Friday, September 18, 2015

The world in the year 2100

In another 85 years, the world will be a very different place. Some nations are already shrinking and have much further to go, while others will grow dramatically. The world powers in economic and military strength are going to change. New stars will rise. Old stars will fade. So I thought it might be interesting to see how Australia might look by the year 2100, compared with some of our major trading partners or world powers.

Think how different the world was 100 years ago. The United Kingdom was an undisputed world power with a global empire that included Australia. The United States was not yet remotely a world power. Russia was still ruled by the Tsars, China was still a largely feudal empire and Japan was ruled by Emperors. From that period to now, the world population has risen by over 400%, with the fastest period of growth in the mid-1960s to 1970s.  Population growth in most advanced economies is now slowing to below replacement rate, with aging populations and fertility levels falling to less than half their 1960 levels. The clever people at the UN Population Division crunch the numbers on a regular and very detailed basis and their predictions in the past have been pretty much spot on. According to these experts, and assuming no Third World Wars or global pandemics, here’s a glimpse into the future…

 Australia’s population will rise from around 24 million now to about 33 million by 2050 and to 42 million by 2100. That might sound like a lot but an extra 20 million of us over the next 85 years is a minor statistical error in global terms, although given recent trends we could be a world stand out with 85 Prime Ministers in as many years.

What many people don’t seem to appreciate is that China’s population is at its virtual peak, and is about to start shrinking.  China will peak at around 1.415 billion people in 2030 and by 2050 there will be nearly 70 million less Chinese than at this peak. By 2100, there will be 372 million fewer Chinese than today and over 410 million less than the peak in 2030. They are also aging faster than their workforce can keep up with, although on the plus side, there is still plenty of room for productivity growth in China. Their current GDP Per capita is USD $7,500, compared to nearly USD $62,000 in Australia. (World Bank data).

Japan is forecast to have a steadily declining population. By 2050, it will have shrunk by 19 million people (that’s getting close to the current population of Australia) and by 2100 it will have shrunk by more than 43 million people. Those inflated real estate prices might be under pressure, which could do all sorts of things to the economy’s capital backing. They’re already reasonably productive and with a rapidly aging population, it looks like the land of setting – not rising – sun for them.  

Germany’s population is also in gradual decline. There will be roughly 5 million fewer Germans by 2050 and by 2100 there will be 17.5 million fewer Germans than today. All those empty beer halls! Little wonder the Germans are happy to accept large numbers of Syrian refugees – they have a highly productive economy but will have fewer people to keep it running.

India takes over from China as the world’s most populous nation within the next five years or so. By 2050 they will have added nearly 400 million more people. Their population peaks in 2070 at 1.75 billion (give or take an Australia or two) and declines to around 1.66 billion by 2100 – which is still some 355 million more than today. India has massive potential for productivity growth with a current GDP per capita of only USD $1,630 – which is 2.5% of Australia’s. They have a western democratic system of government but seem to have adopted the least efficient aspects of western bureaucracy with few of the benefits. If they can resolve their governance failings and modernise their economy, India may well be a new world super power by 2100. If you have kids in primary school today, maybe getting them to learn the Hindi language is not a bad idea. At least they’ll be able to follow all those Bollywood movies.

Our northern neighbour Indonesia has ten times Australia’s current population and this will rise by another 64 million by 2050. Their population will plateau from around 2060 and by 2100 will have decreased marginally from their 2065 peak to 313.6 million. Indonesia also has potential for productivity growth with a per capita GDP of only USD $3,500 but it’s not clear yet what is going to lift their economy nor how they are going to go about it.

Dear Old Blighty just keeps chugging along with its population steadily rising from todays 64 million to just over 75 million by 2050 and reaching 82.37 million by 2100. By this time there might be enough of them to field a decent rugby team. They’re a strong economy with per capita GDP of USD $45,600 but this is highly concentrated on London. Any glitch in London’s world financial HQ status could spell all sorts of problems in the future.

