Missing Middle

What does the future hold?

For mine demographics shape almost everything.

Future demographic shape

If that is true, what does Australia’s demographic shape look like over the next decade?

The first table shows that baby boomers, who were helping drive generic house price growth over the past two decades, are now starting to downsize and/or retire.  As a result, the size of both the downsizing and retirement housing market will grow in size over the next decade.

Also coming through are more first home buyers. This segment is expected to see the largest growth in the coming decade.  High overseas migration – whereby the average age of a new overseas migrant is 29 years – means many more potential first home buyers.

Australia: Past and forecast household buyer type

Household buyer type 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

Some comments

Most aging baby boomers look to downsize/retire in their local area.

But most are not that interested in trading in their detached home for a tight mid-to-high rise apartment.  A ‘middle ground’ product is really wanted.  Better still, is one which can accommodate a relative, grandchildren, visitors, a tenant and in due course, a carer.

First home buyers often need assistance to help pay the mortgage.  Many now take in a tenant.

My Housing Demand Model

Our modelling suggests that over the next decade more housing that fits between a small apartment (often downtown and in large, soulless complexes) and traditional detached homes will be needed.

This housing is often, these days, described as the “missing middle”.

See the schematic below.

More detail

Breaking this demand down further, our work suggests that the demand for housing that caters for sharing is very high – up to 25% – over the next decade.

At present, less than 5% of Australia’s existing housing stock successfully caters to this market.

See the second table for more detail.

Australia: Next decade by dwelling type

Dwelling type Single occupancy Multi-occupancy Total demand
Detached houses on land > 400m2 20% 10% 30%
Detached houses on land < 400m2 15% 5% 20%
Townhouses/villas/terraces/Plexes 15% 5% 20%
Apartments 15% 5% 20%
Age-related care 10% 10%
Total demand 75% 25% 100%

End note

Looking forward, I believe that many Australians will be forced to compromise on their housing.  This is already happening in many locales.

And if I am right – what is often labelled as the “missing middle” these days – should better weather the storm.

To that end, multi-occupancy property is looking more promising rather traditional housing.  This applies to owner residents as well as investors.

For investors, multi-occupancy product already shows a much higher return than most other housing types.  More people are sharing accommodation and a key to getting a better rental yield is to hold property that facilitates sharing.

For mine an astute passive investor will buy strategically for a rental return and not just buy a common property in anticipation of generic price growth.

They will also buy a property with strong owner-resident resale appeal.  This increasingly will mean a dwelling which appeals to multi-generational households.

Missing: Green Infrastructure

Density must be off-set.

That’s a good yardstick.  The chummier our homes – think apartments – the bigger and better the outside space needs to be.

Brisbane is planning to become a very urban city, with many more residents living in mid to high-rise apartments and many of them in the downtown area.

That makes sense, but one thing that Brisbane and especially the inner-city area lacks is public open space.

There are some 275,000 people now living within a five-kilometre radius of the Brisbane GPO; with an additional 100,000 residents expected within the next 20 years.

Yet despite some notable additions like South Bank and Roma Street Parklands in recent years this area holds no more public open space than it did 100 years ago.

Some comparisons

Another way of looking at it is that there is just 6m2 of public open space per resident in inner Brisbane compared to 15m2 in Sydney and 29m2 in Melbourne.  Even in New York City the ratio is nearly twice that of Brisbane.

Worse still is that much of Brisbane’s inner-city open space is fenced and inaccessible to the general public.  This includes sporting infrastructure like the Gabba and Suncorp Stadium; the Riverside Stage and green spaces like Davies Park in West End which is partially fenced for sporting events.

In many of Brisbane’s inner-city suburbs there is insufficient green areas for children (and us adults) to play.

There is little doubt that what open space inner Brisbane does have is well used.  South Bank, apparently, attracts more foot traffic than Central Park in New York City. This to me suggests that South Bank is way too small.

Also, many of the open spaces inner Brisbane does have aren’t used often, nor shared, enough.  Think about Suncorp Stadium’s forecourt or Musgrave Park.

If Brisbane is to accommodate more apartments and at high densities in the inner-city it will need to invest much more in open space infrastructure.

If we use Sydney and Melbourne as benchmarks, then inner Brisbane needs some 100 extra hectares of open space and this will need to be delivered within the next decade.

