Upfront or later?

Introduction

COVID19 and the Australian financial assistance packages – in particular JobKeeper and HomeBuilder – have sparked quite a bit of commentary about better planned local communities and what ingredients make better new suburban subdivisions.

I like to think we are a bit ahead of the curve and over recent years my firm has undertaken various investigations into the benefits of advanced community infrastructure rollouts in new housing estates.

Below is a precis of our general findings.

Background

Most experienced land developers will sell to as many markets as possible – i.e. spec-builders, owner residents and investors – and will also try and keep their marketing programmes as local as possible.

The better land developers also limit the amount of investment selling in their estates.

Often the investment limit is between 20% and 30%.

Local sales are much cheaper than sales made further away.

Sales to owner residents are also much cheaper than investment selling.

The marketing and sales costs for a local owner resident sale is often pegged at 3% to 5% of the land price, whilst interstate/overseas marketing and sale costs can exceed 10%.

These costs are passed onto the end buyer, reducing housing affordability.

Owner residents are also more cautious buyers, wanting to see at least some of the estate, before they purchase, whilst in many cases investors – and especially those living some distance from the estate itself – elect to be ‘early adaptors’, buying in the initial land releases in anticipation of land prices rising as the estate progresses.

Early community infrastructure is often recreational spaces, although some developers  provide amenities such as cafes for local residents, at an early stage of the estate’s development.

However, recreational spaces generally need to be more than just a park; equipment should be provided to encourage sporting pursuits and local community engagement, via children play equipment, BBQs and shaded seating arrangements, street art and signage pointing out local things of interest and as focal point for new residents in the estate.

Importantly, the provision of a ‘standard’ park – largely being just grass – isn’t enough to qualify as community infrastructure.  The community infrastructure needs to allow for a range of activities including cultural, educational, recreational and sporting pursuits.

Such estates have a high local amenity.

Some key findings

More local sales

In brief, such early facilities help a developer demonstrate the quality of the estate which then has higher appeal to owner residents and local buyers, including investors.

A recent review of nine major land estates across south east Queensland found that those estates which don’tprovide early community infrastructure rely heavily on interstate marketing and sold close to half (45% on average) their stock to investors.

We also found that investor interest in estates with high local amenity is still there, but at a much more sustainable level, averaging 24% across the relevant land estates investigated.

Fewer rental moves and resale turnover

There is a strong trend towards higher rental and resale turnover in land estates without upfront community infrastructure.

On average some 38% of rental households across the Brisbane region change residence each year.

Also, a detached house resells, again on average, every nine years.  The sales turnover is less for owner-residential abodes, averaging close to 15 years, whilst for typical housing investment housing stock, the average time between resales is seven years.

When it comes to renters the rate of annual tenant turnover exceeds 70% in those new land estates with none or very limited community infrastructure.

Our work also found that a third of the new homes in such estates with limited local amenity where resold or on the market for resale within three years of the original developer or builder sale.

End note

Whilst the provision of such facilities costs the developer, this cost is often less than paying higher marketing and sales commissions to secure non-local sales and investment transactions.

However, despite such evidence, some developers have an ‘investment’ sales model and rely heavily on investment selling.

The provision of early facilities or any facilities at all, in their minds, is a waste of money and hence they are reluctant to provide such in their estates.

Shovel ready?

Shovel ready projects is the latest government catchcry.

Of late most of these shovel-ready projects involve new civic construction.

There are two basic types of construction: civic construction (roads, rail, utilities, etc.) or building construction (private dwellings, schools, hospitals, offices, factories, social housing, etc).

When it comes to building construction there are two basic types – residential construction and commercial or ‘non-residential’ activity.

The two charts below show the amount of construction work approved but yet started across Australia.

Chart 1 shows that building work yet to commence totals $100 billion, compared to $47 billion work of yet started civic work, whilst chart 2 shows that waiting home building totals $68 billion compared to $33 billion worth of lingering commercial building works.

So, in short, the amount of anticipated building construction is twice as large as the potential civic work and the awaited home building is double the size of the commercial building work waiting in the wings.

One would think that the main aim of any COVID19 construction-related stimulus is to help with employment.

Building accounts for the lion’s share of the construction industry’s employment, while the civic sector has a much smaller labour force.

There are around seven builder tradies for every one civic construction worker in Australia, so a dollar spent on civil works creates far fewer jobs than a dollar spent on building.

Yet the government is focusing on civic projects not building construction.

Also, building activity was already falling prior to the pandemic, suggesting that there was surplus capacity already developing among builders even before COVID19 hit our shores.

As well, building activity is almost entirely privately funded, so it is far more sensitive to a recession than the public sector.

This makes a pretty strong case for favouring the building sector with any construction specific inducements.

We should be stimulating the whole building industry and not just new house and land packages or top end renovations for a quick six-month boost as per the HomeBuilder package.

We need a more evenly spread building package – covering all building types and geographic locations – plus one that covers several years not just months.

Moreover, stimulating via the civic segment may actually do more harm than good as this sector is already operating close to capacity.  Pumping more money into any industry that is operating close to full capacity will create labour shortages and inflate prices.

Some think this focus on new civic work will create much-needed employment for workers displaced from other industries.  This should be a concern.  Reallocating workers between sectors as a short-term fix can create long-term problems.

The mining boom was a classic example.  Workers were diverted into a boom that was temporary.  When the bust came, many of those workers found it very hard to relocate back to their previous work.  A decade later and many of these workers still remain underemployed.  Some are even unemployed.

