New housing constraints

This week I have looked at the perceived constraints on new housing development.

I have used the information from the NAB quarterly residential property surveys – and with some estimates on my part – have compared the survey results between mid 2019 and mid 2021.

Between 350 and 370 property industry panellists participated in each residential survey.

I have included three tables in this post.

Table 1 shows the constraints on new housing development have increased over the past two years.

Please note that the higher the number in table 1 the larger the perception of constraint; with scores ranging from 0 (no or limited constraint) to 100 (highly constrained).

Table 2 suggests that the bigger increase in new housing constraints have been felt in Western Australia, South Australia and then Victoria.  It isn’t a coincidence, in my mind, that these states had the largest uptake of HomeBuilder applications when viewed on per capita basis.

Table 3 indicates that the biggest change in constraints has been in the labour market, site availability and construction costs, all of which have been influenced by a rapid rise in demand brought about by HomeBuilder and to a lesser extent a relaxation in credit compliance.

End note

HomeBuilder was a successful programme, it helped lift housing demand when that demand should have been falling, due to restrictions on immigration.

But such government incentives distort the building cycle, often leading to a boom-bust scenario.  Domestic demand has been brought forward and in coming years we have likely to see a contraction in new housing starts.  How large that reduction is depends on when, and by how much, overseas migration returns and if any further construction incentives are offered in the lead up to the federal election.

A noisy wheel gets the most grease and the housing industry and associated businesses have a big microphone, so I expect it will be back to Big Australia and more building related handouts sometime in 2022.

Bread and Circuses

If you are hooked on the 2032 Brisbane/SEQ Olympic palaver, then maybe quit reading now whilst you are ahead.

For those that don’t easily swallow the bunkum, read on.

…..

My headline comments

For mine such major sporting events are an absolute waste of money.

The 2032 Olympic Games is also very, very unlikely to leave a lasting legacy.

And the next ten years of Olympics-related development – Queensland’s so called Golden Decade (oh Lord please give me a break!) – doubtfully will deliver anything special; let alone supply what is really needed; nor should it lead to above average Brisbane centric asset growth.

Why?  Because such past events like this hardly ever do.

Some statistics

But wait just a minute, there is a report which says that the estimated economic and social benefits of the 2032 Games is projected to around $8 billion for Queensland and $18 billion for Australia.

Yes, there is such as report but did you know that this impact is based over 20 years – between 2022 and 2042 – and more than half of this illusionary $18 billion figure is for things like civic pride, better health due to exercise, self-improvement from volunteering and even ‘retained expenditure’, in this case, the assumption that Aussies around 2032 won’t travel overseas but will stay home to attend the Games.

I kid you not.

Past studies have found that there was only a moderate increase in adult sport participation post a Summer Olympics – and that this didn’t last long – and when it comes to the winter event, and also Commonwealth Games, there was no evidence that the event boosted adult sports participation in the area that hosted the sports event.

We also now have the politicians telling us that the Brisbane Games will create around 120,000 new jobs.  Well, that figure is also over 20 years, and sounds less impressive when you consider that by 2042, Australia is likely to have an extra six million more people employed than now.

A 2% potential job impact doesn’t have the same ring to it does it?

Talk about hyperbole!

But wait there is more.

And just like every other urban region that has invested heavily in hosting a major sporting event or its equivalent over the last couple of decades, this event will most certainly lose money.  Probably a lot of money and much more money than most realise.

A review of the 19 past Olympic Games, covering both the summer and winter events and stretching from Grenoble in 1968 to Rio de Janeiro in 2016 found that the average cost overrun was in the tune of 120%.

The Sydney 2000 Summer Olympics saw a cost overrun of 90%.  Furthermore, the Sydney event – which was fun to watch and no doubt a positive experience for those that were involved – generated about a $2.1 billion loss in real terms.

That’s a very expensive two week holiday if you ask me.

With such a poor batting average it is very unlikely that Brisbane will hit the ball out of the park.  In fact, based on past evidence Brisbane is very likely to eclipse the 120% average and by a long shot.

