current political debate, by boats. As the debate over illegal immigration swirls, it’s maybe timely to remind ourselves how we all got here in the first place.

Before anyone gets a head of steam up, you shouldn’t take this opinion piece as any sort of endorsement of illegal immigration, nor am I na├»ve enough to think that being ‘soft’ on the current illegal immigration issue will do anything to solve the human crisis of people drowning at sea. Nor will it deal with the criminals who put them there. But given I technically arrived in this country by boat in 1975 from Hong Kong  (aboard the SS Chittral as I recall, since scrapped), I have something of a personal, as well as historical interest (I studied Australian history at University) in the topic of immigration.

Black fellas

The first immigrants to Australia, ancient history suggests, were what we now call Aboriginal Australians. The evidence appears to say they arrived by boat or maybe by land bridge from what is now called Indonesia. If some walked, they did so because the ice age lowered sea levels to the point this may have been possible but boats seem the most logical explanation. The rising seas after the ice age made the passage more problematic so those who got here before that big melt, stayed largely uninterrupted. That was roughly 50,000 years ago, or maybe 20,000, depending on who you believe. No one was writing much of anything down back then, so we’ll never really know. Safe to say it was a bloody long time ago.

White fellas.

Also arriving by boat came the white fella. The Dutch or Portuguese may have ‘found’ Australia before Cook, but Captain Cook gets the credit for landing here in 1770. The black fellas argue to this day that the white fella arrived ‘illegally’ and took their land. Terra nullis – the idea that Australia was unoccupied – was really a case of “to the victor the spoils.” So along came the white fella, the boats, and the convicts, followed by free settlers. Australia as we know it today with borders and government, was born.

The yella fella.

News of the discovery of gold in the early 1800s in various parts of Australia spread quickly around the world. Border controls, not being what they are now, meant prospectors from all nations were keen to have a crack at the underground loot. Americans, leaving the US gold fields, were among those arriving here in number but nothing like the Chinese immigrants who came in their droves. Gold fields in Victoria, NSW and northern Queensland (around Cooktown) hosted very substantial populations of Chinese immigrants, who mainly weren’t all that welcome. Some of the black fellas ate them (said of some raids around the Cooktown fields) while the white fellas detested their pigtail hair, opium dens and basically just the culture clash posed by the Chinese presence. There were race riots in the late 1800s that made the Cronulla riots of recent history look tame by comparison. But over time Australia started to get used to Chinese laundries and the many other benefits – material and cultural - brought by the Chinese and things started to settle down, at least as far as the Chinese were concerned.

The wogs, dagos, spics and others

World War One denuded Australia of a huge chunk of its working adult male population. We limped through the aftermath, including the depression, only to find ourselves in World War Two. The post war environment was one of rebuilding, and without sufficient labour and with huge volumes of allied European peoples whose lives were basically destroyed by the war looking for a new start, Australia opened its doors. Italians, Greeks (Melbourne is still to this day said to be the second biggest Greek city in the world), Spanish, Egyptians (and including a healthy dose of more Poms) all arrived by boat to help settle and develop post war Australia. The legendary Snowy Mountains scheme owes much to these immigrants. Their customs (including their food) soon found their way into the Australian heart.

The Vietnamese.

Another war, this one in Vietnam, didn’t end so well (do any of them?). Vietnamese people looking to escape the intolerable injustices of the post fall-of-Saigon era, sought escape, and did so in their droves. They also took to boats and for a time, Australia had its first modern era experience of illegal immigration in the late 1970s. One famous illegal ‘boatperson’ (as they were called) is Ahn Do, now a popular comedian and recipient of ‘Young Australian of the Year.’ His book, “The Happiest Refugee” is a must-read account of his early life and struggles through to his love for his adopted country.  Many others also made their lives here and - after some initial race tensions  - largely found their way into the Australian culture, becoming a part of it in the process. Food seems to have a big role in this, and before long, Vietnamese food was overtaking Chinese as the preferred dine in or take away option, and rivalling the pizza brought here by the Italians. Fish and chips was by now a poor third or fourth. Or fifth.

And now the rest.

Wars seem to be followed by waves of people wanting to settle here, and the troubles of the Middle East and Africa are no exception. We’ve already accepted substantial numbers of legal immigrants from troubled African states like Somalia or Nigeria but we’re also prominently in the news now for trying to deal with an illegal trade in people, mainly from Afghanistan or other Indo-Sinai regions. It’s a human tragedy and the solutions are not easy but we are a big country with a long history of immigrants, both legal and illegal, so no doubt it’s something we’ll deal with sensibly and humanely. 