Another aim of any government stimulus should be to preserve workers’ attachment to their pre-COVID19 occupations wherever possible.

That’s why JobKeeper was designed as a business subsidy and one of the biggest recipients of JobKeeper has been the building industry.

Shovel ready?  I do wonder.

I am grateful to Robert Sobyra, Director, Research & Digital at Construction Skills Queensland for this words of wisdom in putting together this post.

…..

Furthermore, governments, more often than not, build the wrong infrastructure i.e. Cross River Rail rather than new bridges crossing the Brisbane River.  It speaks volumes when the top ten infrastructure projects in Queensland are all located in, or converge on, inner Brisbane.

Yet it pays to understand why such things keep happening.  You may have also missed my thoughts on why I think Brisbane needs more bridges.

Future work – Part 3

As noted last week, this is the third post of three about the potential future shape of new jobs.

The same caveats apply as noted in my last two posts.

This post I have covered two topics – construction jobs and the proposed future distribution of new jobs by small area (SA4) in Sydney, Melbourne, Perth and Adelaide.

Go here to revisit the distribution of new jobs in south east Queensland.

Remember, to work out the SA4 regional boundaries, click here, and select 2016 Statistical Area Level 4 (SA4) in the ‘Choose a boundary type’ area and off you go.

Construction jobs

HomeBuilder has been released because the government knows that new construction activity is a major economic driver and employer.

I think that this scheme misses the mark, but enough has been said by me and others in this space.  Except to say that why backyard homes or granny flats are excluded from this package escapes me.  Such new builds go a long way to providing sensible and affordable accommodation.

Australia’s residential construction sector has weighed in estimating that new housing boosts the nation’s GDP by about 5% per year and directly employs some 134,000 people.

A recent report from the National Housing Finance & Investment Corporation has stated that every $1m spend on residential construction supports 9 jobs and about $2.9m of industry output and consumption across the economy.

I do think this multiplier is too high, as our work, based on the Queensland state govt housing strategy, found since 2018, 312 new dwellings have been created and 1,307 jobs supported, which suggest 4 jobs per new dwelling.

The overall package – a five year programme – is expected to delivery 4,000 new homes and 1,800 new jobs = 2.3 new jobs per home.

I think the latter is a more applicable multiplier.

Table 1 below is a long one and shows those areas across Australia most (and least) dependent on new construction jobs.

Table 1: Forecast construction job growth over next five years

SA4 Region Location New jobs
Construction Total jobs %
Moreton Bay Brisbane 3,094 12,539 59%
East Brisbane 2,151 7,078 30%
South East Tas 186 618 30%
Coffs Harbour – Grafton NSW 979 3,899 25%
Richmond – Tweed NSW 2,334 9,395 25%
Hunter Valley NSW 2,597 10,573 25%
Outback (North and South) WA 737 3,097 24%
Ipswich Brisbane 4,465 19,194 23%
Far West and Orana NSW 571 2,518 23%
Logan – Beaudesert Brisbane 2,619 11,681 22%
North Adelaide 3,272 14,685 22%
Warrnambool + South West Vic 395 1,782 22%
Geelong Vic 2,364 11,502 21%
Bunbury WA 935 4,796 19%
Wheat Belt WA 602 3,095 19%
New England + North West NSW 832 4,285 19%
Mornington Peninsula Melbourne 1,765 9,266 19%
South West Sydney 2,918 15,469 19%
Outer South West Sydney 1,880 10,131 19%
Bendigo Vic 1,316 7,250 18%
South East Melbourne 8,856 49,396 18%
Launceston + North East Tas 678 4,131 16%
North East Melbourne 5,087 31,816 16%
West Adelaide 1,077 7,009 15%
Hobart Tas 1,171 7,767 15%
Parramatta Sydney 4,237 28,186 15%
South Adelaide 1,846 12,780 14%
Hume Vic 608 4,217 14%
Inner Perth 869 6,172 14%
Illawarra NSW 1,538 11,502 13%
Inner South West Sydney 4,711 35,406 13%
Latrobe – Gippsland Vic 995 7,546 13%
Canberra ACT 1,802 13,994 13%
Barossa – Yorke – Mid North SA 177 1,382 13%
North West Vic 328 2,645 12%
Outer East Melbourne 3,012 24,652 12%
Baulkham Hills + Hawkesbury Sydney 1,435 11,782 12%
West and North West Tas 199 1,666 12%
North West Melbourne 2,388 20,420 12%
Newcastle + Lake Macquarie NSW 2,324 21,082 11%
Outer West + Blue Mountains Sydney 1,467 13,329 11%
Australia  113,662 1,075,045 11%
Central + Hills Adelaide 838 8,716 10%
Central Coast Sydney 1,156 12,610 9%
Darling Downs – Maranoa Qld 254 2,812 9%
Gold Coast Qld 4,218 47,258 9%
Blacktown Sydney 1,701 19,317 9%
Inner Melbourne 4,096 47,846 9%
Northern Beaches Sydney 896 11,126 8%
Riverina NSW 471 6,094 8%
Shepparton Vic 340 4,648 7%
Cairns Qld 689 9,569 7%
Central West NSW 425 6,208 7%
West Melbourne 3,946 58,301 7%
North Sydney + Hornsby Sydney 1,552 23,236 7%
North Brisbane 620 9,476 7%
Sunshine Coast Qld 1,395 21,577 6%
West Brisbane 372 5,765 6%
Inner East Melbourne 911 14,414 6%
South Brisbane 997 16,689 6%
Ballarat Vic 252 4,293 6%
City + Inner South Sydney 1,844 32,333 6%
Inner West Sydney 1,032 19,486 5%
Ryde Sydney 420 8,148 5%
Inner City Brisbane 909 18,845 5%
Inner South Melbourne 1,377 29,915 5%
Eastern Suburbs Sydney 830 18,334 5%
Mandurah Perth 103 2,327 4%
Mid North Coast NSW 258 6,179 4%
South West Perth 656 16,851 4%
South East Perth 471 13,032 4%
Capital Region NSW 276 8,230 3%
Sutherland Sydney 321 10,760 3%
Darwin NT 140 5,067 3%
Murray NSW 64 3,992 2%
Southern Highlands – Shoalhaven NSW 46 4,349 1%
South Australia – South East SA 36 3,594 1%
Mackay – Isaac – Whitsunday Qld 24 8,178 0%
Toowoomba Qld 8 5,783 0%
Outback SA 0 1,061 0%
North West Perth -331 23,568 -1%
North East Perth -123 8,094 -2%
Townsville Qld -94 4,971 -2%
Outback Qld -42 1,724 -2%
Central Queensland Qld -191 6,569 -3%
Outback NT -67 1,974 -3%
Wide Bay Qld -250 1,995 -13%
Matusik + lmip.gov.au.  Employment projections for five years to May 2024.