My two bobs worth

Moreover, I think that we – being the ‘West’ and especially, Australia, of late – have now reached a stage where the quote “Give them bread and circuses and they will never revolt” by Roman poet Juvenal, applies.

During the last stages of the Roman Empire, the government kept the Roman populace happy by distributing free food and staging huge spectacles such as gladiator contests in the Colosseum.

In the modern political context, the phrase means to generate public approval, not by excellence in public service or practical policy, but by diversion, distraction or by satisfying the most immediate or base requirements of a populace — by offering a palliative: for example, food (bread) or entertainment (circuses).

Replace ‘food’ with welfare; subsidies; wokeness; even artificially low interest settings and you get the drift.

We are now so hooked on this stuff.  We were once a stoic brunch.  Not anymore.

Imagine if the Olympic monies (and importantly the time and effort) was spent on things that would really make a difference to the city and its local residents.

Some suggestions include:

And whilst outside of my purview, our education, taxation and even health systems need a major overhaul.

The real lesson here

Yet despite volumes of documented evidence to the contrary why do cities and nations keep pitching for these things?

There are several reasons why.

  • Powerful people will benefit.  High profile projects attract vendors, businesses and politicians that seek high profile outcomes.
  • The project is specific.  Are there other ways that Brisbane/SEQ could effectively invested the money? Revisit my short list above and the answer is yes, without a doubt.  But there’s an infinite number of alternatives – with numerous agendas and many vested interests – versus just one specific goal.
  • The project has a rigid timeframe.  It’s imminent. You can’t study it for years or a decade and come back to it.  You are either in or out.  It’s yes or no.
  • The end is in sight. When you build a stadium, you get a stadium.  When you host the Games, you get the Olympics.  That’s rarely true for the more important (but less visually urgent) alternatives, such as actually making the city better.
  • Patriotism’s at work. “What do you mean you don’t support the city?”

As I wrote a few years back, the big takeaway here is to understand that an economic argument as to why the hosting of the Olympics shouldn’t happen is a waste of time.

It won’t change the decision maker’s minds.  It will get no purchase with the masses.  The media might run a few stories about the counterpoint but only really to be seen as offering a balanced view.

But we can learn a lot as to why such campaigns get traction and succeed.

Enough said.  I won’t waste anymore of your time.

Top end of town

The top end of town just keeps getting stronger, if table 1 is any indication.

The Covid19 pandemic, along with the current monetary, fiscal and tax settings in Australia, have been kind to those who own property and especially many in the baby boomer cohort.

Many of these wealthy baby boomers are looking for a better housing solution.

Table 2 shows that there are some 200,000 millionaires currently living in Australia, with 3,200 of them worth over an estimated $US30 million.

But it isn’t just the domestic market that is active at the top end of town, overseas buyer interest is on the increase too.  This can be seen by the lift in the proportion of international apartment buyers over the last twelve months.  Many of these ‘overseas’ buyers are expats, keen to come home once restrictions are lifted.  See table 3.

This really isn’t that surprising given the relative value of top end housing downunder when compared to overseas. Table 4 clearly shows this differential.

End note

I expect a continuation of the recent overseas buyer trends, if not a heightened level of overseas buyer interest from expats and other overseas residents who view Australia has a ‘bolt-hold’ against future potential pandemics.

Peaks head north?

I have undertaken a lot of consultancy work on the Gold Coast over the past three decades – yes, I have been doing this stuff for that long! – and as part of recent project advice commissions we have been asked about the long term housing cycle and the interplay between Sydney and Gold Coast dwelling prices.

So, this post I unpack the past and give my two bobs worth on what I think will happened on the Gold Coast over this property cycle.

Four charts are included.

Charts 1 and 2 show that the Gold Coast housing market is a cyclical one.

Typically, a sales-related housing cycle in Australia lasts around seven years.  The Gold Coast follows this trend.

At present detached house values are rising by 20% per annum and attached dwelling values are increasing by 10% on a year to year basis.

Charts 3 and 4 shows that there was little difference between housing values in Sydney and on the Gold Coast in the mid-1990s and in the late-2000s.