The United States will add another 100 million people by around 2070. (See my friend Joel Kotkin’s book ‘The Next 100 Million’ for what this mean for the USA.). Representing a third of the world’s economy, it’s difficult to see how the USA will lose any of its economic muscle over time. With a GDP per capita of $54,630, they just need their economy to begin firing again and for US consumers to open their wallets to stimulate rapid economic recovery – not just in the US but countries that rely on it. Another friend Dr Doug McTaggart has always maintained that the health of the US consumer has a far reaching impact on world economies and I for one believe him.

Do svidaniya comrades. Russia will shrink by 15 million people by 2050 and by 2100 will have shrunk by 26 million – equivalent to shrinking by a whole Australia today. But our Russian friends only let go of communism in relatively recent times and have much further to go in modernising their economy. They have abundant natural resources and with a per capita GDP of around USD $13,000 it isn’t hard to imagine the Russians still remaining an economic and military power by the turn of the next century.

The country that records the most astonishing growth over the period to 2100 is Nigeria. The forecasts are that the current population of 182 million will rise to over 398 million by 2050 – that’s double – and by 2100 will reach 753 million – which is almost double again and more than four times their current size. Many of the African nations show enormous growth over this period but Nigeria is the stand out. They have low productivity (per capita GDP USD $3,100) and often unstable systems of government. It’s difficult to see this being even a moderately prosperous future, unless those Nigerian loan scams are actually making a lot more money than anyone thought. The whole African story is something worthy of a lot more detailed study because that continent is going to continue growing at rates which far exceed the rest of the world. Something for another day.

What’s it all mean?

The only thing that’s certain is that the world economic order we know today is going to be vastly different in the future. Demography is going to play a significant part in that but, in reality, it’s impossible to predict much of anything beyond the likely population numbers. Will countries like Nigeria follow the Chinese path to rising economic prosperity, or fall further into poverty? Who knows? There’s another metric in all this which is aging and those countries with a younger demographic may well fare better than nations that find their relatively small working population struggling to support a much larger, dependent aged cohort. For nations like Japan, which is both shrinking and aging and with no immediately obvious path to lift economic output, this isn’t a pretty scenario.

And Australia? I think Donald Horne summed it up nicely in 1964: “Australia is a lucky country run mainly by second rate people who share its luck. It lives on other people's ideas, and, although its ordinary people are adaptable, most of its leaders (in all fields) so lack curiosity about the events that surround them that they are often taken by surprise.”

Sunday, September 6, 2015

China’s people shortage

Lately there’s been much attention on the fortunes of Australia’s major trading partner – China – and with good reason. But very little of that attention has focussed on a problem that’s potentially much bigger than a ‘crash’ in China’s economic growth to ‘just’ 4% or 5% GDP.

China, population one thousand four hundred million people, may not have enough people. What? Seriously? The world’s most populated nation, with such a rapid rate of population growth that it infamously introduced a “one child” policy under the Communist regime to keep its population in check, and it may not have enough people? 

In truth, China actually has plenty of people. But thanks in part to the impact of the one child policy on its demography, it is fast going to find itself with a shortage of working age people relative to the number of young and elderly who will rely on those of working age for their taxes and other forms of support.

Source: CEIC, Morgan Stanley Research. Source: Supplied

Introduced in the late 1970s, the one child policy was an experiment in totalitarian control. China’s birth rate fell from over 5 to just over 1.5 compared with a birth rate of 2.2 needed for any nation to sustain its population numbers.  Most of that fall in fertility however occurred before the one child policy took effect, as the country began its transition from a rural economy where large families were an economic necessity to an increasingly urban economy where large families are hard to house. Chinese families over time have also shown a preference for boys over girls: again because of perceived economic benefit. In 2014, there were 100 female babies to every 114 males, well out of kilter. Sadly, infanticide is a factor. This also works against higher rates of population growth.

China’s rate of population growth peaked at around 2.74% in 1970. It has fallen rapidly since then and today stands at around 0.61%.  The prediction is that this will fall to zero by around 2030 from which point on the total population of China will be in decline. 

