Investors or owner-occupiers: Who are we really building housing for? Catherine Cashmore
I’ve written extensively regarding the various issues that adversely affect our home buying demographics.
Within the real estate industry itself, it’s not a popular subject - obviously time spent analysing concerns related to rising capital prices, which will eventually result an undesirable demographic shift in the makeup of our society, do little to promote a profit making business that reaps rewards from inflationary gains.
Any hint that the cost of accommodation may be unaffordable for a growing percentage of potential purchasers, usually results in an accusation that first time buyers are being picky or just plain unrealistic in their expectations. Whilst low rates may assist existing owners, the short-term frenzy of activity being felt in our largest capital cities is primarily being lead by little more than confidence and speculation, with 50% of Sydney and Melbourne’s current demand is coming from the investment sector alone.
Investors now prop up valuations in the lower price bracket and consequently first-time purchasers without some kind of family assistance to help with a deposit, or dual income, often find themselves forced into a rental trap.
Another reason housing affordability is an unpopular topic, is because it needs to be tackled on a number of fronts. Hence, why it often seems like an insurmountable problem that successive governments find “too hard” to change within their short-term outlook, albeit, it’s not through lack of educated advice.
Reviews into tax policy, land constraints and development overlays, changes to existing models of funding and so on, have been analysed and researched extensively. However, if the trade-off risks lowering valuations for an asset class which is the retirement and income stream for a large proportion of Australians, it’s considered political suicide to do much outside of maintain the mantra to keep rates low and job security high.
Housing is evidently more about investment than ownership. The vast majority of programs, publications, and commentary on the housing market, are focused firmly on the investment sector, coupled with plenty of free advice on the expanding array of mortgage products.
It’s a vehicle for making wealth – a valuable asset to tap into when approaching retirement – potentially less volatile than the stock market considering its illiquid nature, and one that when purchased, is held for the long-term, with a view to using the equity to leverage into future acquisitions.
Single first home buyers (if they can be found) need to seek accommodation outside capital city markets to purchase within budget. Therefore, when you witness half a dozen bidders battling it out for small un-renovated 70s style apartment in an inner area of Melbourne or Sydney, and paying in excess of $500,000 or $800,000 respectfully for the privilege of doing so, with a rental return yielding little more than 4%, you have to wonder at the sanity of it all.
A large proportion of unproductive debt being pumped into a limited area of density, with investors (the supposed ‘unemotional buyer’) playing a game of musical chairs with aging stock, hoping consistent market demand from future speculators will keep valuations inflated, and provide the needed rise in capital to make the loss yielding investment worth the risk after maintenance costs, periods of vacancy, and inflation have all been accounted for.
Commentators often try and play down this influence in the Australian real estate market by stating that just one in seven households owns a single residential investment property. However, it’s not so much the overall proportion of investment that matters, although this is a factor, but where the concentration is focused.
The percentage of investor-owned apartments in both Darwin and Brisbane for example falls close to 70% – and in the other capitals, it comes in between 60 and 70%. In Australia, investment property contributes 32% of Australian mortgages, compared to 20% in NZ and 12% in the UK.
Local buyers leverage this debt into established dwellings with the low grade, high-density apartments being primarily sold off-the-plan to offshore purchasers which due to cultural tendencies, often results in a significant proportion sitting vacant.
Considering my statement that housing is more to do with investment than occupation, it could be argued that there’s nothing wrong with this - except of course, we all need somewhere to live, and putting aside a small proportion of Australian’s who make the long term lifestyle choice of renting whilst investing elsewhere, most desire a secure place of residence, debt free, upon retirement.
Hence why affordability and increasing the supply of quality stock to provide a feasible entry point for low-income workers into an area that is not devoid of infrastructure, is primary.
Over the next 40 years, Melbourne’s population is set to expand to a projected eight million eventually putting the state in front of Sydney as the most populated.
Planning Minister Matthew Guy is currently responsible for shaping Melbourne and to be fair, he hasn’t got an easy job.
It’s going to be nigh on impossible to please everybody. Years of poor policy have already ensured we have sparse facilities to meet the demands of those who choose to live in fringe suburbs and consequently, the price of commuting frequently forgoes any benefit gained from paying a marginally lower price for the privilege of more space and accommodation further from the city.
