Matusik Missive

I wrote about demographics about a month ago – back when the world was a far less turbulent place.

That post featured a table showing the total size of the Australia market by housing buyer segmentation.

Several followers asked me if I had similar figures for the rental market.

And yes, I do.

See the table below.

Australian rental housing demand
Age range*	Past decade	Next decade	Change
15-24	9,700	18,500	90%
25-34	16,250	8,500	-50%
35-44	2,800	10,750	290%
45-54	2,000	4,250	115%
55-64	3,900	4,000	5%
65-74	5,900	7,250	25%
75+	3,250	7,900	145%
Total	43,800	61,150	40%
Matusik + ABS 3101.0. and 3222.0.  * Age range of the primary rental bond holder. Past decade 2009 to 2019.  Next decade 2020 to 2030, medium series.

There is a need to build more rental properties over the next decade than the last ten years.  That lift is close to 40%.

This demand has also shifted.

We will need more rental accommodation to cater for young renters, people in their mid-30 and mid-50s and also for those in the last stage of life.

The young want to live near the action but will share accommodation.  The demand for communal rental housing solutions is already on the rise and this need is expected to grow.  More build-to-rent product is on its way.

Many of the older renters will want better quality digs.  They are after this type of stuff.

Some of our aged folks who need to rent might be best housed ‘at home’ with their children.   The same applies to many younger renters too, this time renting from their parents in either an investment property or at home.

There will be the need for more granny flats and backyard home solutions.

The COVID-19 coronavirus outbreak has forced many employers to consider encouraging, or even forcing, their employees to work from home.

Some are saying that this is a new trend, with many more of us – once the respiratory illness is under better control – working from home.

An in-depth survey by Roy Morgan has found that just over a quarter (29%) of Australian workers do undertake some work from home.  This is up just 1% from ten years ago.

Other surveys suggest this figure varies from 25% to 32% of the Australian workforce.  Again, this reflects people working sometimes from home.

Yet it is estimated that under 10% of the Australian workforce work at home on a permanent basis and this proportion has fallen – despite the rise in digital technology and widespread internet access – over the last decade.

Many jobs simply cannot be done from home and these include numerous retail positions, transport services, warehousing, manufacturing and most recreational and personal service occupations.

There are two industries for which ‘doing some work from home’ is reported by almost half of the workforce including finance, property and business services and communications.

I am one of the rare birds that work from home.  I have worked from home – on a permanent basis – for just under five years now.

It takes a certain type to work effectively from their home.  Let’s just say that I have no problems self-isolating.  But most do.

For mine once this black swan event eases, most – if not almost all – will go back to the previous long-term work patterns.

We are social creatures and our infrastructure (and who owns it) is centred around expensive physical assets and almost all of it involves people working together in concentrated urban centres.

Plus answering some work emails or returning a few calls – between Netflix and SBSonline binging – isn’t really working is it?

Besides imagine how much water cooler, but more likely these days, café, chit chat one would miss if they didn’t turn up to the office or other workspaces.

More importantly not turning up might even accelerate the end of one’s employment.

Many human jobs are under the pump when it comes to technology.  To many, turning up might be a sounder option than being ‘out of sight and out of mind’.

Plus, and despite reassurances to the contrary, the current climate of low growth in wages (and the economy) increasingly appears to be structural rather than cyclical.

Job opportunities are increasingly shifting to personal services and whilst a lot of personal services can be based at home they almost always involve some physical human contact outside of the home.

In addition, workers in these sectors do not get paid very much and this will see more people looking for more work.

Many will be forced to go where the jobs actually are.  Almost all of them will not be sourced or conducted from one’s home.

Don’t get me wrong more of us working from home has big urban advantages, but I just don’t see us – collectively – changing our entrenched patterns of behaviour that much once we get a grip on this respiratory infection.

An emergency.  Then crisis.  Now a pandemic?

Falling confidence.  Market correction.  Talk of recession.  Social distancing.  Cancelled events.  Closed borders.  The list goes on and on.

No good news anywhere.

