Matusik Missive

Few urban places across Australia surprise.

In most of our major cities, the demand for detached houses is double the demand for attached dwellings.  And typically, one in ten residential sales across a wide urban area is a vacant allotment.

This has been the norm for some time.

Yet there are a few areas that are starting to defy this pattern. 

These areas include Canberra, Sydney and the Gold Coast when it comes to limited land sales and a high market share of attached dwelling sales.

Other areas appear to have adequate urban land supplies.  These areas include Adelaide, Darwin, Perth and to some degree the Brisbane region, Hobart and the Sunshine Coast.

It looks like Canberra; Sydney and the Gold Coast are set to become vertical cities. 

This will restrict certain lifecycle housing segments – including first home buyers and  families – and in particular those households with two or more children. 

Residents that need several vehicles per household will also be affected.

It is easy to be tricked into thinking that there are apartments everywhere.  And that this is the big trend. 

You see the cranes on the skyline and the new tall buildings stand out far more than any new detached housing estate, infill urban development or backyard home solution.

However, the demand for attached housing, whilst on the rise, is much lower than many realise. 

And the shift from detached to attached is much slower than most think too.

Two tables this post.

Please take 30 seconds to look at them.

Most will focus on the price column in the first table and then spend most of their time reviewing the change in price.  Many will take sides too, either agreeing with or rejecting, my summary of the annual change in the median price data.

But few will focus on the sales volumes in table 1 and even less will spend much time – in my experience – on the second table at all.

Yet, sales volume and especially volumes by price group (and product type) are the key elements to understanding a housing market.

Our minds have been hijacked by price and especially its annual, monthly and even, now, daily movement.

Most online databases promote price.  The name of my preferred sales database – Price Finder – speaks volumes.

When my business undertakes market analysis – or when Paul Broad and I are commissioned to provide project advice – we always spend considerable time understanding, and illustrating, the size of the relevant housing segment.

You need to understand the size of your market, what market share you can realistically achieve and your competitive set. 

The aim should be to reduce your sales risk.

It’s rare to be able to grow a market.  At times it can be done but almost always at high expense.

Many in the property sales space will tell you that they have a wide funnel.  But in reality, it is very uncommon. 

Its best to know the market’s limitations from the get-go and plan accordingly.

Queensland faces two elections this year – local government elections in late March and a state government election in late October.

In most cases, local government elections mean little to those in the electorate, whilst the state poll – which Labor currently holds by just four seats – is considered a more serious affair.

Many believe that Labor will lose the Queensland state election and that we bring about changes.  Some think that these changes will be significant.

A change can be a good as a holiday.  And after a break one often feels more confident and refreshed.  There is considerable credence in this postulation.

But also, confidence is a flitting thing.  Increasingly so it seems these days.

I like to go back to the numbers when confronted with such conjecture.

And the numbers suggest, that regardless of state government flavour, there is likely to be little real change on the Queensland scene.

Queensland carries substantial debt.  Taxation revenue will remain fundamental regardless of party.  There is very little room to ease state taxation or provide incentives.

Queensland’s taxation revenue essentially comes from four income streams.  These, based on the 2019-2020 budget, are:

• 33% Property (transfers, taxation + levies)
• 28% Payroll (tax)
• 23% Motor vehicles (registration, duties + insurance)
• 10% Gambling (taxes + levies)

So, don’t expect any major property related changes. 

A new government isn’t going to be able to notably reduce the cost of doing business nor are they likely to try and reduce the number of cars on Queensland roads.  Quite the opposite in fact.

And with state revenue from gambling increasing by 10% per annum over recent years, expect more casinos and gaming contraptions at your local in the years to come.

Change? 

Hmmm, I do wonder.

At present one in five (18%) of Australia’s households hold two generations and some ten percent (9%) hold three generations.  These figures are expected to rise to 24% and 13%, respectively, within the next decade.

Yet our analysis into this market segment has found that less than 5% of Australia’s existing housing stock successfully caters to this multi-generational market.

Recent analysis by CoreLogic has found that building a secondary self-contained home in the backyard can lift the overall properties value by up to 30% and adds around 27% to an investment properties previous rental income.

This work by CoreLogic also found that there were 583,000 properties in Sydney, Melbourne and Brisbane that met the criteria for an additional self-contained backyard dwelling.

Our work has found that the inclusion of a $185,000 Backyard Home (including development approval and infrastructure costs) – in the Brisbane context – can achieve gross rental yields of between 8% to 10% for permanent tenancies and between 15% and 20% for short-term occupancies.

Our work has also found that middle-ring detached homes with a fully-compliant and high quality one-bedroom secondary residence – like Backyard Home – resell for between 12% and 15% more than other dwellings in the same location without a secondary abode.

The demand for backyard housing solutions is high and rising. 