For what it’s worth, it’s my view that the majority of people so desperate to get here today will, just like the waves before them, only make us a better people.

It might, in the midst of this torrid debate we’re now having, be worth thinking about the words inscribed on the Statue of Liberty in New York harbour, past which literally millions of immigrants sailed on their boat laden arrival to the new world:

“Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!”

It didn’t do America any harm. I think ultimately we’ll manage too.

PS: Maybe we already have our own version of the sentiments expressed in the poem inscribed on the base of the Statue of Liberty. They include this:

“We are one, but we are many
And from all the lands on earth we come
We share a dream and sing with one voice:
I am, you are, we are Australian.”

It was written in 1987 by Bruce Woodley of The Seekers and Dobe Newton of The Bushwackers. You can get all patriotic and watch it on line here.  For my money, it ought to be our National Anthem. And no mention of being ‘girt’ by sea either.

Saturday, August 17, 2013

The forgotten people

Sir Robert Menzies wrote his speech ‘the forgotten people’ about middle class Australia in 1942. Much of it remains relevant today, especially for the generation of new housing buyers who seem increasingly disregarded in public policy debates.

It occurred to me recently that with all the various lobby groups and government agencies involved in the planning and delivery of new housing, the needs of the actual homebuyer seems frequently overlooked or plain ignored.

The home builders have the HIA, general builders have the MBA, developers the UDIA, owners and developers the PCA, the planners have the PIA, architects have the AIA and so it goes. Each group lobbies for the interests of its members, not for home buyers. Home buyers themselves are largely without a voice. They are the new ‘forgotten people’ in a debate about government financing requirements, infrastructure deficits and industry capacity to pay.

It’s reached the point that, despite much hand wringing about the housing affordability issue in Australia, government discussion papers and industry responses to them frequently – it seems to me – overlook the end user. Affordability often doesn’t rate a mention. Discussions about infrastructure levies, for example, seem to revolve around government claims that they haven’t sufficient funds to scrap the levies while industry responses seem to revolve around their own financial difficulties posed by the levies.

But a $30,000 levy, for a young couple on a combined $70,000 per annum (for example) is a very significant amount of money. It’s added to the cost of a new home, and they are asked to pay for it, or borrow to pay for it through their mortgage. This inescapable point is so widely overlooked in the many discussion papers that you begin to suspect it’s deliberately not a focus. It would be a difficult position to justify if it was.

Then we had some recent debate about raising the rate of GST. Some industry groups support this. But as GST only applies to new housing (not established or second hand stock) such a move would only widen the gap in tax treatment which is heavily distorted by taxing new supply only. The GST on a new $400,000 home is $40,000. An increase to 15% would raise it to $60,000. A big $20,000 increase for the young home buyers.  Big enough to write off their chances of entering the market with a new home. But unless I’ve missed it, proponents of raising the GST level have not commented on what this would do to new housing.

Ditto the ongoing debates about urban growth boundaries and the regulator’s desire to limit choices for detached housing in favour of higher density models. The debate swirls around issues of planning ideology, environmentalism, and growth ‘management’ (a byword, in my book, for excessive control). Despite clear evidence of the price impacts of growth boundaries on the cost of new land for housing, the proponents simply disregard the financial impact on young home buyers.

In all of this, the hapless generation of new home buyers are without a voice. Many don’t even know that up to 40% of the price of their new dream home where they’d like to start a family can be sheeted home to taxes introduced in just over a decade. They wouldn’t even know that someone could buy a multi million dollar established home in an upmarket area and pay less tax than they are being asked to.

But onwards we plough, disregarding the irrevocable damage we are doing to society by reducing a generation’s ability to buy and own their own home. The social and economic consequences of a generation of renters in their old age is something, it seems, we can all worry about in years to come. After this election certainly. And after the next one too probably. Let’s wait until it’s too late.

There is no home buyers party at the coming federal election. Housing has barely rated a mention (Sydneysiders with existing stakes in the market, for example, are happy watching prices rise so why make it an issue?) But we have Katters and Greens and Palmers and a host of other minor parties, and the major parties also, and none of them, so far, seem to acknowledge the magnitude of this problem let alone are they ready to articulate meaningful and workable reforms that can actually make a difference for the forgotten people in this debate.