At present the difference in Sydney’s indicative house price is 40% more expense than on the Gold Coast.

Whilst the GFC is somewhat to blame for the Gold Coast’s poorer performance in recent years and Sydney’s price growth has been lifted by Australia’s elevated overseas migration intake over the last ten years, history suggests when the right circumstances present themselves, Gold Coast housing prices come close to matching those being achieved in Sydney.

Synopsis

It would appear that the Gold Coast is at the starting phase of another housing upswing.

I believe that a similar growth curve as to what was experienced between 2001 and 2008 on the Gold Coast is likely to transpire over the course of the current housing cycle.

In addition, I think that due to reoccurring Covid19-related events interstate; coupled with the Gold Coast’s scaled up urban size; quality infrastructure provision and future housing market parameters (tight supply) the Gold Coast is likely to see its dwelling prices start to rematch Sydney’s over this course of this current housing cycle.

Peaks head north?

140 years of house price data

Earlier this year I wrote a missive titled Bust?

That post held a long range chart that I cut and pasted from an academic study by Nigel David Stapledon from the Australian Business School of Economics at the University of New South Wales.

That chart was close to a decade old.

Many asked me if I had an updated version and when I posted a precis of the Bust? Missive on LinkedIn – with a copy of the Stapledon chart – LinkedIn told me that my post was trending big time and I was in the top 1% of viewed articles for that week.

Well, that’s as close as I get to celebrity these days.  Yet there must be something about the chart that appeals.

So, this post I have updated this information and have included three charts.

All three charts cover median house prices from 1881 to 2021 for the relevant aggregated Australian capital cities at the time.  In each case the charts show real house prices in 2021 dollars.

Three charts

Chart 1 outlines that key drivers that have influenced the housing market over the past 140 years.

In real terms (2021 dollars) the median house in an Australian capital city was worth $59,250 in 1881.  Today’s median capital city house price is around $750,000.

For those interested the median house value in current terms in 1881 dollars (when converting from pounds) was $870.

 

Chart 2 shows the time periods between each market trough to market peak and the annual compound growth in current and real (2021) terms.

In current terms median house prices have grown by 5.9% per annum on a compound basis since 1900.

Interestingly, when taking inflation into account, this compound rate drops to just 2.2% per annum between 1900 and 2021.

Chart 3 illustrates the time frame of each previous stagnation period since 1881.

End note

My update further confirms my thesis.  To reiterate:

We are likely to see house prices lift by 25% to 30% from trough (2019) to peak this cycle (2022), which will translate (in current terms) to between 7% to 8% per annum on a compound basis.

Alternatively based on estimated 2023 dollars – and assuming an anaemic rate of inflation between now and then – such growth would convert to between 5% and 6% per annum in 2023 dollars.

The recent change in house prices appear spectacular and is does compare well to the long term average.  But assuming my forecast rings true, then the likely annual rate of component growth (in both current and real terms) will be in line with recent market recoveries/upturns.  Revisit chart 2.

Of course, a higher rate of inflation in coming years would result in less real compound annual growth.

I also believe that after this market peak, the housing market (price wise) is likely to settle into a somewhat long period of stagnation.  Although the stagnation time periods have been shortening over time – revisit chart 3 – here appears to be little left in the tank to help drive future house prices.

I do think that the next price plateau could be as long as a decade.  Maybe even longer.  History shows that such a period of inactivity does happen.

Big Australia

Another common question asked of me during my last Master Class workshop session was “When will overseas migration return?”.

The latest federal budget suggests that positive net overseas migration is forecast to return in fiscal 2023.

Chart 1 shows past net immigration trends and current federal treasury forecasts. 

The current net immigration forecast is as follows:

  • 2020-2021   -96,600
  • 2021-2022   -77,400
  • 2022-2023   95,900
  • 2023-2024   201,100
  • 2024-2025   235,000

It is interesting that the federal bean counters are responsible for Australia’s population policy rather than a more rounded think tank and policy apparatus.

As a result, the business lobby gets the most attention when it comes to our future population count and demographic profile.

