SEQ land market trends

This post outlines the current state of play when it comes to the SEQ land market.

This missive holds two charts plus a missive extra table at the end of the post.


A quick summary

  • SEQ land sales have dropped sharply over the last 12 months.  Yet land values continue to rise on an end price, also on a $/m2, basis.
  • Traditionally, like the dwelling market, a decline in land sales means weaker land prices, but this doesn’t seem to be happening at present across SEQ.
  • Our work suggests that; despite both state and local government assurances that there is amble land available for urban development in SEQ; on the ground this really isn’t the case.
  • The continued decline in median lot sizes also suggest that development land supply is tightening up.

Recent development trends

Our review of residential development trends over the past three years across SEQ has found:

  • 75% of all residential development applications in SEQ are for projects with under 10 dwellings, yet these small developments, when combined, make up just 5% of all the new dwelling starts.
  • In contrast, new projects with over 50 dwellings supply 80% of the new homes across SEQ, yet these larger projects account for just 10% of all development applications.
  • Some 45% of the apparent land supply available is currently set aside for medium to high density residential development, whilst 55% is allowed for detached dwellings and infill product like townhouses, duplexes and dual+ occupant housing.  This supply assumption is at odds with current local market trends and does not fit SEQ’s future domestic demographic shape.
  • A review of approved residential projects that are unlikely to proceed finds that a third of them, across SEQ, involve higher density development, whilst just 5% are for detached housing/townhouses.
  • Furthermore, the smaller the project the less likely it is to proceed. At present some 30% of approved projects with under 10 dwellings is stalled, whilst this proportion (as a count of total potential dwellings supplied) is just 7% for approved developments with over 50 dwellings apiece in SEQ.

Land supply constraints

My simple summation here is that there aren’t enough major development land parcels to cater for demand in SEQ.  The current rationale is that smaller residential projects and higher development yields will cater for an increasing proportion of SEQ’s housing stock.  Yet recent trends suggest that this isn’t working.

In addition to this market mismatch, the land which is perceived to be readily developable, really isn’t.  It is constrained by numerous things such as:

  • Fragmented land sizes and ownership
  • Unrealistic urban densities
  • Various excessively restrictive planning overlays
  • Lack of affordable and co-ordinated infrastructure provision
  • Urban economic inefficiencies
  • Long and uncertain approval processes

Some local councils are better than others, whilst other LGAs have their heads in the sand.  The recently assembled state government land supply council – based in their first round of reporting – appears to be echoing the status quo.

End note

For mine, the priority should be building homes for local residents not overseas buyers or international tertiary students.

The lack of appropriate new development land is already having a negative impact on local job creation and housing affordability. Unless SEQ increases its land supply and facilitates  more wanted urban development, economic growth will go elsewhere.

Timely urban development and infrastructure is the key to facilitating economic growth.  You cannot have one without the other.

It’s time to pull your finger out SEQ!

Trendlines, not headlines

Now that the summer holidays are over and most of us are back on the tools, it might be best to start the batting this year with an opinion piece.

In turbulent circumstances it often pays dividends to set the appropriate tone upfront.

The Australian housing market – as seen through the news and other media – will mostly be a depressing place in 2019.  And if not disheartening, then contradictory at best.

The headlines will tell us about falling prices; rising costs; declining sales; overbuilding; rising supply and, of course, the impact of the banking royal commission and the pending federal election.

But the media (and especially much of the property related commentary) even at its most accurate is bound to paint a distorted picture of reality.

At its core, the ‘news’ is about things that happen and/or what data/study has been released and not about things that don’t happen, such as most of us getting on with our lives; buying and selling homes (often for a capital gain) and/or new housing projects getting developed.

Adding to the gloom is the ethos of the mainstream media, in which reporting a failure is deemed a professional duty, whereas broadcasting success is considered ‘public relations’.

But to get an accurate picture of the world you have to ‘count’.  You also need to take a long view and not rely on the latest statistic or number.  In short you need to go beyond the headlines and follow trendlines.

True past performance is no guarantee of future results.  But history – and in particular the property market – is cyclical.

So, what really matters?  What trendlines count?  What should be ignored?  How does one assess what is really going in your relevant housing market?