The one child policy was officially relaxed in 2013 so that most couples are now allowed a second child but the impact on China’s working age population from this rapid deceleration of population growth is already being felt. Last year, China’s working age population fell by 3.7 million people: the third successive year of falls. And the falls are set to grow: according to a report by Business Spectator, the Chinese Academy of Social Sciences claims that between 2020 and 2030 the Chinese labour force will fall by almost 8 million every year, and from 2030 to 2050 it will fall by 8.35 million, every year. 

Think of what all this means for a moment. We’ve been told of a miracle economy, rapidly urbanising and spewing out upwardly mobile middle class consumers at rates we can’t comprehend. But at the same time, the working population is shrinking, and that rate of shrinkage is set to increase significantly. Not only that but our perception of China is that of a fast growing population. But the facts are that China is about to stop growing and start shrinking within the next ten to fifteen years. We are currently seeing China at its historic biggest.

This can only mean that for China to continue to grow its economy at solid rates of expansion, it will need to do so on the back of rapid gains in in productivity from a shrinking labour force. Increasing urbanisation may help drive productivity and greater value adding as the economy increasingly transitions from rural production to an urban manufacturing and services economy, but it’s hard to ignore the demographic picture.

The saving grace on this is the Chinese are far more resilient and independent than we Australians. This might sound an odd way to describe a Communist nation but the sorts of welfare systems we have put in place in Australia are alien to the Chinese. They are far more likely to support extended family (parents and grandparents as a minimum) without state welfare reliance. This is a cultural value which transcends politics. Their work ethic, family ethic and savings ethic are humbling by Australian standards. Which means that while this sort of demographic trend would be poison for Australia, it is not necessarily quite so poisonous for China.

Ironically, Australia faces a similar demographic problem in the future, as ageing baby boomers and Gen Xers become increasingly reliant on a shrinking pool of working age Gen Ys and millennials to pay for very generous taxpayer funded pension and health benefits. There is a marked difference in scale between the two countries but I am betting that the cultural values of the Chinese will see their economy survive this demographic time bomb, while Australia may sink under the weight of its numerically much smaller burden. If we can’t even manage to agree to a $5 co-payment for free GP visits, how will we have the foresight to get our health and welfare systems into check before the inevitable demographic shift begins to be felt here in earnest?

Wednesday, July 29, 2015

How the hangover could look now that APRA has shut down the party

In the fine tradition of public policy in Australia, we leave things until it’s long overdue. By this time, instead of a manageable slow-down, it often results in a screeching halt followed by a fast u-turn. APRA’s recent moves to stem the flood of finance to speculative housing investors could be a case in point. What might this mean for investors and for the industry generally?

Some years ago, Reserve Bank Governor Glenn Stevens expressed caution that low interest rates, which ought to lead to an increase in housing supply, might simply lead to a run up in prices. See for example this analysis of mine back in 2009. This year, in a vindication of those earlier fears, he described the market in Sydney as ‘crazy’. You don’t get stronger hints from the RBA Governor that things are a bit out of control than that. 

In December, the Australian Prudential Regulation Authority started to tighten the screws on lending, and it made further moves this year targeted more particularly at investors, who for the first time account for more than half of new lending for housing. Banks are responding by quickly tightening their lending criteria and some – AMP Bank for example – have now announced they have banned loans to property investors, effective immediately. Others are offering loans to investors at higher rates of interest than to owner occupiers. How might this play out for the legions of speculators who have invested in the so-called ‘generational shift’ to apartment lifestyles?

It’s not a pretty scenario and it’s all happened before, but for the ones with short memories or without the benefit of having been through a serious downtown before, here’s how it can pan out. 

Think of the investor who’s been sold the story of a generational shift to inner city apartment living. They see demand rising for this type of product and lifestyle and figure that this is a good market to buy into. They purchase a $500,000 unit ‘off the plan’ with a $50,000 deposit, when the banks are happy to lend 90% of the value. They may be thinking that, by the time settlement is due within maybe three years, that unit could be worth maybe 10% more, so their equity will have gone from $50,000 to $100,000. Happy days. Plus they’ll be getting a rising rental return, at least in line with CPI. After all, this is how - and where - everyone wants to live, isn’t it?