New jobs distribution by capital cities

Four tables follow.

Again, to revisit south east Queensland’s future job spread go here.

Table 2: Forecast job growth over next five years within Sydney

Sydney region Number of new jobs % Sydney
Central Coast 12,600 5%
Baulkham Hills and Hawkesbury 11,800 4%
Blacktown 19,300 7%
City and Inner South 32,300 12%
Eastern Suburbs 18,300 7%
Inner South West 35,400 13%
Inner West 19,500 7%
North Sydney and Hornsby 23,200 9%
Northern Beaches 11,100 4%
Outer South West 10,100 4%
Outer West and Blue Mountains 13,300 5%
Parramatta 28,200 10%
Ryde 8,100 3%
South West 15,500 6%
Sutherland 10,800 4%
Sydney region 269,500 100%
Matusik + lmip.gov.au.  Employment projections for five years to May 2024.

Table 3: Forecast job growth over next five years within Melbourne

Melbourne region Number of new jobs % Sydney
Inner 47,800 17%
Inner East 14,400 5%
Inner South 29,900 11%
North East 31,800 11%
North West 20,400 7%
Outer East 24,700 9%
South East 43,400 16%
West 58,300 21%
Mornington Peninsula 9,300 3%
Melbourne region 280,000 100%
Matusik + lmip.gov.au.  Employment projections for five years to May 2024.

Table 4: Forecast job growth over next five years within Perth

Perth region Number of new jobs % Sydney
Mandurah 2,300 3%
Inner 6,200 9%
North East 8,100 12%
North West 23,600 33%
South East 13,000 19%
South West 16,800 24%
Perth region 70,000 100%
Matusik + lmip.gov.au.  Employment projections for five years to May 2024.

Table 5: Forecast job growth over next five years within Adelaide

Adelaide region Number of new jobs % Sydney
Central and Hills 8,700 20%
North 14,700 34%
South 12,800 30%
West 7,000 16%
Adelaide region 43,200 100%
Matusik + lmip.gov.au.  Employment projections for five years to May 2024.

These tables tell me: that Melbourne is expected to create more new jobs than Sydney over the next five years.

Also, most new jobs – around 90% – when including SEQld, Canberra and Newcastle/Wollongong – are expected to be held in our six largest urban areas.

In addition, some 70% of these new jobs are in suburban locations.

Yet many of the new big-ticket infrastructure projects being fast-tracked across the country are situated in, or focused on, inner city locations.

Future work – Part 2

As noted last week, this is the second post of three about the potential future shape of new jobs.

The same caveats apply as noted last week too.

I have combined the originally planned second and third job Missive posts together in this communique.

Several have asked me if I would post the proposed future distribution of new jobs by small area (SA4) in Australia’s major urban areas.  This information will be posted next week and will close out this Missive job series.

Three tables follow.

Table 1: Average individual annual total earnings by industry type

Industry type Average annual total earnings
Higher paying jobs
Mining $137,500
Utility services $100,250
Financial/Insurance services $90,250
Media/Telecommunications $86,250
Professional/Scientific services $86,000
Transport/Warehousing $83,250
Middle paying jobs
Construction $82,250
Public administration $82,000
Wholesale trade $72,000
Manufacturing $70,250
Education $64,500
Real Estate $62,500
Lower paying jobs
Health care $59,000
Private administration $55,000
Other services $49,250
Arts + recreation $44,500
Retail trade $42,250
Agriculture $37,500
Tourism $30,000
Average $65,500
Matusik + ABS 6302.0.  Total average individual annual total earnings as at November 2019.

Table 1 tells me: that the highest paying job in Australia involves working in the mining industry, whilst the lowest paid work is serving tourists.  As a side bar here is that there is something wrong when our teachers and medical staff get around half the brass paid to folks working in mineral resources.