The thinking goes something like this – we need more customers to sell to; lower labour costs (wages) and lower taxes.  The bottom line is the perceived need to maintain Australia’s headline economic growth rate and the Commonwealth’s projected tax revenues.

I increasingly think we should reassess our immigration intake.  There is a lot of evidence to suggest that we are worse off across a range of indicators as a result of our high immigration settings over the past 15 years.

Mass immigration since the GFC (revisit chart 1) has seen:

  • Falling productivity growth,
  • Falling real wage growth,
  • Stagnant real per capita household disposable income,
  • Stagnating growth in real GDP per capita,
  • Rising traffic congestion and associated travel times,
  • Smaller, more distant and expensive housing,
  • Reduced liveability in many of our bigger urban places,
  • Rising pollution and waste,
  • Loss of farmland, open space and the natural environment, and
  • Rising infrastructure need and costs.

Based on current long term immigration projections, some 10 million people more will live in Australia within the next 20 years.  That’s nearly 8 million more cars if established trends continue.  See chart 2.

We would see little change in our population or motor vehicle count between now and 2041 if we stopped immigration altogether.

This of course is going too far, but we do need to think about what we are trying to really achieve with our recent mass immigration mindset.  Illusorily economic growth and questionable tax relief surely isn’t enough.

Sadly pigs don’t fly, so we are likely to see immigration numbers leap again once we open our borders.  Vaccinations are a key benchmark here, but also playing a large factor – if you ask me – will be our collective exhaustion.  There is only so much Covid palaver one can bear.

The housing construction industry will be doing it much tougher in coming years, with some builders already facing potential bankruptcy as costs rise beyond their fixed price building contracts.

The building industry and their rent seeking lobbyists will want another HomeBuilder incentive and/or higher population growth.  The federal government – especially in the lead up to an election – will be keen to please. Big Australia is easier on the wallet (over the short term at least) than another cash handout.  The first tick for a return to mass immigration.

The agricultural sector and several service industries cannot seem to survive without visa slaves.  Pity these businesses don’t pay a half decent wage, have honourable work contracts and invest in improving productivity.  Anyway, tick two.

Of course, us plebs are also somewhat to blame.  The spin-doctors will be telling us that we face higher taxes unless we get more bums on seats to help share the load.  Many workers will agree.  Tick number three.

And the recent rendition of the Australian Intergenerational Report adds further grist to the mill.  Tick number four, five and six.

We could continue the tick-a-thon but your get the drift.

As a result, I reckon the latest immigration forecasts are both light and somewhat delayed.  I expect that we will go back to an annual immigration intake well in excess of 250,000 sooner that forecast and for many years.

Big Australia here we come.

When will the housing market slowdown?

One of the more common questions asked of me during my last Master Class workshop session earlier this month was “When will this crazy sh*t stop?”.

In other words, when will the RBA and APRA start applying the brakes?

So, this week lets cover this question.

Chart 1 shows that the current official interest rate setting is inflationary. 

It isn’t a question of if interest rates will rise, but when and by how much.

When, for mine, depends on the timing of a federal election.  November this year or in the first half of 2022?  Coin toss maybe.  But Morrison has been doing the overseas tango and is apparently on a diet.  Late this year me thinks.

The RBA – again for mine – will start lifting the cash rate in 2022.  The first lift is likely to be in February if we have a 2021 election or in May or August depending on when we go to the polls during 2022.

The later they leave the first lift the more likely we will see several 0.25% monthly repeat touches on the interest rate brake.

By how much interest rates rise is much harder to guesstimate.

Yet smarter heads than I am are suggesting that the cash rate (which is a record low of 0.15%) needs to lift by at least 2.5% within the next year or two to keep future CPI within the RBA inflation target range of between 2% and 3%.

Assuming we see a 2.5% lift in the cash rate and all of that rise is passed onto borrowers, then we are likely to see a doubling in the annual mortgage rate from the current average rate of 2.5% to 5%.

A $500,000, 30 year variable principal and interest loan, which at the current average mortgage rate of 2.5% per annum equates to a repayment of about $2,000 per month.