How can this be done?

For mine, Brisbane’s greatest asset is the Brisbane River.  Like many assets it can be a burden too. The Brisbane River divides the city; confuses the uninitiated and sadly has been sold off in large chunks in recent decades to the highest bidder.

The best place, for mine, to start making inner Brisbane green again is to take back large parts of the river foreshore. Half a dozen bridge crossings – mostly green but a few vehicular ones too – would help matters as well.

On The Edge Of Town

A change in population is dependent on three things:

  • Natural increase – in short, births versus deaths.
  • Net internal migration – this means movements within the country, including interstate moves but also movements within the same state or territory.
  • Net overseas migration – people moving to Australia from overseas.

South east Queensland: Population growth last year

Urban zones Natural increase Net

internal migration

Net overseas migration Total

change

Inner city 1,831 2,194 3,983 8,008
Middle ring 7,368 -66 9,393 16,695
Outer suburbs 8,762 9,895 4,622 23,279
Outer conurbation 4,062 13,203 7,301 24,566
Total SEQ 22,023 25,226 25,299 72,548

Comments

1. Overall the data highlights that residents are showing a preference for shifting to either the outskirts of major capital cities where new housing is being built at lower prices.

2. Inner Brisbane is also attracting local moves as a proportion of the population – the young especially and in some instances those downsizing – are attracted to downtown living.

3. Some residents are moving away from middle ring locations, particularly those in Brisbane’s southern and western suburbs.  Several questions spring to mind including:  Are we already full?  Is the existing housing now too expensive?  Getting overcrowded?  Lack of amenity?  Or a lack of appropriate new housing stock?

4. Overseas arrivals are largely choosing to move to inner city and middle ring locations as these places hold educational facilities which is one of the main reasons for overseas arrivals to Australia.

5. Overall most of the population growth is taking place some 20 or more kilometres beyond the Brisbane GPO.  This trend, for mine, will now escalate as Brisbane City Council has just implemented some 40 new development and design measures that restricts the housing that many people really want.

My definitions

  • Inner city = within 5km of the GPO
  • Middle-ring = between 5km and 20km of the GPO
  • Outer suburbs = between 20km and 50km of the GPO
  • Outer conurbation = extended urban area, typically consisting of several border towns/cities merging with the outer suburbs of a major city.

10 Things: The Economy

Here’s a quick summary of the Australian economy (well the one that really matters).  Let’s call it 10 Things: The Economy.

1. Working longer hours for less pay per hour.

2. Stuff all wage growth, which is unlikely to change – digital stuff, automation, the internet of things, baton change to service industries and importantly low/declining productivity.

3. Many already underemployed, with a lot more oldies needing to work longer to make ends meet.

4. Rising costs – here I am talking about the vital day to day stuff and not the once off big-ticket items which, when combined, have a large weighting in the CPI index.

5. Housing supply rising against falling sales = lower/falling property prices.

6. High migration intake in an attempt to keep the housing demand artificially high…

7. …lending restrictions which were recently tightened but have just been loosened again because investors stopped buying – dur!

8. Deflationary not inflationary world with way too much debt.  When I was a youngin’ $1 of debt produced $1 of economic growth but today $4 debt = a $1 increase in GDP – madness!

9. Interest rates on hold for as long as possible.  I reckon the RBA should drop the cash rate but I am not holding my breath.

On most RBA interest rate benchmarks the results are below the line – wage growth, inflation, productivity and economic growth.  Yes economic growth.

Below are four charts which I have taken from PCA and Commsec emails I received yesterday.  Whilst the first two are the positive headline results, being 3.1% annual GDP growth and a 1% lift in the March Qtr, what gets very little airplay is that 70% of the March Qtr 1% GDP boost was from net exports and government spending.  Very little of our current economic growth is coming from domestic business expansion and household consumption.

Furthermore, chart 3 shows that we are running down our savings due to higher day to day expenses and low wage growth; and chart 4 shows that our productivity is in the toilet.

Pardon me if I don’t get too excited about Australia’s apparent stellar economy.

10. For mine, the next decade or two will be very different than the past 25 years.

The 15% Club

In a recent book physicist Geoffrey West has shown that there are both economies of scale (in infrastructure) and increasing returns to scale (in human creativity) from the process of urbanisation.