Table 2: Forecast job growth over next five years by capital city + industry type

Industry type Number of new jobs % Capitals
Higher paying jobs
Mining 10,800 1%
Utility services 4,600 1%
Financial/Insurance services 16,900 2%
Media/Telecommunications -1,100 0%
Professional/Scientific services 154,700 19%
Transport/Warehousing 37,200 5%
Total higher paying jobs 223,100 28%
Middle earning jobs
Construction 84,900 11%
Public administration 37,000 5%
Wholesale trade 8,000 1%
Manufacturing -5,700 -1%
Education 89,400 11%
Real Estate 11,800 1%
Total middle paying jobs 225,400 28%
Lower earning jobs
Health care 158,200 20%
Private administration 27,100 3%
Other services 25,000 3%
Arts + recreation 21,600 3%
Retail trade 54,000 7%
Agriculture -1,300 0%
Tourism 64,000 8%
Total lower paying jobs 348,600 44%
Total capital cities 797,100 100%
Matusik + lmip.gov.au.  Employment projections for five years to May 2024.

Table 2 tells me: that some 44% of the new jobs created in our capital cities over the next five years are expected to be lower paying ones.  The share of expected higher and middle-income jobs are 28% each.  The top five capital city job growth types are health care, professional/scientific services, construction, education and tourism.

Table 3: Forecast job growth over next five years, regional Australia + industry type

Industry type Number of new jobs % Capitals
Higher paying jobs
Mining 4,600 2%
Utility services 2,200 1%
Financial/Insurance services 3,500 1%
Media/Telecommunications 500 0%
Professional/Scientific services 17,700 6%
Transport/Warehousing 6,600 2%
Total higher paying jobs 35,100 13%
Middle earning jobs
Construction 28,800 10%
Public administration 15,100 5%
Wholesale trade 2,500 1%
Manufacturing 2,300 1%
Education 39,900 14%
Real Estate 500 0%
Total middle paying jobs 89,100 32%
Lower earning jobs
Health care 94,400 34%
Private administration 7,700 3%
Other services 13,300 5%
Arts + recreation 5,100 2%
Retail trade 8,400 3%
Agriculture -2,600 -1%
Tourism 27,500 10%
Total lower paying jobs 153,800 55%
Total capital cities 278,000 100%
Matusik + lmip.gov.au.  Employment projections for five years to May 2024.

Table 3 tells me: that over half of the new work across regional Australia is expected to be in lower paying jobs.  The regions are expected to create limited new higher paying jobs.  The top five future job types include health care (with a high 34% of new regional jobs over the next five years), education, tourism, construction and professional/scientific services.

End comments

As noted last week there has been some commentary about more people moving out of the major capitals and living/working in regional centres.

If this eventuates it might see a change in regional employment types, but it would take wide-ranging economic reforms including decentralisation, overhaul of taxes, red tape, industrial relations and research and development incentives.

As they say, “pigs might fly”.

Yet, for mine, we will need such economic reform if we are to see a lift in the number of better paying jobs in the future. This applies to our capital cities as well.

Let’s hope that Reserve Bank of Australia governor Philip Lowe thought bubble about such reforms are taken seriously.

Nevertheless, the key finding here – again reiterating my thesis – is that future work in Australia (and for that matter across much of the western world) is lower paying jobs.  This changes the type of property people can afford; the way they live, travel to work and what they do in their leisure time.

For mine, new housing essentially takes two forms – small digs lodging individuals and couples near employment nodes and multiple families/unrelated people sharing accommodation in most other locales, including regional Australia.

Future work

A somewhat contentious post given recent events and COVID19’s potential impact on employment.

Last year the Australian Government’s released new five-year forecasts for employment via its Labour Market Information Portal.  Heavy caveats have subsequently been added to this dataset.

We have been using this information for some time and my regular review of the statistics have shown them to quite accurate.

So I have posted this information to your consideration and potential use.

I do think that what they suggest is still likely to come true.  More so the distribution of new jobs rather than the actual quantum as there will no doubt be changes to Australia’s job creation capability over the short-term given COVID19-related impacts and restrictions.

So maybe ignore the actual number of projected jobs and focus on the potential future distribution of new work.

Four tables follow.

Table 1: Forecast job growth over next five years by state and territory

State or territory Number of new jobs % Australia
New South Wales 368,000 34%
Victoria 330,000 30%
Queensland 212,000 20%
South Australia 49,000 5%
Western Australia 81,000 8%
Tasmania 14,000 1%
Northern Territory 7,000 1%
Australian Capital Territory 14,000 1%
Australia 1,075,000 100%
Capital Cities 797,000 74%
Regional Australia 278,000 26%
Matusik + lmip.gov.au.  Employment projections for five years to May 2024.

Table 1 tells me: that most new jobs with be created in the three major eastern states and three-quarters of this new work is expected to be in our capitals.

Table 2: Forecast job growth over next five years by capital city

Capital city Number of new jobs % Capitals
Sydney 270,000 33%
Melbourne 286,000 36%
Brisbane 101,000 13%
Adelaide 43,000 5%
Perth 70,000 9%
Hobart 8,000 1%
Darwin 5,000 1%
Canberra 14,000 2%
Capital Cities 797,000 100%
Matusik + lmip.gov.au.  Employment projections for five years to May 2024.

Table 2 tells me: that most of the new jobs in the capitals should be in Melbourne, Sydney and then Brisbane.

Table 3: Forecast job growth over next five years by major Australian region

Region State Number of new jobs % Regional Australia
Newcastle New South Wales 32,000 12%
Wollongong New South Wales 12,000 4%
Richmond-Tweed New South Wales 9,000 3%
Geelong Victoria 12,000 4%
Bendigo Victoria 7,000 3%
Ballarat Victoria 4,000 1%
Gold Coast Queensland 47,000 17%
Sunshine Coast Queensland 22,000 8%
Cairns Queensland 10,000 4%
Mackay Queensland 8,000 3%
Toowoomba Queensland 6,000 2%
Townsville Queensland 5,000 2%
Bunbury Western Australia 5,000 2%
Launceston Tasmania 4,000 1%
Regional Australia 278,000 100%
Matusik + lmip.gov.au.  Employment projections for five years to May 2024.