Panic!

There is little doubt that it is serious.

And I don’t want to make light of the coronavirus (COVID-19) but I am of the opinion – and it is just my opinion after all – that its impact will ultimately be temporary.

In the words of the infamous allegory; this too will pass.

The start of 2020 was always going to be bumpy.  The economy was slowing down in earnest during the second half of 2019.  And the recent two black swan events – local bushfires and now the coronavirus – have added further turbulence.

However, with RBA action, government incentives and now some meaningful endeavours – and with a little bit of self-control on our part too – hopefully, the second half of calendar 2020 should be better, economically, than the first half and 2021 should be stronger than 2020.

For mine it is always the property fundamentals that really matter.

The long-term view outsmarts short-term thinking.

Things that really matter when it comes to the housing market include demographics, work trends, settlement patterns, finance, taxation, regulations, compliance, affordability, and importantly supply and demand.

None of these fundamentals are likely to be substantially altered by the current virus and the ensuing fear; subsequent machinations and changing confidence.

And again, in my opinion, residential property is unlikely to be affected anywhere near as much as other property classes.  People will always need somewhere to live, and homes are the true “safe haven” in the current environment.

This sentiment may also loiter after this emergency passes.  It may even strengthen the longer the virus remains unrestrained.

It is always challenging to invest when the rest of the market is running around beheaded and worrying about the end of the world.

People much smarter and wealthier than me say that it is precisely these conditions that present the best opportunities.

So, if you have a strategy, you know what you want to do and why.  In short if you have a long-term plan, then now is an opportune time to do something about it.

I am sometimes employed to help identify future housing development sites.  These appointments always start with me asking the client to define what they are after.

It is surprising that many don’t have a clearly defined answer.

If you too would struggle with a reply, then maybe answering these ten questions is a good place to start.

The italic replies below illustrate the type of reply which would help me and should help you too.

1. Geographic– Want to stay in Brisbane region, preferably within 10m to 25km radius of the GPO
2. Buyer types– Downsizes and pre-retirees as owner residents, sharing as tenants
3. Price points– Middle of the bell curve – $350k to $600k
4. Product– Three bed minimum, two+ 1/2 bathrooms, two cars
5. Tenure– Freehold wherever possible or low body corporate fees
6. Project size– Site values up to $1.5m, gross realisation under $5m, 10 to 25 dwellings typically
7. Timing– In and out within 12 to 18 months
8. Status– Accept that exiting DAs will need to be changed
9. Budget– 2% marketing + sliding sales commission starting with 5% sales and sliding to 3%
10. Brand – No waste, value for money, a third of our sales come from referrals.

So, again without making light of the coronavirus and its impact, if you have a plan, now is an opportune time to do what the crowd isn’t; and in this case, buy your next development site or your next home or property investment.

Of course, caveat emptor applies.

So, what do tenants want?

We recently asked the Matusik Missive tribe to answer this question.

We had just over 100 replies and thanks to those that took the time.

I like to number things, but acronyms can be fun too.

Here are three acronyms you should know to better understand what tenants want.

SOAP

SOAP has been around for some time and it is somewhat heartening to see that this old faithful still features high on the rental markets want list.

S = Storage

0 = Outdoor living space

A = Air conditioning

P = Parking (off street)

PIES

In recent years there has been a want for other things when it comes to rental accommodation and the PIES abbreviation sums it up nicely.

P = Pets

I = Internet (hi-speed) connectivity

E = Energy efficiency appliances and cost saving installations like solar panels

S = Security measures covering both the house (contents) and vehicles

When it came to pets, most seemed happy to a pay premium to allow them to rent with their pet/s.  Our survey confirmed the often cited 10% to 20% additional charge.  For more about this topic go here.

LEAP

Looking forward several of our respondents would like to see changes in the rental space and the four most common appeals included:

L = Longer leases

E = Easy to maintain home

A = Attention to detail

P = Policing

Many renters surveyed are looking to lock into a longer lease – more akin to a commercial lease – with a three or five year terms and set rental increases.