In his words: “Cities are … the cause of the good life.  They are the centres of wealth creation, creativity, innovation, and invention.  They’re the exciting places.  They are these magnets that suck people in.”

Economies of scale 

West and his colleagues at the Santa Fe Institute have identified two noteworthy statistical regularities.

First, “every infrastructural quantity…from total length of roadways, to the provision of sewers, to the number of buses needed… is scaled in the same way.”

That is to say, the bigger the city, the fewer the things that are needed per head of population.

And the economy of scale has a fairly consistent exponent of around 0.85. This means that, when a city’s population increases by 100%, it needs to increase the number of things per capita by only 85%.

Returns to scale

Secondly, and more surprisingly, is the socioeconomic impact – things like wages and the number of jobs, educational institutions, cafes, restaurants, shops and services etc. are upwardly scaled.

Instead of being an exponent less than one, indicating economies of scale, the exponent is bigger than one, indicating increasing returns to scale.

That says that systematically, the bigger the city, the more wages you can expect, the more educational institutions in principle, the more cultural events, the more jobs are produced and so forth.

In short, bigger places are more innovative.

The 15% Club

According to West’s work this seems to apply to nearly all places undergoing urbanization and more remarkably, all to the same degree.

There was a universal exponent which turned out to be approximately 1.15, which says something like the following:

If you double the size of a city, from say 300,000 people to 600,000 as in the Gold Coast’s case over the last 20 years, you get a 15% increase in productivity, jobs and wages (per capita) plus you get orderly 15% saving in length of roads and other general infrastructure needed.

People even walk disproportionately faster in big urban places than in small ones.  There is a wider range of possible jobs to do.  This is largely to do with bigger networks.

And this is why we are seeing population growth, not only in Australia, but elsewhere in the world, concentrate in a select few areas.  Cities are becoming bigger.  Big cities are becoming mega ones.  This trend is expected to escalate.

Unoccupied

We know that the number and proportion of unoccupied homes across Australia is increasing.  The latest national count found that 11.2% – or about one million – of our private dwellings were empty at this time last year.

Some statistics

Now, I need to bore you for a few moments with some stats.

The 2016 Census identified approximately nine million private dwellings in Australia on census night, of which 8,286,000 (88.8%) were identified as occupied and 1,040,000 (11.2 %) were unoccupied.  In the 2011 Census, 7,760,000 dwellings (89.3 %) were recorded as occupied and 934,500 (10.7%) unoccupied.

This represents an increase of 632,250 in total private dwellings since the 2011 Census, and an increase of 105,500 in unoccupied dwellings, which equates to 17% (or approximately one in six) new dwellings between 2011 and 2016 being unoccupied.

Let me repeat that – one in six of our new dwellings is unoccupied. 

Now, the Bureau used to – as part of the census – ask why a dwelling was empty during the night of the census.  It’s true that the highest levels of vacancy are often in coastal areas – or in areas where occupation during winter is not much fun (the census in recent decades has been conducted in early August) – plus, also in resource based towns/regions.  So, when we undertake our national count has some impact.

But housing vacancy in capital cities is also a growing trend, especially in locations associated with medium density housing and in particular, high-rise apartments.  There have been several studies in recent years, illustrating such.

Why is a dwelling vacant?

And when you look at past ABS results about why a dwelling is vacant, they found:

  • 50% – Resident is usually absent
  • 20% – Holiday accommodation
  • 20% – For sale or rent
  • 10% – Repairs/alternations

So, it is a somewhat safe bet to say that at least half of the dwellings unoccupied are deliberately locked up.

Recent plans

The Commonwealth and Victorian governments have now announced plans to tax vacant properties.  The Victorian government’s Vacant Residential Property Tax imposes a levy on properties that are vacant for more than six months in a year.

The federal tax differs in that it only applies to foreign owners, with a $5,000 charge to properties that are vacant for more than six months.

The increase in vacant dwellings is also a global trend.

The value of housing is no longer based on its social use.  Housing, in many western countries, has become a financial vehicle, and in markets where capital gains outweigh rental returns, homes are increasingly left vacant.

Two comments

Firstly, we are not undersupplied with housing.  There is plenty of spare capacity – which leads me to my second thought:

The development industry keeps advocating that increasing new housing supply will alleviate housing affordability problems.