Table 3 tells me: that when it comes to new regional employment, the Gold Coast, Newcastle and the Sunshine Coast are expected to dominate.

Table 4: Forecast job growth over next five years within South East Queensland

SEQld region Number of new jobs % SEQld
Sunshine Coast 22,000 13%
Moreton Bay 13,000 8%
Brisbane north 10,000 6%
Inner Brisbane 19,000 11%
Brisbane East + Redland 7,000 4%
Brisbane south 17,000 10%
Brisbane west 6,000 3%
Ipswich 19,000 11%
Logan 12,000 7%
Gold Coast 47,000 27%
SEQld 172,000 100%
Matusik + lmip.gov.au.  Employment projections for five years to May 2024.

Table 4 tells me: that when it comes to new jobs across south-east Queensland, inner Brisbane’s share is expected to be just 11%, equal to Ipswich’s projected new job creation.  The Gold and Sunshine Coast are expected to create many more jobs as are the Brisbane suburbs, especially those in the south.

End comments

I think that little will actually change – assuming restrictions ease and no further major outbreaks occur – when it comes to our working environment.  Most – if not almost all – will snap back into their established pattern and distribution of work.

Adding weight to this argument is that nearly all of my recent work-related communiques focus on returning to pre-COVID19 behaviour.

Examples include: “When can we meet?” “Looking forward to the master class.”  “Can you give us a presentation?” “We want you to meet our board and present your findings.” “Your suggested workshopping your recommendations with recent buyers is a good idea, how do we implement this.”

There has been some commentary about more people moving out of the major capitals and living in regional centres.  This has been already happening when it comes to people downsizing or retiring, but it isn’t commonplace when it comes to the most working households.  Nor, for mine, is this going to change.

I think that actually fewer new jobs will be created in regional towns over the forecast five-year period as outlined in the tables in this post.  This will especially be the case if the coronavirus impact sees regional tertiary education facilities close; less overseas tourists and our fracas with China escalates limiting the economic viability of certain resource operations.

Forecasting what exactly?

On an almost daily basis there is another housing price growth forecast.  They range widely and, at present, mostly in the negative.  Some commentators have changed their tune, with one or two having done so within a month.

Almost all talk about ‘Australian’ house prices, a few break down their prognoses by capital city or region, but very few define what they are actually measuring.

Here is an example from the weekend papers:

“We still see Australia’s house prices falling, but now only -5 to -10 per cent.”

We know that the median is not the same as the average, but in describing a statistic, it also pays to differentiate between the median or average and a more relevant sample.

For example: The ‘median’ house price in Brisbane is $495,000, the ‘average’ price is $550,000 but a recently renovated four bedroom house on a 500m2 to 600m2 lot in Brisbane’s northern suburbs is currently selling for between $900,000 and $950,000.

The values in the first two sets are declining but in the third they are rising, as demand is high whilst supply of that property type is short in Brisbane.

The reason the numbers are different is that the samples are different.

We chop off the outliers in the third set.  This is really useful, because it enables us to be clear about what property or housing market segment we are talking about.

There are many housing market segments, some are doing it tough right now, others aren’t.

As suggested above how a housing market is preforming, more often than not, comes down to supply versus demand in the relevant subset or segment is question.

There is no national housing market, there is no capital city or regional town market neither.  There are really only subsets and they often differ substantially from each other.

It is best to clearly define which housing market segment you are looking at and start from there.  Ignore the generalisations and the talking heads that use such misleading parameters.

Sadly, in real estate, it is the easy things that get measured, and not the things that should.

Three things

As the title says, three things this post.

1. Land tax

Below are two media summaries, the first published earlier this year and the second this week.

Victorian Treasurer Tim Pallas and his New South Wales counterpart Dom­in­ic Perrottet are investigating the phasing out of stamp duty on property sales, with stamp duty to be replaced an annual land tax. The NSW government has estimated stamp duty costs the economy $2.35 for every collected dollar, compared to just $0.16 for land tax, while land taxes would provide state governments with a much more reliable revenue stream than stamp duties. Getting rid of stamp duty could boost property transactions in NSW by 25%, according to a 2017 report commissioned by the NSW Treasury.

New South Wales and Victoria have been talking for some months about the possibility of getting rid of stamp duty; the two states get around 25% of their annual revenue from the duty. The property industry contends that now is an ideal time to get rid of stamp duty, given the depressed state of the housing market. Stamp duty would be replaced by an annual tax based on land value, and the ACT government is currently involved in a long-term initiative along these lines. EY’s head of tax policy Alf Capito says any system to replace stamp duty needs to have bipartisan support and needs to be something that is very hard to change once put in place.

To review what I would do go here.

2. Buyer profiles

Much has been written about the apparent fluctuation in overseas apartment buying in recent months.  Also, there seems to be expectation that a bit of magic dust sprinkled over potential property investors will see them toss caution to the wind and buy.  In addition, there seems to be a somewhat widespread belief that first home buyers aren’t active, and they also need further assistance.