At 5% per annum this loan will cost the borrower $2,700 per month; a 35% increase.  These borrowers will need to find another $8,400 (net) each year to pay their mortgage.

Yes, you can get home loans cheaper than 2.5% at present, but the story remains the same, being that within the next 12 to 24 months many mortgage holders will be paying much more for their homes or investment properties.

It is true that the impact on those that have recently borrowed monies to buy a dwelling might not be that bad – assuming the circumstances above – as many new loans would have been assessed on a repayment schedule 2% to 3% higher than the actual borrowing rate at the time of the loan.  Having said that, such an assessment is often quite different to what one can actually afford and especially on an ongoing basis.

Moving forward – assuming the base variable home loan rate of 5% per annum -many new home loans will be assessed on a 7% to 8% annual rate, bringing the assessed monthly repayments on a $500,000 variable P+I home loan to around $3,500 per month.

To meet this criteria many future borrowers will need to have a $150,000 annual household income.  At present an annual household income of around $110,000 is enough to secure a $500,000 home loan.

At present approximately 40% of Australian households can borrow $500,000 to buy a home.  A 2.5% lift in mortgage rates will reduce this number of potential households to just 9%.

Of course, interest rates don’t have to rise to slow the housing market, APRA can do much of this heavy lifting themselves and they could tighten things much earlier than RBA too.

But again, for mine, their energy levels are likely to remain subdued until after we go to the federal polls.

Tough love is coming.  A housing slowdown is on its way.  It needs to happen.  And I expect that there will be some blood on the floor.

SEQld demand v supply update

At its core real estate is about demand and supply.

When demand exceeds supply, then values often rise.  When supply is greater than demand, values either plateau or fall.

The degree of rise or fall often relates to the magnitude of the demand and supply imbalance.

I have included six charts this post – three covering the new housing market across south east Queensland and the second trio covering the resale or existing dwelling market.

In short, the new housing market, despite the recent fall in demand – i.e., very little net overseas migration during financial 2021 due to Covid restrictions – still remains undersupplied.

These three charts include my estimates for population growth during fiscal 2021.

The resale housing market is also undersupplied.  In this case demand is growing – that is, increasing sales – whilst the stock listed for sale is falling, and sharply in many cases.

This mismatch is very likely to keep the upward pressure on dwellings prices across south east Queensland for some time to come.

Australian economy

I left this post until the latest gross domestic product figures came out earlier today.

I don’t want to add to the economic growth noise.  Far from it.

I want to outline the broad indicators I like to look at when trying to work out what is really going on with our economy.

I have included five charts.

Five charts

The March quarter growth in GDP was a surprising 1.8% as many economists expected a 1.5% quarterly lift.

And whilst the Australia’s economy grew by just 1.1% over the past twelve months to March 2021, it is the fastest recovery from a recession in 45 years.

Tomorrow’s headlines will shout “Rebound” or similar, but that is really only half the story.

Chart 1 outlines Australia’s quarterly economic growth against a trend line of what the size of the economy would have been without Covid and our response to that virus.

This chart shows the real effect of Covid: it has left a massive hole in our economy and one that will be unlikely filled.  Of course, in addition we incurred a huge debt too.

The size of this economic hole is currently $104,000 million or the equivalent of six months’ worth of economic growth.  A simpler way to put it is that we lost $4,100 per person, so far, since the beginning of 2020.

And chart 1 shows that we haven’t plugged this hole yet.

Chart 2 shows me that new private expenditure remains lacklustre, and it has been this way for some time.  Australia’s economy, of late, has been largely driven by government spending.  Rising capex is needed to genuinely drive a capital economy.

Chart 3 tells me that public service is doing okay and that the private sector borne the brunt of the Covid ‘recession’.  A whilst things are improving on the private front, there is still a ways to go before many of us are back to working at full capacity.

Of course, the hours not worked over the last twelve months has the same negative impact on the community has suggested in chart 1.  No doubt government measures such as Job Keeper helped but they have gone now.

Chart 4 shows you what most of us know to be true; that there is stuff all wage growth.  And for mine it will take a lot more than falling unemployment to turn this trend around.