Menzies had it right when he said:

“I do not believe that the real life of this nation is to be found either in great luxury hotels and the petty gossip of so-called fashionable suburbs, or in the officialdom of the organised masses. It is to be found in the homes of people who are nameless and unadvertised, and who, whatever their individual religious conviction or dogma, see in their children their greatest contribution to the immortality of their race. The home is the foundation of sanity and sobriety; it is the indispensable condition of continuity; its health determines the health of society as a whole.

I have mentioned homes material, homes human and homes spiritual. Let me take them in order. What do I mean by "homes material"?

The material home represents the concrete expression of the habits of frugality and saving "for a home of our own." Your advanced socialist may rave against private property even while he acquires it; but one of the best instincts in us is that which induces us to have one little piece of earth with a house and a garden which is ours; to which we can withdraw, in which we can be among our friends, into which no stranger may come against our will. If you consider it, you will see that if, as in the old saying, "the Englishman's home is his castle", it is this very fact that leads on to the conclusion that he who seeks to violate that law by violating the soil of England must be repelled and defeated.

National patriotism, in other words, inevitably springs from the instinct to defend and preserve our own homes.”

Where is that patriotism now?

Thursday, July 25, 2013

Why infrastructure levies are hard to justify

Upfront per lot infrastructure levies, in addition to raising the price of new housing (and hence dampening demand) are also highly discriminatory. They apply only to new houses or apartments and effectively transfer a community wide infrastructure burden onto the mortgages of new home buyers. This approach is hard to justify on social fairness grounds.

One way to highlight the manifestly unfair discrimination of per lot infrastructure levies is to contrast the cost impact on a young low to middle income family buying their new home, with a wealthy family buying an established multi-million dollar home.

If you thought the millionaires would pay more, you’d be wrong. Yes, the way levies are now applied means that the young family will pay more tax on their new home in absolute dollar terms, and in percentage terms, than millionaires. Little wonder the new home building market is at generational record lows, and little wonder new home buyers have been on strike.

Here’s a simple illustration.

Alan and Kylie have finally scraped together their deposit monies for a new project home (or it could be an apartment) and got their bank approval. The purchase price is $450,000. Built into that purchase price is GST (10%) plus a $30,000 infrastructure levy. Add in the additional compliance costs, application fees and related government costs and the total tax and charges figure reaches the $120,000 mark. That’s a conservative number.  Other estimates put it higher.

So Alan and Kylie, possibly on a combined income of around $70,000 per annum, are paying upfront a $120,000 tax bill on their new home.  That’s money they’ll have to borrow. Even at today’s low interest rates that’s an extra $848 per month they’ll have to find just to pay the upfront tax bill (calculated on the basis of the extra $120,000 borrowed at 7% over 25 years).  With that extra mortgage burden, they’re deferring having children until later in life.  They’re deferring a lot of things actually. If this is their first home, they are exempt from stamp duty and can get a $15,000 grant (in Queensland anyway). But this grant and exemption combined, however well intentioned, does little to offset the discriminatory tax regime which their new home is subject to.

Now let’s contrast this young couple with another couple. Let’s call this couple Will and Kate, who are buying an established home in an established inner city suburb. They’re on a high household income (Will’s income alone is enough to support a big mortgage plus private school fees for their tribe) and want to live close to the CBD for Will’s job and so their kids can get to the best schools. They’re forking out $1.5 million. They’ll be up for stamp duty, which is $59,600. And that’s about it in terms of property taxes.

Will and Kate’s home also comes with all the handy neighbourhood infrastructure they could want, already in place. There’s taxpayer subsidised rail, buses, libraries and they’re close to action of the CBD’s cultural and recreational attractions. They’ve paid their stamp duty and will only need to pay rates going forward.

So our first young couple Alan and Kylie have kicked the tin for around $120,000 in taxes on their new home. Even netting off the grant for buying a new build, they’re still up for around $100,000 on a $450,000 home.  Let’s call it 25% for simplicity.

Will and Kate by contrast have only had to fork out a touch under $60,000, or around 4%.

Now don’t for a minute take this as some sort of excuse to impose even higher taxes on established homes. Taxes on housing are already too high and we have an affordability problem as it is which is locking out a generation from home ownership. Increasing housing taxes further would be disastrous.

The better and fairer way is to scrap the upfront tax burden on new supply, stimulate demand and produce more lower taxed supply. Spreading the infrastructure burden across the entire community makes sense because the entire community benefits.

However you look at it, the impact of the current infrastructure levies approach on young families buying new homes is very hard to justify. I'd challenge anyone to try do so.

Footnote: Yes, there’s a first home buyer grant, but as it applies equally to new builds and second hand (established) homes, it’s left out of this for obvious reasons.