Australia – Buyer type

Buyer type 5 years ago Last year Today
New development
First home buyer (owner resident) 15% 33% 36%
2nd and subsequent owner residents 34% 36% 30%
Foreign buyer 16% 6% 7%
First home buyer (investor) 10% 10% 11%
Investors (Australian resident/company) 25% 15% 16%
Established housing
First home buyer (owner resident) 17% 22% 27%
2nd and subsequent owner residents 42% 47% 43%
Foreign buyer 9% 5% 2%
First home buyer (investor) 10% 9% 10%
Investors (Australian resident/company) 22% 17% 18%
Matusik + NAB Residential Property Survey Q1-2020

3. Constraints

Regardless of what you think of NAB, their economic team and the regular email posts are very good.  Mandatory reading if you ask me.  Go here to find out more.

One of the things NAB does well – in the residential research space – is undertake a national quarterly survey about housing constraints.  For March quarter they found the largest constraints by order of magnitude were:

New development

  1. Tight credit
  2. Housing affordability
  3. Sustainability of past dwelling price gains
  4. Construction costs
  5. Lack of development sites
  6. Labour availability
  7. Rising interest rates

Established property

  1. Employment security
  2. Access to credit
  3. High level of prices
  4. Better returns on other investments
  5. Lack of stock
  6. Rising interest rates

End comments

Do first home buyers really need another rebate?  And especially one linked to new construction, when a higher proportion of first home buyers are already buying new when compared to established digs?

If lifting short-term construction employment is the aim, then surely the recently floated ‘renovation grant’ would have more impact regarding helping the building trades secure more work.

But for mine it would be even better to spend this money on building more social housing.

Foreign buyers will return, given Australia’s low COVID-19 infection and death rates, plus as a means of buying future citizenship.  Ditto when it comes to tourism.  We will be stupid, economically speaking, not to plan for this.  But we need a national housing policy, which is clear, concise and enforced.

Rental yields are the new black when it comes to housing investment.

We have an aging demographic, especially when it comes to housing ownership and short-to-medium housing term demand.  We need to free up the ‘sales train’ encouraging older owners to downsize and sell their large homes to younger buyers.

Removing stamp duties will help, but so too will helping these older sellers actually sell their homes.  Many are asset rich but cash poor.

Consideration should be given by developers, especially of completed stock targeting downsizers and retirees, about how they can transact a sale by assisting the buyer sell their current abode.

A sensible COVID-19 government response would be to do likewise.

Up or Out

I am a town planner by qualification and some practice.  I have been employed numerous times to determine forward housing demand and best matched dwelling supply.  I have done this for both private clients and, increasingly, in the public realm of late.

I write this introduction as a segue to advocate that what the official forecasts suggest is going to happen when it comes to new housing supply is often miles off what is happening now and likely to take place in the future.

Housing affordability and dwelling suitability disparities can be misunderstood but more concerning is that environmental, development feasibility and even existing town planning constraints are often not factored into the equation at all.

The press clipping below indicates that my firm was involved in an in-depth housing supply and demand study regarding greenfield land on the Gold Coast late last year.

In short, the official forecasts are way off the mark.

This is major issue facing not only the Gold Coast, but many urban locations across Australia.

The impact of not having enough land available for development negatively impacts local jobs; housing affordability; infrastructure, service and lifestyle provisions and even resident satisfaction.

Supply: Matusik chance ratings

Before I outline what, we found, I need to outline how we analysis potential housing supply in a study like this.  What we do is provide a chance rating.

We score each potential development site based on a high, medium or low chance of development success.  For example, for our Gold Coast work we used the following benchmarks:

  • High = 75% + likelihood of development between 2020 and 2041
  • Medium = 35% to 75% likelihood of development between 2020 and 2041
  • Low = Less than 35% likelihood of development between 2020 and 2041

See the postscript for more detail.

Greenfield dwelling demand

We also need to determine new housing demand.  Here we use annual dwelling registrations and we also break that analysis up by development density – typically by dwellings per hectare – as future housing supply outcomes are often set by such parameters.

On the Gold Coast and over the last five years, there has been a demand for some 2,375 new dwellings each year in the Gold Coast greenfield area.

Importantly most of this demand – some 85% or 2,022 housing starts per year – have been in new estates and projects with development densities under 20 dwellings per hectare.

Supply finding #1

Once you exclude the greenfield sites which are rendered undevelopable due to existing town planning and environmental constraints (this work was done by my study partners Zone Planning and BIOME Consulting) there are 22,673 potential dwellings available to be developed (in theory) across the greenfield areas on the Gold Coast.

These dwellings are hypothetically anticipated to be developed between now and 2041.

It is important to note here that some 23,000 potential dwellings (if you take the higher end of the official Gold Coast greenfield land supply forecast) have been excluded from development.  Much of this is to do with ‘desktop’ environmental constraints which when on the ground become irrelevant.

Of the 22,673 potential dwellings left, only 31% or 7,068 dwellings have a high chance of being developed over the 21 years.  A further 18% or 3,972 dwellings have a medium chance of development and a very high 51% or 11,633 dwellings have a low chance of development during the subject time frame.

Supply finding #2

The 22,673 potential dwellings are spread across 1,478 prospective development sites.

Only 4% or 55 sites have a high chance of being developed between now and 2041.  A further 13% or 188 sites have a medium chance of development.  An extremely high 84% or 1,235 sites have a low chance of development during the subject time frame.

Also, of note is the small size of the development sites, making it almost impossible for developers to amalgamate future sites and at feasible prices.

The high chance sites averaged just 9.3 hectares; medium chance sites averaged a low 0.9 hectares and the low chance sites averaged a piddling 0.24 hectares.

Supply finding #3

 When looking at the dwelling supply by expected dwelling density and limiting our efforts to those sites with a high and medium chance of happening between now and 2041 there are 4,134 dwellings under 20 dwellings per hectare and some 6,906 dwellings over 25 dwellings per hectare.