Below is a list of things that I think matter. They apply to all geographic areas; housing types and both new digs and resales.  A deep understanding of these trendlines cancel out any headline.

Ask yourself these 5 questions.

1. What is the local time?  That is to say where is the relevant local market and housing product positioned on the property clock.  The action taken depends on the time.  Whilst the property industry doesn’t like me saying this, sometimes the best course of action is to do nothing at all.

2. How deep is the market?  What is the current and future level of relevant housing demand?  Here we are counting sales by price group; product type and dwelling characteristics plus the underlying need to supply more housing.

3. What is the current and likely future level of housing supply?  It is best to include supply on several levels including resales; new developments and also dwellings available to rent.

4. Who will buy or rent the dwelling?  Here we suggest breaking the existing and future market into either generic demand groups (first home buyers, upgraders and downsizers for example) or lifecycle segments (such as young couples no children, families with young children and older lone persons households etc.).  Regardless of method, is the local ‘target market’ big enough to help you succeed?

It is often best to reverse this analysis and determine the size and direction of the relevant local housing market segments first, and then, deliver to appropriate product to them rather than trying to ram your predetermined ‘square’ product into a ‘round’ hole.

The ramrod approach can work when things are going well but rarely when things are more cactus.

5. What makes this property and location special?  Consider the things that really matter like local employment; income levels; schools; transport and affordability.  The hard-core stuff not the fluff.

And finally, it often pays to do a ‘Denzel Washington’ and clarify your rationale to yourself like you were explaining it to a five-year-old.

For younger readers watch the 1993 movie Philadelphia.  It won several Oscars including best sound track by Bruce Springsteen.

10 Things: 2019

1. Politics.  I don’t want to wax lyrical here, just to say there is likely to be a May federal election. So, it will be a year of two halves, with stuff-all business wise happening until the election – and post the event and regardless of result – things economic should improve.  At present, how much is anyone’s guess but how far the housing market tanks will be a key factor.

2. Two speed economy.  Public versus private.  Almost all of our economic growth of late is due to the public sector, population growth and debt.  On the private side, businesses are taking profits, rewarding shareholders but not employing more or raising wages.  Most economic indicators, on a per capita basis, are down.

3. Cash rate.  Unless we see a lift on the private side of the economic ledger then the cash rate will fall.  I have been saying for some time that this is very likely, as we have been in an ‘income recession’ of some time.  Now that the official statistics suggest similar, the “cut rates” calls are increasing. Two cuts of 0.25% each are on the cards in 2019.  Chinese walls between the RBA and current government and an attempt to keep mortgage rates were they currently sit are the main reasons why.

4. A two-speed housing market too.  Sydney and Melbourne are over cooked whilst much of the rest of the joint is about “just right”.  What drove prices up in the two big smokes hasn’t happened elsewhere.  I don’t expect big price (or rent) gains in coming years – and maybe for a decade – in areas outside of Sydney and Melbourne.  But values are likely to continue to fall in Sydney and Melbourne in 2019.  How far down they could go is a like throwing a dart, but another 10% drop in values – from the 2016 market peak – is possible.

5. Perception.  Negative press is set to continue, especially now with the Nine Network in the Aussie mainstream mix.  Maybe best not to watch commercial TV, read the newspapers or listen to the shock jocks. But importantly it is when you bought a property which has a big influence on your mood.  ME Bank did a good poll a few weeks back.  See the table below.

Issue Purchased dwelling when?
Last

12 months

12 to 36 months ago Longer than 36 months ago
% worried about value falling  

70%

 

66%

 

49%

% worried about losing money on the property  

60%

 

68%

 

35%

% worried about owing more than it is worth  

57%

 

68%

 

27%

% regretting that they paid too much  

46%

 

48%

 

15%

Punters who bought three-plus years ago appear less stressed about the housing market’s current direction than those that bought more recently.  The last line in the table is interesting.  Despite the worries, only one in six (15%) of the 1,500 people surveyed by the ME Bank who bought three-plus years ago regret that they paid too much.  So maybe it’s largely just whinging after all.