However, whilst housing supply has technically kept pace with population growth in Australia in recent years, most new housing development occurs disproportionately in “mid-to-high” priced segments, locking out many – and not only first home buyers.  Plus, it doesn’t help when a high and growing proportion of our new digs is locked up by speculators.

How Much Is A $1 Billion?

A billion – in Australia – is $1,000,000,000.  You see this amount written everywhere these days.  You cannot escape it.

It was brought home to me a few weeks back, whilst driving through New South Wales.  Road work signs proudly announced $2.3 billion worth of construction here, another $1.7 billion there.

Governments love to announce new projects.  The bigger the dollar signs, the better.  High Speed Rail, no problems, that’s just $114 billion (based on latest estimates); oh, and the NBN…well, that is just another $50 billion, give or take $5 billion. What’s a few billion dollars between us Aussies?  Everything will be okay, mate!

All new government projects involve debt.  On average, studies suggest that over 90% of such funds needed are borrowed.  You, I, our children, our grandchildren and very likely great grandchildren will be paying off this debt.

So what does a billion dollars really look like?

If you were paid $1 for every step you took, to earn a billion Australian dollars, you have to walk around the centre of the earth some 31 times.

Now, if you were a really fit bugger and walked eight hours non-stop, every weekday, it would take you some 60-odd years to walk that distance.

But that is somewhat silly, so let’s look at something more reasonable.

The most quoted walking target is 10,000 steps per day.  So, that’s 70,000 steps per week, or 3.64 million steps per annum.  If you keep this up every week, it would take about 274 years or – if you were lucky enough to live to the average age of an Aussie (currently 82 years) – almost three and a half lifetimes to walk far enough to earn $1A billion.

Which ever way you cut it, a billion is a bloody massive amount.

Some may say that borrowing money to pay for things used over a millennium is worthwhile.  Others will chirp in and talk about the ‘multiplier effect’; you know – stuff like economic stimulus, job creation, investment confidence, debt to GDP ratios and similar economic weasel words.

In the decades immediately after the Second World War, a dollar of debt produced a dollar of economic output; so, worthwhile one might think. But these days, it takes more than $4 of debt to produce $1 of economic output.

Like any Ponzi scheme, this driver of artificial growth must have its limits.

Not convinced?  Then go here and watch it for a while.  Even Usain Bolt couldn’t keep up!

7 Must Know Urban Trends

Here are my seven most important urban trends:

  1. Increasing in household size.  More people are living in blended households.  The now defunct baby bonus was taken up with gusto, so lots more kids in our population mix and migrants to Australia are generally young adults, with an average age of around 30 years, so they have or want kids, too.  Plus, the mix from overseas has changed, with more migrants now coming from those countries with large family units.
  1. Polarisation of demographics.  An increase in those living alone or as a couple, plus an increase in blended households as noted above – coupled with a drop in what many still think is the standard Aussie household, mum and dad and 2.5 kids.  The proportion of those living alone or as a couple over 60 years of age will have increased too, especially women over 60 years; sadly, most with limited financial means.
  1. Casualisation of the workforce.  Many more will be working a range of casual or part-time jobs than the regular ABS labour force data series suggests.  As part of this trend, more oldies will be working than in previous generations.  Most are doing so, because they have to, financially, rather than because they want something to do.  The promoted image of Australian retirement is a happy couple walking along a beach at dawn or dusk, whilst the real picture is weathered hands counting coins.
  1. Limited wage growth.  Very little real change in household income over the past ten years, with falls in real average household income in recent years.  Increasing share of material stuff for the top 10% of wealthy households; a contraction in the size of the ‘middle class’ and a large increase in the number of Australians in struggle street.   Nearly all households will have taken on more debt.
  1. Fewer moves.  Blame stamp duties; lack of new full-time work; oldies needing to work to help fund retirement or low housing affordability, but our current count is likely to see a very low number of moves in coming years.  Tenants are also staying put longer.
  1. Maximising available space. Tenants are not only staying longer but they are subleasing space in order to afford the rent.  Owner residents are also now turning to the likes of Airbnb to help cover the mortgage.  Others are now renting out homes that were once locked up or used occasionally.  This trend towards utilising our spare bedrooms or even homes – despite the recent rise in off-plan overseas buying (and the penchant of Chinese towards locking up assets) – we believe, is on the increase.
  1. Lower home ownership.  Less home ownership for those in the typical first home buyer age group; even falls in home ownership rates for those in their 40s and even 50s.  About two out of five households now rent, up from 30% only ten years ago.  In the coming decade, one out of two Australian households could opt to rent, not buy.