There is also a want to replace carpet with timber flooring (even in bedrooms) and to reduce the level of outdoor maintenance required.  These respondents seemed willing to pay a slight premium (averaging 5%) for an easy maintenance rental home and would pick such a property over one which – they think – would take longer to keep clean.

Attention to detail, is a two pronged folk.

On one prong we have renters saying that the rental managers need to improve their level of service and to remember basic details about the property they manage and the tenants occupying them when they make contact or undertake inspections.

And on the second spike, quite a few respondents complained about the small stuff – leaking taps, very worn carpet, poor painting, holes in fly screens (and walls!), windows and doors that don’t open or shut properly and other such remedial repairs.

And finally policing.  This was mostly from folks renting apartments and townhouses and their complaints were about the lack of policing the body corporate rules – noise, rubbish and parking violations were the more common grievances.

A now a few words from our survey respondents.

If I could change anything, I would have an extra car park plus more storage space.

It’s modern, easy to clean, comfortable inside and air conditioned.  Plus – it’s pet friendly.  A must for us.

We have three kids and we need enough room for all the stuff that comes with that (cricket gear, bikes, etc).

I would change the lease tenure giving renters the ability to lock in longer leases. 

Three or five lease terms would work better for us and we really want to know what rental increases are expected years in advance.

What would I change?  Replace the carpet with polished floorboards and ban morning leaf-blowing.

My building is in need of remedial work – external facade has splitting render, cracking tiles in bathroom and kitchen, efflorescence on balconies, etc.

Stricter body corporate policing is needed to keep the common areas presentable and residents plus guests using their designed parking spots.

If I could change it, I would make the outdoor living space more appealing.

Now I too would like to stop morning leaf-blowers and to be honest I had to look up what ‘efflorescence’ meant.

One moment with Mike…

Has the scheme worked?

There is little doubt that the scheme was popular.  There are numbers floating around saying that 6,500 loans of the original 10,000 annual cap, are being processed.

But for mine, these 10,000 placements are already gone. 

My understanding is that they went in the first couple of days.

I know of several pending first home buyers that have been told that they missed the boat.  For now.

Given the popularity of the scheme and the associated politics, there is likely to be a further 10,000 placements released later in the year.

The 1^st of July is the probable date.

So, the current scheme is a good one?

Well there are a barrage of statistics coming from the Morrison government saying who bought what and where.

But the one statistic that is missing is how many of these assisted first home buyers bought a new home.

I would be surprised if it was 10%.

The current price caps largely ensure that second-hand properties were purchased. 

What would you change?

The current scheme, like most previous first home buyer initiatives, is good politics but poor policy. 

All that has happened really is that prices are being keep artificially high, resulting – over the medium to long term – in less first home buyers entering the market than would be the case if no first home buyer incentives where introduced.

Such action is of course eroding housing affordability.

I think that if this deposit scheme is to continue then it should be used as a housing policy and only apply to new dwellings.

I would also remove all caps – being purchase price and household income parameters –  too.

But I would apply a strict rule and police it hard.

What would that rule be?

Many first home buyers – in some instances it exceeds 20% in select areas or new housing projects  – use such initiatives to buy, then in 6 to 12 months’ time rent it out and move back in with mum and dad or rent another property.

I have developer clients telling me that this has been the norm for some time. 

Any first home initiative must see the recipient live in that property for at least five years.

If the recipients of such as scheme, sell the property for a gain or rent the property, within that five year period then they have to pay back the monies gifted and with a commercial rate of interest. 

Any final comments?

Lenders need to acknowledge the scheme exists and not discount the property’s value or increase the interest rate or apply mortgage insurance because a first home buyer has accessed government deposit assistance.

First home buyers also need to understand that they have to have their finances in order before they apply. This wasn’t very well defined in the lead up to the current scheme’s release in January.  That communication also needs to be improved.

James Carville, allegedly, helped win the Presidency for Bill Clinton in 1992 with a sign in the campaign’s headquarters saying, “The economy, stupid”.