6. Population.  We need a long-term population policy, but pigs might fly too.  I suspect that the current level of annual increase (400,000) will ring true for some time.  Most of this new growth will continue to settle in four areas of Australia being Sydney, Melbourne, SEQ and Perth.  More will escape from Sydney and maybe Melbourne and move north (NSW coast and SEQ) or south (Tasmania), but many will be economic refugees or retirees.

How much they will influence house prices is questionable.  As outlined last week more private investment is need in SEQ before housing values lift in earnest.  You need private sector jobs and higher paying ones too to lift property values.  There are no free kicks left.  Interest rate cuts will be an attempt to keep the current status quo.

7. Wages.  A lot is against the return to half decent wage growth.  Automation, digitalization, the internet of things and algorithms are all stacking up against automatic annual lifts in how much most of us get paid. There will be more lower paying jobs in the future.  Middle income households are likely to be further squeezed.

8. Land supply.   Here I will keep my comments to SEQ and in this region the current levels of practical of land supply – being broad hectare and serviced parcels – is in very short supply.  There are heaps of infill, fragmented smaller pieces of potentially re-developable land, but in reality, developing much of this stock is just a pipe dream.  This issue needs sorting out.  If it isn’t people will move elsewhere and the SEQ economy will suffer.

9. Housing demand.  The two largest housing demand segments, starting in earnest next year, will be first home buyers and downsizers.  See the table below.

Australia
Past and forecast annual housing demand by key household segment

Key household segment Last decade

Annual change

Next decade

Annual change

Change
No. % No. % No.
Young renters 29,000 23% 14,000 9% -15,000
First home buyers 7,000 6% 29,000 20% 22,000
Upgraders 28,000 22% 18,000 12% -10,000
Downsizers 36,000 29% 47,000 32% 11,000
Retirees 12,000 10% 26,000 18% 14,000
Aged 14,000 11% 14,000 9% 0
Total households 126,000 100% 148,000 100% 22,000

Matusik database + ABS various.

These two markets segments want certain things. Revisit my earlier posts on these markets here and here.

And also, of note is the underlying need to build more homes per annum over the next decade, when compared to the last ten years.  This is because downsizers and, in many cases, too, first home buyers, have smaller households than the upgrader market segment.  Swelling overall numbers – in both the first home buyer and downsizing buyer segments but with less people per household – increases the need to build more dwellings.  Now if only the right stock (and at the right price and place) can be supplied?

10. And lets finish with negative gearing.  In short, if applied to new builds only, then more investment homes will be built.  But more pertinent is that the removal of NG will see a big change in the type of investment housing sought.  More rental income will be needed.  This usually means more tenants per asset.  Yet most local authorities are starting to over regulate (or even outright ban) dual-occupancies, ancillary dwellings and granny flats.  We need to get this also sorted and fast.

My quick summary

2019 will be harder than 2018, but probably not as bad as most think.

Measure five times cut once.

Bridging Brisbane

One of Brisbane’s biggest assets is the Brisbane River.  It is also one of the region’s major challenges.  For mine – and it would appear to many others too – there isn’t enough river crossings in Brisbane.

I touched on this issue as few months back when I questioned the lack of public open space in inner Brisbane and this lack’s likely detrimental effect on future inner-city high-density residential development.

To revisit go here: Missing: Green Infrastructure 

That post received many replies, with several subscribers telling me about a recent RACQ study into the local population’s perception about building more bridges in Brisbane.

Go here to see the full RACQ results: Bridging Brisbane 

A quick summary

  • 4,600 people were surveyed by the RACQ in mid 2017
  • Most drove cars to work; reside in Brisbane’s western, eastern or inner-city suburbs; were aged between 35 and 64 years and were RACQ members.
  • Overall 12 Bridges (including the three associated with the Wilson Triple Jump) and two tunnels were considered.  Why these 12 river crossings were selected is outlined in the missive extra section at the end of this post and they are shown in the map below.

  • Overall there was very strong support (88%) to build more bridges.  See the table below.
  • The majority want to these bridges to support a range of transport modes including private vehicles.
  • Tolls, in some cases, were also considered a reasonable trade-off between the increased convenience and a way to help offset cost.