Fast forward three years to settlement time. The banks are no longer prepared to lend 90% but our investor’s bank will still lend to 80% of the valuation. That valuation has come in a few months before settlement and the bank now has a piece of paper that says the home unit is worth $450,000. Values have fallen because there is a very large volume of similar stock on the market at the same time, in roughly the same location, and there are more sellers than buyers.

So as far as our investor’s bank is concerned, they will now lend 80% of $450,000, which is $360,000.  The investor now needs to fund the remaining balance of the contract price of $450,000 ($500,000 less his deposit). So our investor needs to find another $90,000 to make the settlement. They could walk away and lose their deposit, or they could try argue their way out of the contract, but both aren’t exactly appealing options.

They could sell the apartment but that would mean taking a loss in that market. They could rent it as planned but vacancies are high (there’s a lot of similar product out there) and rents have fallen (supply over demand). So their return on renting is nothing like they imagined it could have been. Plus, by now, interest rates have risen so the gap between the rental income and the repayments is much wider than they banked on. It’s called ‘negative’ gearing for a reason but there’s a limit to how much most people can lose.

If our investor decides to sell and realises $450,000, they still have their transaction costs to take into account so their net realisation may be closer to $400,000 on the ins and outs of the deal. They can pay out their $360,000 loan and have $40,000 left. This looks pretty ordinary if they had to sink $140,000 of their own savings into the deal. That $140,000 is now worth $40,000 – not including any losses on the cash flow if they’ve been renting it (or trying to) for a time.

This is a worst case scenario and I am not predicting financial Armageddon. But I do come across plenty of people in the industry who seem to be in denial that this is remotely possible. Yet it has happened before and may well happen again.

Who’s to blame if this does eventuate? Accountants and some financial advisors, who promoted investment property deals because on paper they look tax effective, will have questions asked of them. Accountants love things that look good on paper but in my experience aren’t very good at understanding property. Urban planners and policy makers that promoted high density living at the expense of other options paved the way for the supply-side response. Developers have done pretty much exactly what most metropolitan planning schemes called for – extensive high density urban infill. That’s precisely why so much of it has been approved. And they have met the market price points. The fact that market was driven by investors buying into a financial product not owner occupiers buying into a lifestyle product, isn’t the developers fault. The banks too should shoulder some blame but good luck trying to make that stick. And the investors who could lose out will be busy for looking for anyone else to blame but themselves.

And what’s the impact on the industry if this happens? That will depend on whether any problem - if it occurs - will be contained to a certain type and style of investor housing product, or if the property industry generally suffers the hangover -  even if large parts of it weren’t part of the party in the first place. This is a question that’s going to occupy a lot of minds in coming months and years.

Wednesday, July 15, 2015

Aged care & retirement living: are they immune to market and economic cycles?

Much has been written about the ageing of our population but less is known about the implications for housing and caring for them. In the past, this has been left to not-for-profit groups like religious organisations or charitable institutions and a handful of smaller private operators. But the numbers that are coming in terms of ageing Australians will render this cottage industry approach entirely obsolete. Demand is likely to be so strong, for so long, you have to ask if this is one part of the property industry that will be immune from cyclical gyrations because it will be one long upswing lasting more than 20 years.

If you were born in 1900, you could expect to live on average to around 50 years of age – less than today’s retirement age. If you were born in 1945 that rose to around 68 years of age. If you were born in 2009 you can expect on average to live to 79 for males and 84 for females – a good way past retirement age. The United Nations has estimated that every second child born in a developed economy from 2000 onwards could live to 100. So one in two of today’s children in Australia may somehow have to work out how to live without an income for some 35 years. Good luck with that.

They - and today’s ‘baby boomer’ generation - will also need to find somewhere to live – and this is where the property industry comes in. There are two types of product and generally two types of operator servicing the needs of the 70+ population: retirement living (also known as independent living) and aged care (once called nursing homes). Neither are for everyone and take up rates in Australia are still low by developed nation standards. However, even based on those low take up rates, demand is going to quickly outstrip supply.