The state government are taking a two pronged approach. Firstly, by deciding to enforce a permanent urban boundary to prevent further sprawl, whilst encouraging expansion of regional towns such as Bacchus Marsh, Warragul, Kilmore and Wonthaggi. And secondly, increasing the proportion of high-density accommodation by way of recent changes to residential zones.
So far, the main consensus of opinion on talk radio, television, and social media, has been virulently against all of the above - urban sprawl, increased density, and regional development, with neighbourhood voices speaking strongly against any change to their local landscape.
However, whilst heated emotions are understandable, ease of effective supply is an essential component when combating issues of affordability, and therefore, if this is what the state government intends - as spruiked in the various press releases, it must achieve the following:
- Drive down land values
- Ensure infrastructure is adequately financed
- Keep speculative activity in check to make sure supply is suitably priced and attractive to lower income homebuyers and renters.
In light of the above, a few cautionary points should be highlighted in regard to Melbourne’s new plan.
When you place a band of restriction around any neighbourhood – with a ‘permanent urban growth boundary,’ you effectively make assumptions about future increases in population, and in doing so restrict the amount of developable land, resulting in a decrease not increase of supply over the longer term.In addition, larger developers have a tendency to land bank the available plots reducing competition against smaller players who don’t have the financial capital to compete so far in advance of demand.
This inevitably leads to higher, not lower land prices for the predominant demographic this type of accommodation attracts – lower wage dual income buyers.
Families require houses (not apartments) gardens, green areas and local schools. They need community facilities, a local doctor on hand, good public transport and nearby shopping centres – and they need it all at an affordable price.
Therefore, as much as idealists may not like sprawl, it’s not only important to make land readily available and free of restriction when population growth demands as such, it’s also important to implement a structured and timely plan to fund essential community infrastructure to attract consistent solid demand.
The specified areas closer to town set aside for intensive development of high-density apartment blocks will be immune from council or residential protest.
However, to date, the rush into apartment living has been anything but robust. The elderly overwhelmingly downsize into medium density accommodation– and although younger generations in their 20s and 30s have a better propensity towards high density dwellings, figures still only peak at around 14% at the age of 27 (as of 2011).
At the root of the problem lay a few issues. The relatively small one and two bedroom units featured as 'affordable' tend to fall into the investment sector of the market, not just because of tight lending restrictions banks impose on first home buyers for this type of accommodation, but also due to high owners’ corporation fees set aside to service the lifts and other security features.
The standard of accommodation is typically low grade and developers are pressured to pay vastly inflated commissions to achieve the pre-sale targets set out by the banking system in order to acquire funding. Hence why such projects are often aggressively marketed to offshore purchasers.
In this regard, the avenue Melbourne is heading toward, is similar to the building initiatives employed in Ireland in the run up to the GFC.
In this region, when supply responded to demand, it was generally too late. Urban growth restrictions ensured new homes were built in locations far from existing amenities, and therefore not appealing to the home buying demographic whilst brownfill sites were filled with high-density poor quality unit stock more suited to investors than the needs of owner occupiers.
Subsequently, in the two years leading up to 2007, almost half of all new home purchases stemmed from the investment sector rather than a first home buyer demographic, and as a result, many of these homes are still sitting vacant whilst the lingering lack of ‘quality’ accommodation is once again starting to disproportionately inflate as the economy shows slow signs of recovery.
If nothing else, the example proves aptly how supply shortages can still occur, even when building initiatives have been implemented.
Therefore, as admirable as the state government’s plans may seem on the surface, there’s every risk they won’t fulfil the objective intended.
In an excellent piece in The Australian a few days ago, Toby Hall, chief executive of Mission Australia made comment;
“Housing is part of our critical infrastructure and we should treat it as such. We (should) consider debt financing for major projects - bridges, roads, rail - and we should consider a housing bond backed by the commonwealth.”
Because of our current tax system the best-established property in our inner suburban market suited to the first home buying sector is currently a hotbed of investor demand. Therefore, as vital as it is to consider finance initiatives to stimulate new projects, it is equally important to make sure the supply constructed is diverse enough to appeal and fulfil the needs of low income owner occupiers -including an increased provision of social housing - and therefore suitably targeted toward those who need it most.
Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.