Brisbane bridge preferences 
Ranked by level of support

Bridge or tunnel Yes* No
7 West End to St Lucia 94% 6%
3 Centenary Motorway Upgrade 93% 7%
10 Wilson Triple Jump 92% 8%
8 West End to Toowong 90% 10%
1 Moggill Road 90% 10%
2 Bellbowrie to River Hills 90% 10%
11 Bulimba to Teneriffe 90% 10%
4 Walter Taylor Bridge 89% 11%
12 Hamilton to Balmoral 89% 11%
6 East West Link (Tunnel) 84% 16%
5 South West Tunnel 80% 20%
9 Victoria Bridge 69% 31%
Overall average 88% 12%
*Includes both percentage FOR and percentage NEUTRAL

End note

More river crossings would make life much easier for many Brisbane residents and also visitors to the city.  They could also help improve the region’s property values.

They would be much cheaper to supply than the big-ticket items like Cross River Rail and I reckon they would have far greater impact than the big-ticket items too.

There seems to be strong local public support for such infrastructure, yet whenever I have asked about building more bridges in Brisbane – which I have done in several public forums in recent years, including a gathering of five Brisbane Mayors – I have been shut down with the usual political stone walling.

Brisbane is often categorised as a “Lifestyle City” in typologies of world cities.  If that rings true – and I think that is a far better handle than the “New World City” pretence that is currently being flogged – then we best do something that really adds to resident’s lifestyle, which includes improving how most of us move around the joint.

If I was in charge, I commit funds to build all 12-river crossing as outlined above – over the next 25 years.  That’s one crossing every two years, starting from 2019.  Several of the current and proposed white elephants would have to go.  This would include Cross River Rail and the pitch of the 2032 Olympics.  Such is life.

We need things that work not pipe dreams.

Missing: Qld Private Investment

This post I have included seven charts outlining what’s missing when it comes to Brisbane’s housing market.

For the record the latest data from CoreLogic suggest that Brisbane house values rose by just 0.3% over the last 12 months, with values rising 0.1% over the last three months.  So, no price acceleration at the moment.

Now that’s a heck of a lot better than the 8% annual fall in Sydney house values during 2018 and the 6% decline in Melbourne’s house prices over the same period.

But to many the lack of movement in Brisbane’s housing values is a real puzzle – what with the big difference between prices in Brisvegas when compared to the southern smokes and with all those interstate migrants now flocking north out of Sydney.

For mine, a key reason why house prices haven’t moved much in Brisbane (yet) is the lack of private investment.

Queensland is currently attracting about $25billion worth of new private capital expenditure.  This is a 21% share of the nation’s total.  It attracted close to 50% just five years ago.  One of big reasons for the fall is that mining expansion is on the decline. See charts 1 and 2.

New South Wales and Victoria – which attract a lion’s share of the non-mining investment monies – have expanding private investment spending, whilst Queensland doesn’t.

See charts 3, 4 and 5 below.

It is not until Queensland sees more private investment – and more pertinently more non-mining investment monies – that house values will grow in earnest.  See charts 6 and 7.   

In fact, the state’s rising interstate migration intake; the large lift Queensland public service jobs in recent years and now the major public spending in big ticket infrastructure projects is helping keep things, including Brisbane house prices, afloat.

Obviously the large capital injection in mining a few years back – revisit chart 6– has also had a positive impact.

But how long these things can last without more private investment is questionable.

Hopefully the list of big things promised – such as second airport runway; Queens Wharf redevelopment, Brisbane Metro project, Cross River Rail, Brisbane Live and the Brisbane plus Herston Quarters – we see an injection of private spending in Queensland.

That’s what’s missing – private non-mining investment in Queensland.

SEQld: Land Prices

There is a somewhat misguided debate going at present, suggesting that Australia’s houses are too big, especially when compared to other countries, and that is one of the main reasons why housing here is expensive.

Putting aside the differences in how house sizes are actually measured across countries, the local evidence strongly suggests that building the biggest house you can afford makes sense in Australia, as it is the land the grows in value and not the actual dwelling.

Let’s explore this notion a bit further.

