The death of the housing market – for all but a few

The death of the housing market – for all but a few
The death of the housing market – for all but a few

Results from various reports from every corner emphasize the national shortage of housing – most notably the 2011 National Housing Supply Council’s State of Supply report, which emphasizes that during 2009-2010 financial year the gap between supply and demand expanded from 28,000 to 186,800 dwellings.

That’s a big jump, indicating that we’re facing a real crisis and when looking through the crystal ball the outlook doesn’t get any sunnier.

The report says that by the end of the 2012 financial year we’ll have a gap of 243,000 dwellings, 2014 a gap of 300,000 and by 2024 the figure will have reached more than half a million.

They are numbers we can’t easily conceptualize but everyone will have noted the dramatic changes in the topography of our cities during the past 20 years and the subsequent consequences to our lifestyles, including traffic congestion, pollution, crowded public transport systems, etc.

The easy answer is to start mass building projects, expanding outwards and in inner urban areas upwards, and via various spurts of growth that is exactly what has happened.

However it seems that we’re not doing it fast enough and rather than ramping up construction the pace is slowing quite dramatically. Latest ABS statistics show the number of new dwellings approved for construction fell 7.8% in February 2012 seasonally adjusted.

The Housing Industry Association’s National Outlook for Residential Building Housing Starts quarterly report says that should the current trend continue figures will continue to fall some 12.4% during 2011-2012, making it the seventh consecutive drop during the past nine years.

The only area of construction which seems to be booming is demonstrated in the passion owner occupiers have for renovating existing dwellings.

During 2010-2011 some $30 billion was spent on upgrades, pushing the price of established housing ever higher and certainly out of reach of first home buyers.  No wonder Bunnings is one of the few retail outlets bucking the downturn and recently announcing the creation of 6000 jobs nationally.

Of course construction for new homes is only going to improve if the appetite for new housing from the buying market improves.

The differences between underlying demand and effective demand need to be clarified.

The first is assessed from the level of migration and changes in population growth and the second – effective demand – is driven by the buying market, which is dictated by market forces. When it comes to supply of new housing the pace of construction can only be driven by the latter.

The number of finance commitments for the purchase of new dwellings for owner occupation, seasonally adjusted, fell 6% in January 2012 and is now at the lowest level since the onset of the GFC.

Demand for new construction only ever seems to rise by any significant degree when incentives are ramped up for first home buyers, such as the removal of stamp duty costs for a new property under $500,000, which is the case in NSW.

There are various reasons for the low demand apart from the overall malaise in the buying market, which is currently being hampered by affordability along with concerns about the economy, job security, and interest rates.

New housing falls into two main categories. The first is high-rise construction of comparatively expensive 1 and 2 bedroom apartments, which are hastily built, commonly located on main roads, lack character and come with high owners’ corporation fees, therefore holding little appeal apart from investors looking for tax benefits.

The other is the outer suburban style “Mac mansion” found in new housing estates which have commonly been planted in paddocks with sparse local facilities, poor transport systems and no established sense of community.

It doesn’t take an intelligent mind to understand why the demand is so low. Below are a couple of recent comments I picked up from online conversations on the subject which sum it up nicely:

“I'm looking to buy/build my first home and cannot justify the expense and lack of infrastructure/connection in the areas where land is offered.”

“Maybe if builders started actually building houses from scratch fully insulated and by that I mean walls and floor not just roof space, with double glazing as standard on an 800-metre block, then you could justify those ridiculous prices for a blot in what was once a paddock in the back of beyond.”

“These places also need to be built somewhere where there are basic amenities – anyone with a grain of sense now knows that a new home in an outer Melbourne suburb comes complete with long drives (no public transport) to work, school, shops, medical services and entertainment.”

Another major reason is failure of local governments and councils to understand what drives a home buyer to settle rather than sojourn.

Proximity to work, schools, shops and transport are of course necessary, but we all end up settling where we feel a sense of belonging and that is down to the community that surrounds us.

Community means different things to different people – in a regional town community people are far more likely to take an interactive hands-on role with the immediate surrounds as opposed to an inner urban area, where the population per capital is greater.

In urban areas community is not so much focused on conversations we have with neighbors over the back fence – it’s often formed from those who sit next to us in the workplace, people we interact with over the internet or Skype and more importantly the atmosphere generated by local facilities that give us a sense of enjoyment, enhanced activity and life.

Those who purchase in an urban atmosphere may go a day without conversing with anyone in particular but still have that sense of belonging generated by the local community. In essence people don’t buy a home, they purchase a lifestyle or to put it another way, people don’t live in houses, they live in the communities in which those houses are situated.