Leading Aged Services Australia is the peak body representing aged care providers. They estimate that there will need to be an extra 83,000 new aged care places in Australia in the next nine years alone. Let’s adopt an average of 80 beds per facility which is typical of most existing aged care operations. That equates to 1037 new aged care facilities for the next nine years, or around 115 per annum for that period. Mostly they will be needed in the larger capitals. Some research I coordinated for Calibre Consulting shows that in Brisbane, Sydney and Melbourne will all need something like 20 to 25 new facilities each year to 2031 and probably beyond. Each place costs roughly around $250,000 in development costs (building plus land plus other charges) so each facility of 80 beds will on average be around $20million. The 115 new facilities needed nationally work out to an annual development budget of $2.3 billion. And this is just to keep pace with the demand we know is coming, without any increase in take up rates. And these are only the development numbers for aged care. Add in the retirement living market and you could potentially double that. Or maybe more.

The thing about this market is that demand is fairly predictable. You will not find an aged care or retirement living operator complain about a lack of demand. They will however complain about high operating costs and high site costs, if they can find the sites. After all, it’s one thing to reel off statistics about projected demand but the industry still has to find places to develop these facilities. And because most seniors (and their families) want to age in the communities they are used to living in, this does not mean they’ll be interested in shifting out to some bleak cow paddock on the urban fringe. Nor will they (or their families) be interested in trotting off to some aged care facility that has all the charm of a 1930s insane asylum, or if a retirement living facility, all the design flair of a post- war workers housing scheme, complete with vinyl floors.

Not all of them will be able to afford to be choosy of course. But there will be enough of today’s boomers with enough cash to support a large and growing industry that will appeal to their needs and advanced tastes.

(What though will happen to today’s generation of kids? They are renting longer, entering the housing market later and with much higher mortgages. They are projected to retire with a mortgage and will need to live that much longer without an income past retirement. Today’s boomers are often multiple property owners having grown up in a post-war era of extraordinary opportunity. Today’s millennials by contrast, when it comes their turn to find a retirement living or aged care product, may not have the assets to fund their lengthy senior years. For them, is it time for Logan’s Run?)

The other aspect of demand in this market is that it is typically unrelated to market or economic cycles. True, most people entering a retirement living product do so by selling their family home, and they will try maximise the price for that by waiting for the right time to sell. But ageing has its own immutable clock, which doesn’t wait for market cycles - especially if people suffer from loss of a partner, a fall, or stroke or rapid onset of dementia or other debilitating conditions that can’t be forecast. They need new living arrangements, or they need care, and they need it now. Family members are often left to find somewhere and they need to find it quickly. Market or economic cycles are immaterial to finding suitable places for loved ones to live in. And there will be an increasing wave of seniors in precisely these situations that will drive a long upswing in the aged care and retirement living market.

How will the industry respond? Here are a few thoughts.

Consolidation by merger or acquisition is inevitable. The top two or three largest operators in the aged care market, for example, control only around 5% of the market. Contrast that with retail where the two majors receive 80% of the retail dollar. There are literally thousands of facilities and operators nationwide and many of them with only one or perhaps two facilities. They will not survive, except perhaps for the elite end of the market, because they do not have the economies of scale to provide cost-efficient operations. Everything from the cost of meals to laundry to staff:patient ratios counts and larger operators will win out.

There will also be more professionalism. No disrespect to the many well-meaning and long standing charitable and religious providers but in terms of property development or redevelopment, many don’t have the skills. Their business models were based on noble but often uneconomic commitments to provide care at ‘affordable’ prices. Their cash balance sheets are often incapable of supporting new development to meet demand even though they may be paper rich in land assets. I suspect many will start joint venturing with private developer-operators to fund their future – indeed some are already doing so.