Over the last 20 years, house prices in Australia have grown by 4.5x, whilst the cost of building a home has risen by just 1.8x.

When looking at the established housing market, in 1998 the land’s value accounted for 45% of a dwelling’s resale price. Today, the land’s average value is closer to 65%.

Land is becoming more expensive – blame town planning, developer land banking, dribble release management, a general lack of supply or population growth – and as a result two trends are evident:

  • land sizes are falling, and
  • the land price per square metre is rising.

Also adding to weigh behind these two trends are changing demographics, and sociographics, too.  Many want to live closer to the action and/or have little time for backyard maintenance.  A yard, to many these days, isn’t worth the cost anymore.

Some statistics

When looking at our capitals, average lots sizes have shrunk from 700m2 in 1998 to about 450m2 today.  Whist the price per square metre of the land sold has increased and, in some cases, dramatically.

For example, in Sydney new land values averaged $500/m2 ten years ago, but today they have more than doubled to $1,150.  A similar escalation rings true for vacant land sold in SEQ, up from $300/m2 in 2008 to $600/m2 today.  And in Melbourne the growth rate has been on a tear, up from $250/m2 a decade ago to $900/m2 as at June 2018.

Across south east Queensland, a similar trend is apparent with new urban land values (on a rate per square metre basis) increasing between 42% and 130% over the last ten years.

The average size of lots sold across SEQ have dropped by 33% over the same time frame.

In summary, land values have doubled, whilst lot sizes have shrunk by a third.  See table 1 below.

Table 1:

Change in land values and lot sizes over the past decade

South east Queensland

LGA Total change in land values and lot sizes
$/m2 Lot size
Brisbane (C) 130% -28%
Gold Coast (C) 96% -35%
Ipswich (C) 75% -29%
Lockyer Valley (R) 42% 1%
Logan (C) 102% -33%
Moreton Bay (R) 124% -35%
Noosa (S) 80% -24%
Redland (C) 42% -39%
Scenic Rim (R) 60% -10%
Somerset (R) 52% -18%
Sunshine Coast (R) 72% -24%
Toowoomba (R) 71% -2%
Total SEQ 105% -33%
Queensland Treasury, Years ending Sept Qtr. 2008 v Sept Qtr. 2018

End comment

Much more needs to be done regarding the price of land when it comes to making housing more affordable.

Thoughts needs to embrace how we tackle:

  • Land use
  • Supply
  • Lot sizes and frontages
  • Vehicle use, access and storage
  • Road access including ingress and egress
  • Tenure
  • Servicing

Some ideas include:

Allowing front yards to be used for a range of activities including commercial use such as ‘pop up’ stalls.  Having no minimum lot sizes or frontages.  Parking cars elsewhere overnight and on weekend like in nearby schools or even shopping centres.  Providing rear lane access and shared road reserves in low trafficked areas. Leasehold not freehold.  More off grid – or at least semi off grid – development.

I recently discussed land supply in some depth.  To revisit go here:  SEQ: Land Supply.

Changes regarding how we build homes in the future is much needed to, but for mine getting the cost of the land down is key to improving housing affordability.

SEQld: Land Supply

Broad hectare refers to land parcels greater than 2,500m2 planned for residential development.  Also, broad hectare supply – either by area or dwelling yield – includes only the developable component of the land parcel.  Constraints to development, such as flooding and protected vegetation are removed.

In short, the broad hectare count in south east Queensland quantifies the amount of residential land supply and the number of dwellings that could potentially be accommodated over select time frames.

It must be noted that further development outside the identified broad hectare land parcels could also accommodate additional housing by way of infill development.

However, only 15% of new housing across SEQld is currently provided by infill development.  Most of the new homes built across south east Queensland are supplied via broad hectare land parcels.  See table 1 below.

Table 1: Distribution of dwelling approvals by infill or broad hectare land size 

LGA Development type
Infill Broad hectare
Brisbane (C) 43% 57%
Gold Coast (C) 12% 88%
Ipswich (C) 6% 94%
Lockyer Valley (R) 59% 41%
Logan (C) 11% 89%
Moreton Bay (R) 8% 92%
Noosa (S) 97% 3%
Redland (C) 30% 70%
Scenic Rim (R) 5% 95%
Somerset (R) 21% 79%
Sunshine Coast (R) 14% 86%
Toowoomba (R) 14% 86%
Total SEQ 15% 85%
Matusik estimates, Queensland Treasury.  Total dwelling approvals over the past three financial years.