High rise construction has its own issues. Not only is it harder for a first home buyer to purchase (with banks generally seeing it as a higher risk proposition, thereby requiring a bigger outlying deposit), they are often no more affordable than established units, coming with much higher owner corporation fees and commonly located on busy main roads.

For that reason larger numbers are rented, demand from most home buyers is lacking and there is no getting away from the fact that for many they are eyesores on the horizon.

Local communities have protested in vain against the development of high-rise towers and it’s not just a bad case of NIMBYism, it’s a desire to have an active role in how suburbs are developed.

It’s important to allow residents that involvement in order to nurture growth in the communities but so far protests have been overruled on just about every occasion.

Rather than providing affordable accommodation for first home buyers the number of home buyers who prefer this type of accommodation tend to be a higher-earning demographic which picks out premium apartments in the block and have an income to service inflated fees.

Rents are also no cheaper than established apartments, in fact due to the newness of the development they are often a good deal higher.

In Melbourne the recent burst in rapid construction of those dwellings, which have a strong investor market but suffer low owner occupier demand, has pushed vacancy rates close to 3%.  Because of that many think the rental market is somewhat softer in Melbourne and consequently yields will fall.

In our Melbourne office’s rental department demand for the much lower number of established low-rise apartments has been so intense that there have been many applications offering more than the advertised weekly rate for available tenancies.

There has been growing evidence since the 2006 census that single-person households are no longer growing at the rate previously speculated, with a marginal increase in household size being noted, but how far the wheel will turn in the opposite direction is debatable.

When it comes to purchasing property it generally happens at the “couples” stage, where combined incomes and the future aspiration of forming a family unit pushes people to “settle”, moving out of rental accommodation or living with relatives.

When they do they are most likely to look for something larger than a typical 2 bedroom, 1 bathroom apartment.

Whether it’s a townhouse, detached family dwelling with backyard or small single-level subdivision, it’s important to remember couples with children still make up the largest buying demographic, therefore it is essential to provide a mix of housing across all communities that provides viable accommodation for all – and we’re simply not fulfilling that need.

Governments seem fixated on spending large amounts of taxpayers’ money preparing expensive reports on how to effectively increase the supply of affordable accommodation but I don’t think anyone would argue that we’re not even halfway to winning the battle – and if anything the situation is worsening.

In one of the Annual Demographia International Housing Affordability surveys there is an interesting picture painted that compares Sydney and Melbourne Growth with Dallas Fort Worth and Atlanta in America.

In 1981 both cities were a similar size to our biggest capitals but in America they provided cheap land on the outskirts of city boundaries and unlike Australian counterparts, who believed it was too hard to nurture such growth due to the expense of providing infrastructure to newer suburban districts, they proved the theory wrong by doing just that –expanding public transport systems into the new suburbs as part of the plan.

Neither city has suffered the same level of housing affordability we’ve experienced here and it’s also worth noting that Dallas Forth Worth’s 2030 growth plan includes further expansion of train lines, obviously envisioning the wisdom of such a move despite the current financial crisis.

It’s vital that we start listening to local community needs to understand how to effectively increase and nurture growth and expansion of our suburbs.

Ask a community in an outer suburban location what they need to grow and they’ll answer “community facilities” and more often than not a train line along with better public transport systems.

Ask a community in an inner suburban location what they need and the debate will focus on greater balance in the type of accommodation on offer, such as small-rise apartments, townhouses, better public housing facilities and re-evaluation of the number of empty homes as well as old industrial sites.

It’s also not unreasonable to draw a line under the rate of population growth rather than cramming as many people as possible onto one site, as is the case with high rise accommodation.

It’s a welcome relief to see various reports emphasize such points such as the recent McKell institute’s ‘Homes for All’ paper, which touches on some good policy changes which should be openly debated.

Compared to other nations suffering the kickback from years of greed we’re a mere teenager in our stage of growth and it’s clear that what we’re doing is failing to adequately provide for the needs of all. It’s favoring those who are already home owners and not providing viable options for those who aren’t.

It’s been a long time and many failed promises since Gough Whitlam’s It’s Time speech, which gave hope of affordable housing to those locked out of the market.

It’s clear that unless authorities stop and listen to community needs we’ll continue to lose the battle.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition. She is Channel Ten’s property expert on The Circle and a senior consultant for National Property Buyers servicing the needs – Australia wide – for home buyers and investors.

Catherine Cashmore

Catherine Cashmore

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.

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