And finally chart 5 shows that we weren’t too confident last year, and many saved every cent they could.  We seem to have reopened our purse strings a bit and hence we are seeing a lift in retail consumption.  But many still remain hesitant and are still saving for a rainy day.  A smart move.

End comment

I must admit I am quite over all this economic growth stuff.  I typically don’t include GDP or other similar stuff in my reports or presentations.  I like to know what is happening with jobs, hours worked and rates of pay, but not the often-cited ‘cure all’ such as GDP or similar figures.

As I get older, I think that having a single overriding ‘economic’ health measure such as GDP is flawed.  New Zealand is leading the change – like many things it seems these days – and they have taken a more comprehensive stance measuring a range of indicators which they have called Living Standards Framework – to better judge their ‘economic’ wellbeing.

Another smart cookie is Kate Raworth who has written a great book called Doughnut Economics.  This work also outlines the need to have more comprehensive set of economic measures and much more sustainable growth-related economic goals.

Internal migration again

I knew that I would be writing about internal migration several times this year as I expected that there would be a lot of talk about Covid’s impact on domestic population movements.

Well, that talk is happening and much of it is noise.

So, please bear with me.  This is my third post about this stuff so far this year and to save you some pain this missive is somewhat short and sweet.

Well, I think they are all sweet!

Synopsis

If you believe the media one would think that we are witnessing a massive lift in internal migration.  But the official statistics show otherwise.

Last year – that is during calendar 2020 – some 354,000 people moved around the country.  As it should be expected, given the circumstances, this internal population movement was down from 396,000 during 2019.  But on average over the last decade some 365,000 moved internally around Australia each year.

And for those who like to quote the latest statistics rather than a trendline, there were 109,000 internal movements during the last three months of 2019 compared to 105,000 similar travels during the December quarter last year.

So last year – or the most recent quarter – wasn’t anything really special at all when it comes to overall internal migration volumes.

Yes, there were some winners and losers in the internal migration mix.

Table 1 shows that the winners were NSW and NT (with fewer people leaving the state) and in terms of positive migration Qld, SA, WA and the ACT were also winners.

The big loser was Victoria and, also to a much lesser extent, Tasmania (despite many commentators suggesting otherwise) as the Apple Isle also went backwards in terms of interior migration last year.  I might have had something to do with that!

It is also a yes when it comes to regions getting a higher share of the recent population count when compared to the recent past.

That regional population count was up 45% over the last twelve months, with a 19,000 net increase during 2019 versus 43,000 net lift last year.

Furthermore the 19,000 net regional increase made up for 5% of the total internal population change across Australia in 2019 and the recent 43,000 net rise accounted for 12% of the nation’s interior tally during 2020.

Yes, this is a big change, but as I outlined earlier this year one of the main reasons for this is that many young people living in regional Australia – and who would normally have done so – didn’t move to a capital city last year.

Population movement is a net result.  Regional arrivals have remained largely steady over recent years, whilst regional departures have fallen.  Hence there has been a lift in the regional population count between 2019 and 2020.

Also masking the real extent of any recent ‘regional’ population movement is the fact that the ABS includes many of the outer urban/suburban areas in our larger city conglomerations as being a ‘region’ rather than a part of that wider metropolis.

Think the Gold Coast, Sunshine Coast, Newcastle, Wollongong and Geelong for example.

In addition, table 2 shows that the has been little change in the age structure of internal migration across much of the country last year.

The only noticeable change – which ironically is in contrast to the recent front-page headline grabbing images of young couples with a bub having a brew in the provincial trendy café and waxing lyrical about living in a regional hub – is that a higher proportion of older people are moving to our regional centres.

The portion of young people moving to a regional centre is actually declining.  Again, revisit table 2.

Two tables

End note

And of course, actions speak louder than words.

If regional centres were seeing a massive influx of new residents and especially those of working age why is the likes of the Queensland government offering cash incentives for people to move and work in a regional town?

To visit my two earlier posts about internal migration, go here:

Internal migration

Snapback

I think I have given this topic a good shake and unless something contrary to my thesis jumps out in coming months, I will stay silent on this subject for a while.

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