Regardless of land size, residential development is dependent on adequate land supply.

Broad hectare data can be used to identify a shortfall in residential land supply and to trigger a planning response. It is important that adequate levels of residential land supply are maintained since it is one factor affecting housing affordability.

The current SEQld broad hectare count was done in September 2013. Queensland Treasury, however, updates this count quarterly, removing potential housing stock as new lots are developed and registered.

The information in this missive is based on June Quarter 2018 data.

Key findings

Over the next ten years it is estimated that some 156,500 new dwellings can be supplied via broad hectare land across south east Queensland.

Table 2 provides a breakdown by local authority area below.

Table 2: Broad hectare land supply available over next ten years by dwellings

LGA Available within next ten years
Hectares Dwelling yield
Brisbane (C) 669 22,599
Gold Coast (C) 1,160 10,184
Ipswich (C) 2,320 32,917
Lockyer Valley (R) 1,661 8,341
Logan (C) 3,956 34,079
Moreton Bay (R) 2,100 13,858
Noosa (S) 30 303
Redland (C) 200 3,918
Scenic Rim (R) 1,115 3,927
Somerset (R) 388 1,608
Sunshine Coast (R) 1,244 16,915
Toowoomba (R) 1,076 7,824
Total SEQ 15,919 156,473
Matusik, Queensland Treasury.  Medium dwelling yield expectation which is based on realistic assumptions as per land fragmentation and ownership.

At first glance this seems a lot of new homes. But when you compare this potential quantity against the annual need to build new dwellings; the broad hectare land supply mooted over the next decade appears to be below demand. See table 3.

Table 3: Broad hectare land supply versus demand

LGA Ten-year dwelling supply Annual housing demand Current supply in years
Brisbane (C) 22,599 7,725 2.9
Gold Coast (C) 10,184 4,896 2.1
Ipswich (C) 32,917 2,094 15.7
Lockyer Valley (R) 8,341 296 28.2
Logan (C) 34,079 1,938 17.6
Moreton Bay (R) 13,858 3,771 3.7
Noosa (S) 303 242 1.3
Redland (C) 3,918 844 4.6
Scenic Rim (R) 3,927 291 13.5
Somerset (R) 1,608 234 6.9
Sunshine Coast (R) 16,915 2,756 6.1
Toowoomba (R) 7,824 716 10.9
Total SEQ 156,473 25,803 6.1
Matusik, Queensland Treasury and ABS various.  Annual housing demand based on last ten years.

Overall there is a need to build about 26,000 new dwellings in SEQld each year, yet the broad hectare land parcels available (at present) over the next ten years can only yield about six years supply.

Some areas are very undersupplied with new broad hectare opportunities, whilst others local council areas have amble development parcels.

Pets

Just over two-thirds of Australian households own a pet.

Of these 38% are dog owners and 29% are cat owners. In addition to this, just over half of the people who don’t currently own a pet admit that they would like one.

Australia has the highest rate of pet ownership in the world. Only America, where 65% of homes have a pet, comes close.

In total, it is estimated that there are 24 millions pets in Australia. This includes dogs, cats, birds, fish, reptiles, insects, cows, sheep, goats and even horses. I don’t know how they count the fish and insects, but there is a regular pet count so someone is doing the hard yards.

And if these statistics don’t prove how important pet ownership is in Australia, then perhaps this will: more of us live in a house with a cat or a dog than with a child.

By excluding pets, landlords are missing out on a significant rental premium; longer tenancies and often less hassle.

We have found that tenants will pay between 10% and 20% more to have a pet. The higher premium is when the property is well catered for pets – like having a secure fenced yard.

Most tenants with pets also want to say longer in their current rental abode, with the average tenure being 24 months and not the more typical 6 month lease.

This is because there are not a lot of rental properties available to lease that allow pets.