Planning schemes and community attitudes must also change. There are virtually no undeveloped sites suitable for retirement living or aged care facilities in areas of our cities where demand is most acute. Under-utilised land like shopping centre carparks or even that second school oval are going to need to be available to meet demand. Otherwise we may as well put up signs in our cities saying “hey oldies, thanks for building all this but you can piss off now you aren’t welcome anymore.” Height restrictions will also need to give way to provide for higher density facilities especially in areas where land or sites are particularly scarce. The NIMBY attitude of some community groups that I’ve seen actively oppose new aged care facilities is nothing short of disgraceful, and the politicians giving them encouragement should be given an advanced ageing pill so they know what it’s like to be the wrong side of 80 with nowhere to live and no going back.

The other thing that will change dramatically is design. The next generations will demand higher standards that more closely resemble a Balinese resort. Or their children will demand it for their parents. We are all becoming increasingly spoiled and those with the money will want to remain spoiled in their senior years. Already we are seeing cinemas, resort style pools, quality cafeterias and dining areas with high standard menus, hairdressers and beauty salons, resort style landscaped gardens and a host of other features that bear no resemblance to the ‘retirement homes’ or ‘nursing homes’ of years past.

All this presents challenges and the prospect of enormous change for the industry on a scale that is hard to imagine. But that change will come because it is being driven by a tide of demand that is irresistible and inevitable. 

Quite possibly that wave of demand is something that for this part of the market at least, economic or market cycles won’t be the main drivers: demography will.

Wednesday, June 10, 2015

Three reasons apartments may not deliver on density

A key thrust of higher density development plans for our various inner city areas was that this would lead to a significant increase in population densities. But what if the current wave of inner city apartment development isn’t likely to deliver as many people as the plans presumed? Does this mean we need even more apartments to meet infill population targets? Or do we need to revise the population numbers altogether? Here are three factors I doubt were taken into account when these targets were first devised

Many of our prevailing metro wide planning schemes are revisions of similar schemes devised in the late 1990s and early 2000s. A key plank of these schemes was to prevent ongoing ‘sprawl’ (being outward suburban development) and encourage higher densities in established areas, particularly inner city areas. The plans came in for their share of criticism at the time. Tony Powell – an icon of Australian planning – described them as a “sad parade of failing capital city strategic plans” that in some cases were “superficial to the point of ridiculousness.” Professor Brendan Gleeson disdainfully described the wishful thinking of much plan making at the time as “faith-based planning.” 

A key focus of the ‘faith’ and also of the criticism was the belief that population growth could be contained in higher density housing, as opposed to continued expansion of suburban markets. 

Tony Powell put it bluntly in a 2007 lecture to planning students: “The proposition in the latest crop of metropolitan strategy plans that 50 percent or more of future housing development can be accommodated in existing suburban areas of the major cities is patently ridiculous.  These are simply unexamined and unreliable hypotheses, not strategies.” 

Fast forward to today and the sheer volume of apartments now being developed in inner city markets might suggest Powell was wrong: indeed, there is widespread talk of oversupply and bubbles in particular markets. But what if, despite this unprecedented pace of apartment development in inner city markets, the population numbers still won’t materialise? Could we actually have an apartment boom without the people to match?

There are three factors at work which I suspect no one at the time predicted:

  1. There are very few owner occupiers in the current wave of apartment development. If it were true as widely claimed that we are witnessing a permanent change in Australia’s housing preference in terms of units over houses, you would expect to see more owner occupiers active as purchasers. But the numbers in some cases are very small. Michael Matusik in Brisbane has looked at a number of newer projects and in many of the larger scaled developments, the percentage of owner occupiers is only 3%. That’s not a typo. Smaller developments show a higher proportion of owner occupiers but across the board, the figure is still only 10% of sales to owner occupiers. Two thirds of investors of inner city apartments are from interstate or overseas. 
  2. The apartments are typically small and getting smaller. Again based on Matusik’s research, ten years ago the proportion of one bedroom apartments being developed was just 10%. It is now more than three times that at 35%. And while three or more bedroom stock accounted for some 30% of stock ten years ago, that figure is now just 5%. Plus they’re shrinking: one bedders have fallen from 70 square metres to 50 square metres in that space of time. 
  3. Vacancy rates are increasingly unreliable. The most widely quoted vacancy rates are provided by various real estate institutes. These are not audits of vacant stock – they only reflect a survey of member agents: not all agents are members and not all members bother completing the survey. The problem here is that with new apartment projects, the available rental stock is unlikely to be included in real estate institute numbers if being marketed through various investment or project selling channels, or strata managers or others. No one knows what proportion of properties available for rent are not being captured in ‘official’ real estate institute data because of this, but you can simply peruse available rental listings online to see how many are being offered outside of ‘traditional’ real estate agency channels to get some idea. It’s significant. Plus of course, the ‘official’ figures can’t possibly capture the number of apartments that are kept unoccupied for whatever reason. So while ‘official’ vacancy rates for inner city areas might point to a 4% vacancy, the actual vacancy (including those not recorded in ‘official’ data) could easily be double that or higher in the apartment sector. 