And the supply of housing that caters well for multi-generational and other household members is in short supply.

It might not happen later today, but it should happen soon and maybe twice in the next couple of months.

I am of course talking about the RBA cutting the cash rate.

Mark Twain famously said “Lies, damned lies, and statistics”.  And this was quoted in the context of the use of statistics to bolster weak arguments.

But for mine, the chart below isn’t a weak argument.  It shows that interest rates are heading down.

However, don’t expect much of it to be passed onto us punters.  

Nor will it really have much impact, economically, except maybe to help keep some housing markets more buoyant than they really should be.

But when you only have one or two tools in your tool box you have to use what you have got to try and get the job done.

The average floor area of a new free-standing house in Australia is 254 square metres.

Our homes are much larger than those within Europe and even many American cities.

Why has this occurred? 

It is simply economics.

The actual land component of a new house and land package is very high and fixed.

And these days the land usually costs around two-thirds of the total purchase price.

For example, a 150m2 three-bedroom house and land package can cost $525,000. The land price would be around $330,000 and the cost to build the house about $195,000. The building rate equates to $3,500/m2 when including the price of the land.

Now, a larger 250m2 four bedroom house with a study + even multi-purpose room might cost $275,000 to build, making the end package total $600,000. The buyer gets 100m2 of extra house for just $75,000 more.

The total end price per square metre has now dropped to $2,400 or 30% less.

And here is the real rub.

Assuming that the buyer can afford to pay the extra deposit and fund a $600,000 house and land package, all it costs – assuming a ten percent deposit, 25 year principal and interest loan and using a 3.75% variable interest rate – is an extra $10 per day in mortgage payments.

The new home buyer can now own a home that is two-thirds larger for just $70 per week.

To upsize the house, as outlined in the example above, would cost the buyer an extra $3,650 per year.

Given the high cost of land in and around our capital cities, the trend towards larger new homes makes economic sense.

Buyers are just acting in their own interests and are making rational decisions to choose a larger and more valuable home for what is a small additional out of pocket expense in the broad scheme of things.

Unless there are real economies in the land content – for example, the plentiful supply of subdivided land to keep land prices keen – building a small house is often not the best value for money.

At first glance it looks like we have a lot of spare bedrooms.

Yes, our homes are big, but they aren’t all that well designed to cater for multigenerational households.

The number of people per household is now on the rise.

This is being influenced by a range of factors including low housing affordability, harder economic times, limited land supplies in our major cities, rising land prices and demographic change.

Increasing traffic congestion and travels times are also having an impact. 

Many younger adults are staying at home longer or boomeranging back and forth. Whilst, in some cases, grandparents are living in the family home too.

Also, quite a few homeowners are taking in a tenant to help make ends meet.

My new business venture backyardhome.com.au caters for these trends. 

Queensland is attracting more people.

They are increasing coming from overseas and not from interstate. 

Queensland’s biggest increase in overseas nationalities over the last five years were:

• Indian up 64%
• Korean up 57%
• Chinese up 49%
• Spanish up 44%
• Sri Lankan up 43%
• Filipino up 35%
• Vietnamese up 35%                                

If this population remix remains in play, then Queensland’s housing needs will change. 

Many of the nationalities high up on the Queensland overseas growth list want different things when it comes to housing when compared to older Australian households and migrants coming from the Anglosphere.

They like, for example, to live in multi-generational groups. 

For many accommodating their adult children and/or their elderly parents on the same title is the major factor when buying or renting. 

Many also opt to improve their residence – over time – to support more household members.

For more detail about backyard home go here.

One might say there are winners and losers. 

With Tasmania, Queensland and Victoria in the improving line-up and the Northern Territory and Western Australia in the loser’s circle.

Well one might.  But I reckon it depends on which side of the fence you sit. 

More bums on seats can be a good thing, but it can also be a curse.

Remember for every 1,000 increase in population there is another 776 cars.  This ratio is 817 in Queensland and even higher out west and in Tasmania.

There is little doubt that the east coast states are dominating population growth, with an 85% market share last year.  Its share of the spoils is on the rise too. 

When it comes to population, we have a very lopsided nation.

For more detail about what is – and isn’t – going on in south east Queensland go here.

Some areas are doing better than others. 

However, the overall trend is down, with fewer new jobs being created across SEQld last year when compared to the previous five year average.

Also, of note is that if Brisbane is going to continue to create about a quarter of the new jobs in the region, it really needs to think through its new housing development policies.

Does Brisbane really want to be a doughnut city, where most workers reside elsewhere and commute in and out of the city each day? Do Brisbane residents want to pay the lion’s share of that burden?  Or is it best to have people work and live within a close commute?  I wonder.

Regardless of my muse, new job creation is the challenge for Queensland and a big factor as to how the local housing market plays out during 2020.

And if you want to get another 23 tables like this one, go here.