For example a quick search on realestate.com.au has found that just 22% of the rental properties available for lease, in Brisbane, allow pets. This proportion is 25% on the Gold Coast and 31% on the Sunshine Coast.

In regional towns, rental properties allowing pet ownership appears higher with 38% of Mackay’s properties for lease, for example, allowing pets.

Allowing pets is higher, as one might expect, for detached homes (33% in Brisbane) and is lower for townhouses and apartments (both 17% and again for Brisbane).

Our work has also found that many tenants with pets are prepared to pay a pet bond. My suggestion is that the interest earn’t here goes to the RSPCA.

But in actuality the vast majority of tenants with a pet aren’t different to those that don’t have an animal. If fact my experience, true it is a small sample, has been that tenants with pets were better occupants than those without a pet.

Now I live on acreage, have pets of many types and so maybe I am biased.

Housing Affordability

A lot is being written and said about the future of Australia’s house prices.

There seems to be a lot of confusion about the issue.

I have included three tables in this missive in an attempt to outline what I think is the real state of play.

Table 1
Housing affordability #1

Australian Capitals

Capitals Median house price Median family income Current price to income ratio Affordable price Difference
Sydney $1,165,000 $107,500 10.8 $753,000 $412,000 35%
Melbourne $829,000 $99,000 8.4 $593,000 $236,000 28%
Brisbane $524,000 $98,500 5.3 $493,000 $31,000 6%
Adelaide $465,000 $86,000 5.4 $430,500 $34,500 7%
Perth $513,000 $106,000 4.8 $529,000 -$16,000 -3%
Darwin $503,000 $94,750 5.3 $473,750 $29,250 6%
Canberra $648,000 $135,250 4.8 $676,000 -$28,000 -4%
Hobart $473,000 $85,000 5.6 $424,750 $48,250 10%
Average* $785,000 $101,000 7.8 $597,750 $187,250 24%

Table 1 shows that most major capital city markets aren’t that overvalued.

Sydney, Melbourne and to some degree Hobart are, but median house values, for the rest, fall between 4.5x and 5.5x median family household income.

Just two years ago, many could borrow 10x (or more) of their household income to buy a property.  Today that has been scaled back to 5x to 6x household income.

My general affordable price benchmark is 5x median household income but I use a higher ratio for Sydney (x7) and Melbourne (x6) because history shows that these two cities command a premium.

Table 1 also shows that there are many housing markets in Australia and not just one.

So if it all goes to shite then maybe the damage is most likely to be contained to a few spots.  This, of course, assumes that things economic don’t implode or that we don’t panic.  Greed often turns to fear.

Table 2
Housing affordability #2

Brisbane region

Indicators 1994 2018
Median house price $126,000 $524,000
20% deposit 20% 20%
Amount borrowed $101,000 $419,000
Mortgage rate pa (from major bank) 9.1% 5.2%
Annual payment (P+I loan) $13,000 $31,000
Loan time frame 30 years 30 years
Median household income $65,000 $98,500
% income needed to service loan 20% 31%
Ratio house price to household income 1.9 5.3

Table 2 – using Brisbane as an example – shows that although many places aren’t over cooked (i.e. ratio of house price to household income) there is very little room from house prices to improve unless either costs decline or incomes rise.

It now takes – on average – 31% of a average Brisbane resident’s household income to buy a house.  That translates to 5.3x median family household income.

A generation ago the income needed to service an average loan was 20% (as interest rates were higher) but the median house price was very affordable at 1.9x family household income.

My take on this is that we are likely to experience ‘the big yawn’ for the next 5 years, but most probably 10 years or so, whereby dwelling values don’t rise much across most places in Australia.

It reminds me of the 1990s.

Table 3
Housing affordability #3

Brisbane region

Indicators 1994 2018 Increase $ Increase %
Median house price $126,000 $524,000 $398,000 315%
Median household income $65,000 $98,500 $33,500 51%
Amount borrowed $101,000 $419,000 $318,000 315%

Table 3 brings my last statement home.  Much of the past price growth in Brisbane – and everywhere else in Australia too – was due to an increase in loan size rather than growth in household income.  That feels like a once off to me.  Well it is very unlikely to happen again anytime soon.