Well maybe there should be a sign saying – “Demographics, stupid” – on our desks as well.

Many in the economic, town planning and property space, including investors, tend to ignore or underplay the influence of demographic factors over the short and medium term.

But demographics matter.

Look at the table below.

Australian housing demand
Lifecycle housing segment		Annual housing demand
Description	Age range	Past decade		Next decade
Young renters	15-24	11,820	8%	20,410	13%
First home buyers	25-34	27,550	19%	13,090	9%
First upgrade	35-44	7,800	6%	23,700	16%
Second+ upgraders	45-54	7,500	5%	10,360	7%
Downsizers	55-64	21,620	15%	8,900	6%
Retirees	65-74	39,180	28%	23,830	16%
Aged	75+	26,190	18%	52,380	34%
Total		141,660	100%	152,670	100%
Matusik + ABS 3101.0. and 3222.0.  Past decade 2009 to 2019.  Next decade 2020 to 2030, medium series.

There is a need to build more homes over the next decade than the last ten years. 

But not only has the demand lifted, it has shifted too.

We will need more new homes catering for the young and the old, with less for the age groups in between. 

That suits those suppling downtown units, infill town homes, smaller suburban apartment complexes and retirement villages. 

It also suits the provision of granny flats and backyard home solutions. 

Much of this new housing supply will also need to cater for local demand, especially when it comes to older residents. 

The irony is that that many ageing residents don’t want to see their suburbs change to cater for their future housing needs.  Local councils are often quick to agree. 

Of course, stamp duties also halt local housing moves.

In addition, the size of the first home buyer cohort is expected to decline, whilst the need for more homes that cater for families upgrading should rise.

Yet there is a focus on first home buyer benefits.  Many local authorities are looking to restrict infill development and implement financially unviable car parking regulations. Whilst stamp duties are too high and property investment incentives too lax.

Our energies seem wrong. 

Maybe a “Demographics, stupid” sign isn’t that stupid after all.

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. 

Residential sales
Location	Total sales	% detached houses	% attached dwellings	% vacant land
Adelaide	24,800	60%	25%	15%
Brisbane	48,830	61%	26%	13%
Canberra	8,440	50%	46%	4%
Darwin	2,020	55%	26%	18%
Hobart	5,510	67%	19%	14%
Melbourne	76,840	61%	31%	8%
Perth	34,190	70%	12%	19%
Sydney	74,740	54%	40%	5%
Capitals	275,370	60%	30%	10%
Gold Coast	16,460	42%	51%	6%
Sunshine Coast	9,190	54%	33%	13%
Matusik + Price Finder.  Year ending September 2019.  Includes both new sales and resales.

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.

Table 1: Detached house sales + median price
Location	Sales	% change	Median $	% change
Adelaide	14,770	-10%	$472,000	2%
Brisbane region	29,550	-11%	$545,000	0%
Canberra	4,130	-13%	$690,000	1%
Darwin	1,120	-5%	$485,000	-3%
Gold Coast	6,930	-14%	$650,000	0%
Hobart	3,690	-14%	$460,000	8%
Melbourne	46,910	-19%	$714,000	-5%
Perth	23,800	-7%	$475,000	-3%
Sunshine Coast	5,010	-11%	$605,000	0%
Sydney	40,680	-6%	$890,000	-6%
Matusik + Price Finder.  Year ending September 2019.  % change on year before.

Table 2: Detached house sales by price group
Location	< $500k	$500k-$750k	$750k-$1m	>$1m
Adelaide	55%	26%	13%	6%
Brisbane region	41%	31%	18%	10%
Canberra	11%	40%	35%	14%
Darwin	53%	37%	8%	2%
Gold Coast	22%	36%	26%	16%
Hobart	57%	27%	13%	3%
Melbourne	13%	35%	26%	27%
Perth	54%	23%	13%	10%
Sunshine Coast	23%	44%	23%	10%
Sydney	9%	21%	27%	43%
Matusik + Price Finder.  Year ending September 2019.

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.