Our findings

There are 11,040 dwellings across the greenfield expansion area on the Gold Coast that have a high to medium chance of being developed over the next 21 years.

As noted above this breakdown of this potential dwelling supply by development density is 4,143 dwellings under 20 dwellings per hectare and 6,906 dwellings over 25 dwellings per hectare.

Over the past five years, there has been, on average, 2,375 new residential lots registered per annum across this greenfield area.

The breakdown of this annual average dwelling demand by development density was: 2,022 new lots registered under 20 dwellings per hectare and 353 new lots registered over 25 dwellings per hectare.

In summary, the 11,040 potential greenfield housing supply divided by the recent demand for 2,375 new dwellings each year equates to 4.6 years supply.

Yet the future supply of housing stock at development densities under 20 dwellings per hectare is tight (being 4,143) whilst the annual demand for such housing is very high, being 2,022 on average, over the past five years.

This equates to just 2 years supply.

End note

This, to me, is a real problem.

Many in the land development space have already left the Gold Coast and more will follow.  Jobs are being lost.

Many tradies and other Gold Coast employees are forced to live in more affordable and suitable accommodation some distance from where they work.  This means they are commuting long distances on the M1 and other major roads to get to and from work each day.

It seems to be getting worse on a daily basis.

Adding further angst is that much of the ‘real’ greenfield supply is in hands of a few developers and on just a few sites.

Price escalation is likely.  Home builders already face low margins, as the end house and land package price have a definite ceiling, yet land developers can (and are) increasing the price of the land.

The official reply to this issue has been its “up or out” – meaning “its high-rise housing or off to Logan or Ipswich you go” – but maybe that is the wrong attitude.

A better reaction might be to investigate the validity of the existing constraints to new housing supply in the greenfield areas, first, and secondly, look for ways to expand the greenfield land supply.

This should be done, not only on the Gold Coast, but throughout south east Queensland.

I have done enough similar work across this region in recent years to say, and with a high degree of confidence, that similar findings apply to most council areas across the south east corner of Queensland.

To get a copy of our report go here.

…..

Postscript: Matusik chance ratings explained

The high chance sites are either already owned by development companies or are in areas where similar urban development is well advanced.

The medium chance category includes sites that are held in private hands and makes – in our opinion – some economic sense to redevelop.  Of course, this doesn’t take into account the owner’s intent or their expectation as to profit or timing.

The low chance segment includes sites which contain a very high expectation with regards to density.  Such sites are already hard to develop near the beach, along the light rail corridor and/or in existing established urban centres on the Gold Coast.  The economic reality and past track record suggest that high density development across much of the Gold Coast greenfield area is very unlikely over the next decade or two.

Also, sites which have an existing land use – like a shopping centre – have also been placed in the low category.  The chance that an existing retail centre in a greenfield location – and especially one with multiple owners and tenants – will be redeveloped into dwellings is low.

Likewise, sites which have been reduced dramatically in terms of dwelling yield due to environmental and other town planning overlays has also been allocated to the low pile as well, as these are probably no longer economically viable.

New homes

Four charts this post.

Chart 1 tells me new housing approvals across the country are in decline.  They peaked in 2015, with 235,000 permits.  Over the last year, some 172,000 new dwellings were approved.

Chart 2 shows that 60% of the approvals, last year, were for detached houses, whilst 24% were for apartments and 16% were for townhouses and duplexes.  Apartment approvals have fallen from 36%, again in 2015, whilst detached housing permits have risen from 50% over the same time frame.  Whilst the chart scale hides it, new townhouse/duplex supply has almost trebled over the last ten years.

Chart 3 tells me that a third of new apartment approvals haven’t yet started construction.  This equates to some 24,000 apartments.  The proportion of approved detached houses waiting in the wings, so to speak, is just 9% or some 9,000 dwellings across Australia.  The number and proportion of non-apartment starts has risen sharply over the past five years.

Chart 4 outlines that just 1% of the new homes built in Australia last year were supplied by the government or a ‘public’ housing supplier.  This has been the trend since the GFC, where for one year, the proportion of public housing supply – after much hand wringing (like is happening now) – rose to 6% in 2010.  Back in Whitlam’s short rule, it jumped to 17%, and during the 1980s, it averaged 10%.

My comments

Over the next decade there will be an underlying demand to build some 150,000 new homes each year.We are still overbuilding – mostly the wrong housing stock, hence the increase in approved apartments not starting construction – and housing demand is likely to be less over the next 12 to 24 months due to COVID-19 related restrictions.

But the want to visit and live Downunder is likely to be even higher in the future, and we will need these extra young heads too.

Our forecasts suggest that detached homes will make up half of the housing demand over the next decade, whilst apartments and townhouses will have a 20% market share. Our research shows that 10% of the new demand – it maybe more now due to the coronavirus – will be satisfied by renovations, extensions and backyard housing solutions.

Personally, the “stay put and maximise our existing asset” mindset is likely to hold a 20% market share of ‘new’ housing supply in coming years.

Many of the non-start apartment projects need a major design and pricing overhaul. Regardless, lots of them are very unlikely to be built and especially in their approval timeframe, and hence shouldn’t be included in government new housing supply targets.

In addition, if we are to believe the COVID-19 commentary, then the demand for centralised workspace and accommodation is set to wane, replaced by bigger suburban homes (and yards), each with dedicated workspaces and drone landing pads.

Hmm once and hmm again.

There is little doubt that we have major problems with housing affordability. The debate here – I am guilty too – often is focused on deposits needed/interest payments required etc. by the middle-class and not where the want is the most acute, being those on minimum wage and government payments like Jobseeker.