In summary, house price growth over the last 25 years was largely manufactured by the reduction of interest rates, whilst at the same time, punters were encouraged to borrow a lot more.

End notes

Unless you bought at the height of the boom, and overpaid plus overextended yourself, then the coming changes over the next 5 to 10 years might not have that much impact on you.

True you might not be in a rush to buy or sell a dwelling.  Why haste if prices are flat?

But if you did overpaid and especially overextended yourself then you might be in for a fair bit of pain.

10 things: Urban Commute

The Grattan Institute earlier this month released another great report on Australia’s urban landscape.

To read the 87-page report go here.

But for those of you that are time short, I have pulled together 10 things you need to know about this work. Many of them are quite surprising.

10 things

1.  Most residents don’t live far from where they work, and this isn’t changing much.

2. Commuting distances have changed little in most of our cities in recent years.

3. Commuting times have also been largely stable over the last decade.  See the table below.

Three-quarters for work trips are no longer than this

Capital city 2008 2016
Sydney 60 minutes 62 minutes
Melbourne 45 minutes 48 minutes
Brisbane 42 minutes 46 minutes
Perth 34 minutes 39 minutes
Adelaide 30 minutes 30 minutes
Canberra 30 minutes 30 minutes

4. The CBD’s are growing (in terms of jobs) in Sydney and Melbourne but are actually shrinking in most other Australian cities.

5. Most new jobs are in other suburban areas, with three out of four jobs widely dispersed.  See the diagrams below.  Diagrams one and two are what is in most town planners’ heads, but the third diagram is what really goes on.

6. Living in a large Australian capital city doesn’t mean travelling much further than living in a smaller capital or major regional town.

7. The common urban myth “double the population means double the commute” doesn’t apply.

8. Population growth has a bigger impact on commuting distances and times in smaller cities than large ones.

9. People accept a longer commute to live in a lifestyle area and in particular close to the beach.

10. In recent years very few workers have actually changed the way they get to work.  See the table below.

Transport method used to travel to work

Capital city Mode of transport 2011 2016
Sydney Car 68% 67%
Public transport 23% 24%
Bike/walk/run 5% 4%
Worked at home 4% 5%
Melbourne Car 75% 75%
Public transport 15% 14%
Bike/walk/run 6% 6%
Worked at home 4% 5%
Brisbane Car 77% 78%
Public transport 15% 13%
Bike/walk/run 4% 4%
Worked at home 4% 5%
Perth Car 80% 80%
Public transport 13% 13%
Bike/walk/run 4% 3%
Worked at home 3% 4%

Some caveats

But some caveats do apply.

1. Some cities have grown a lot in recent years – especially Sydney and Melbourne – and much of this increase in population is due to a lift in net overseas migration.

2. Most overseas migrants settle in Sydney and Melbourne.

3. Many recent migrants settle in the more urban parts of our capitals, whereas longer term residents live (mostly) in the middle and outer suburbs.

So, some of the ten points listed above have been influenced by recent demographic trends.

Suggestions

Yet here are some things worth considering that might actually improve the current state of play.  Some of these suggestions are Grattan’s and some of them are mine. These include:

1. Get more people to work from home via tax breaks and favoured appointments.

2. Question the mega projects.  Incremental improvements are likely to have more impact. In Brisbane for example there is a need for many more bridges crossing the Brisbane River.  These are cheap as chips when compared to such white elephants as Cross River Rail.

3. Encourage people to move closer to work or encourage work to relocate closer to the workforce.  Property stamp duties stop local moves.  Restrictive town planning and zoning stop new builds. Cheaper and different building methods are need too.  Visit here.

4. Change the way people get to work.  A congestion tax and/or free public transport during peak periods.

5. Get kids to catch the bus or train to school. Given the increasing demand to live in the ‘right’ school zone, many of the kids can probably walk to school.  And I am a parent of two daughters who were made to catch the bus.

6. Stagger school start times; school holidays and change the 9 to 5 work day.  These schedules are a legacy of the industrial age and/or unionised labour.

7. Provide clear and separated modes of transport. Get push bikes off the road but have well connected bike lanes.  Better connectivity for walking too.