So what does this mean when it comes to housing?

  • Less new houses will be needed than many think.
  • Dwellings need to accommodate sharing – either by tenants and/or blended families.
  • Fewer sales than in the past.  Biggest falls expected in investment selling.
  • Being close to work or being conveniently located near major transport routes will become paramount.
  • Many will be forced to compromise on their housing choice.
  • Limited price and rental growth, if not real falls in both.
  • More tenants per dwelling, but with increasingly limited money available for rent.
  • Fewer property investors – as the easy gains are now largely gone.  A drop in the number of households holding just one property and an increase in the number of investors with multiple holdings.
  • Residential returns based more on yield and manufactured growth, via redevelopment or maximising existing space.

Not being heard, yet

This new world is currently not being supported by the mainstream.

Our banks, building industry, valuation process – and especially governance (and in particular local government/town planning) – is holding back much needed housing reforms.

Mum and dad, without wanting to sound too derogatory, want these housing changes.  Whenever I give a public market outlook presentation and the time comes to outline what’s really happening out there, most of the ‘mum and dads’ in the audience nod in agreement.

When it comes to question time, the majority want to know how they can redevelop their home to assist with their retirement and age in place.  Few seem truly interested in moving into a new build.  They are too expensive and/or poorly designed/built.  More would move if the product did the right things.

Why Are Housing Prices So High?

The housing affordability debate is starting to leap all over the joint – from quips about breakfast options to now, a blame game.

So, I want to outline, in plain speak, why Australian housing prices are so high.

Five reasons why

Let’s keep this simple.  Here are the big five reasons why.

  1. Urban planning policies

Glacial release of land for housing development, urban growth boundaries, packing the population in major cities and especially the inner city versus decentralisation or multiple CBDs.

  1. Tax incentives and taxes

Capital gains discount on housing, negative gearing, government first home buyer grants, stamp duty, superannuation access/use.

  1. High immigration and baby bonus

Nothing wrong with population growth, but it works against you when half of it is taking place in Sydney and Melbourne.

  1. Cheap and accessible credit

Low interest rates, lax bank lending (yes, it is still lax!) and offshore wholesale borrowing by banks and developers.

  1. Foreign investment

Mostly out of China and most of this capital goes into property; much of it illegal under current FIRB guidelines.

Baby Boomer Buyer Wants

Fast facts about baby boomers – who they are; a brief description of typical baby boomer buyer wants; their housing considerations; preferences; and what most buy.

  • 50 to 74 years
  • 2.1 people per household
  • 92% no children at home
  • 71% couples or living alone
  • A projected 24% of total new housing demand over next decade (again, like yesterday’s Missive, for the Brisbane outer suburbs)

Brief description 

As their title suggests, many want to move into something smaller and, if possible, in their existing neighbourhood.

Housing considerations

  • Low maintenance
  • Convenience
  • Like-minded residents
  • Small scale projects and/or in the more…
  • Secluded areas within a housing estate/neighbourhood

Preferred housing options:

  • 10% to 20% – spacious apartments (inner city)
  • 30% to 40% – townhouses/duplexes and similar multi-housing products (middle-ring suburbs)
  • 30% to 40% – detached-based homes (mostly outer suburbs)

What most buy?

  • Quality build and finish
  • Well-priced – value for money – usual rule of thumb is that they need at least a 20% ‘jingle’ in their pocket between the sale of their existing home and the price of their downsized abode
  • Privacy and security
  • Parking and storage
  • Space for visitors and grandchildren 

Something to think about

Also, many downsizers are now looking for a home that is capable of taking in a tenant/s to help them live a more fruitful retirement – additional income and/or ability to travel and have someone ‘looking after’ their home whilst away.

Dual+ occupancy homes – two or more separated residences (yet, often under one roof) on one title – have increasing appeal.

This caters for not only tenants, but the extended family and in time, the potential need to have a carer live onsite.

Such a dwelling arrangement has increasing appeal to an investor on future resale – more rent/yield based decision –   as well as an owner-resident.

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