Also, of importance is not only affordability, but suitability also.

A one-bedroom apartment might be affordable for a family of four with a parent on the minimum wage or Newstart (now Jobseeker) payments, but it is not suitable.

A March 2020 Anglicare survey found 70,000 places to rent across Australia, but just nine – that’s not a typo – were affordable and suitable for a one income household receiving the Jobseeker payments.  And doubling the Jobseeker payment or having two adults receiving the payment lifts the rental supply to just 1,000 places.

This has been a problem for some time, and the impact of the coronavirus, will most likely make it worse.

Maybe some good might come out of COVID-19 – shining a light on the need for public and social housing.  But we need more than a quick fix.  A bump in public housing starts for a year or two isn’t the answer, we need a long-term housing strategy.

Rental market outlook

Much has been written – with little doubt more to come – about the Australian rental market of late.

The themes most discussed include the potential impact of eviction and rental increase bans; the fall in international student numbers and their effect on rental demand; the rise in unemployment (especially in those industry sectors which employ numerous renters) and its likely negative impact on rental need plus increasing new rental supply.

New rental supply is rising because some tenants are quitting their leases and are either moving back in with their parents or bunking in with friends or other relatives.

Some renters, if not many, will find this way of living to their liking, especially if the right accommodation arrangement is available.  Not all parents, on the other hand, would agree.

Also, many short-term accommodation spaces are now being offered for longer occupation.

Many are quick to say that weekly rents will fall, with some suggesting a bollocking.

A few – amazingly to me – are forecasting rental growth.

The usual talking heads are saying that the rental investment landscape has changed, and significantly, due to COVID-19.

Before I reply please review the two tables below.

Table 1: Three-bedroom detached houses – current asking rent + change

Location Asking rent Change
Last month Last year Three years
Sydney $655 -4.1% -4.3% -9.8%
Melbourne $530 -1.5% 0.3% 4.0%
Brisbane $430 -1.2% 1.0% 2.0%
Perth $410 -2.3% 0.4% 1.4%
Adelaide $400 -0.1% 3.7% 9.0%
Canberra $585 -1.0% 1.6% 10.7%
Hobart $430 -3.1% -1.0% 21.1%
Darwin $400 -0.1% -2.9% -11.4%
Newcastle $405 0.9% 1.8% 5.1%
Wollongong $440 0.5% 0.1% -2.0%
Sunshine Coast $460 -2.2% 1.0% 6.5%
Gold Coast $565 -4.3% -1.0% -1.4%
Australia $440 -0.7% 0.0% 3.5%
Matusik + SQM Research.  As a 4th May 2020.

Table 2: Two-bedroom apartments – current asking rent + change

Location Asking rent Change
Last month Last year Three years
Sydney $495 -2.0% -4.3% -8.2%
Melbourne $420 -2.2% -1.6% 4.0%
Brisbane $365 -0.5% 2.4% 3.5%
Perth $340 -1.5% 4.6% 4.2%
Adelaide $305 -0.5% 2.7% 5.8%
Canberra $490 0.9% 1.6% 12.2%
Hobart $380 -3.2% 4.4% 16.0%
Darwin $345 -0.4% -2.5% -11.4%
Newcastle $365 4.8% 6.1% 8.5%
Wollongong $390 1.8% 2.2% 2.4%
Sunshine Coast $410 1.8% 10.0% 14.4%
Gold Coast $460 -2.8% 2.2% 7.5%
Australia $365 0.0% -1.9% 4.0%
Matusik + SQM Research.  As a 4th May 2020.

Table 1 outlines the current average weekly asking rent and the change in that rental amount over the last month (as at early May, so relevant as it includes the first month of the Australian lock-down restrictions); last year and past three-year period for three-bedroom detached houses.

Table 2 provides that same detail for two-bedroom apartments.

These tables tell me – outside of a few select areas – that weekly rents haven’t changed that much over recent times.

The rapid rise in weekly rents in Hobart and on the Sunshine Coast are associated with economic growth, whilst in Adelaide and Canberra rental growth over the past three-year period was mostly due to tight rental supply.

Rents have actually been falling in Sydney, due to affordability constraints plus a lift in supply, specifically evident when including granny flats in the supply equation.

A key message here is that there has been little rental growth of late and that the future outlook for such growth is slim.

Slimmer now, maybe, because of COVID-19 but it was always looking slim, nonetheless.

The reasons behind this leaner rental future are limited wage growth (actually wages are falling in real terms and when measured against the inflation rate of household necessities rather than luxury items or irregular purchases) coupled with an increase in the proportion of lower paying jobs in our recent, and importantly, projected future employment mix.

Many of these lower paying jobs are held by the rental market.

A second message is that the number of households renting has been rising steadily over the past two decades.

The trends above, coupled with low housing affordability, lacklustre dwelling price growth, deflation and our changing demographic mix is likely to see renters make up 40% of the Australian housing market by our next Census in 2021.

That proportion could be higher because of COVID-19 but it is already growing and set to potentially cross the halfway mark sometime within the next two decades.

So, if you are a residential investor there are two solutions here:

  1. either provide what the rental market really wants and will pay a premium for,

and/or

  1. provide housing stock that really enables tenants to share accommodation.

For mine, nothing much has changed with regards to the rental market’s future shape.  It might just arrive, now, a bit sooner than expected.

In short, multiple rental occupants per title is the new black and the number of households renting will continue to rise. 

Both trends even more so post COVID-19.

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