This poses a dilemma for planners who equated apartment development with population growth. Back when there were typically more (and larger) three bedroom apartments being developed, and more of these being sold to owner occupiers, the residency ratios were higher. I used to use an average of 1.6 persons per apartment as a rough guide. 

But today, with so many more (and smaller) one and two bedroom apartments being designed for absentee investor appetites, the residency ratios must be smaller. A one bedroom apartment of 50 square metres, for example, will on average not have more than one person living in it. And that’s only if it’s occupied. Take into account vacancy figures, factor in what’s not included in those figures and factor in the number of apartments that are simply unoccupied on a permanent basis and not available for rent, and residency ratios must fall further again.  

If you take a hypothetical 250 apartment project, it may once have housed 300 to 400 people - if those apartments were mainly two and three or more bedrooms, and a high proportion of owner occupiers. But now, with changes in the type of stock and the nature of the market, that project may only house half as many people. No one really knows, which is my point: markets and planners seem to be relying on untested assumptions about the relationship of apartment construction with population growth. 

This low residency ratio could also explain a couple of things. Many shops and businesses associated with new developments, who anticipated high expenditure from residents, have been disappointed. Perhaps the expectation of how many people are actually living in the new projects were based on wrong assumptions?

And the profile of those actually in residence is another factor. One bedroom rental units will equate to a high proportion of students or lower income rental groups. They certainly won’t be consuming like a family of four. Hence the actual discretionary income available from these residents needs to be rethought.

Most interesting though is the proportion of urban population growth that will actually find itself housed in the current wave of development. If the residency numbers are in reality that much lower than planners first presumed, this could mean we need more apartments per 1000 of population to achieve identified targets, or we need to rethink the targets.

Either way, it’s a fascinating question with significant implications.

Wednesday, May 27, 2015

Better suburbs = better cities. Employment and the importance of the suburban economy.

Australia’s inner city areas and CBDs are a focus of media and public policy attention, with good reason. But it’s also true that the real engines of employment are outside the inner city areas and that the dominant role of our suburban economy as an economic engine is grossly understated, even ignored. This is not good public policy. It’s not even common sense. 

I have a view that the focus on urban renewal and inner urban economic development has become a policy obsession of late. It’s the trendy thing to quote Richard Florida’s ‘creative class’ theories which become the excuse to increasingly spoil inner city workers with transport, cultural and other forms of taxpayer funded infrastructure. There was a time when inner city areas, if not recapitalised, risked pockets of blight. But those days have passed. Today, it is the suburban landscape – much derided in fashionable inner city policy circles – that risks pockets of blight if not brought back to the attention of policy makers and strategically recapitalised.

The imperative is simple: the suburban economy is so much larger than inner city areas. As a rule of thumb, between 8 and 9 out of ten jobs in our major metro regions of Brisbane, Sydney and Melbourne are suburban. Only one in ten or at most two in ten, are found in the inner city areas. Achieving a 10% improvement in the suburban economic engine is hypothetically equivalent to achieving an 80% improvement in the economic performance of the inner cities. 

So why this preoccupation with the inner cities to the detriment of the suburbs?

First, a quick review of the evidence as provided in the Census. 

In Brisbane, the CBD itself accounts for 12.5% of the Brisbane region’s employment numbers – one in eight. The combined CBD and inner city areas – including the CBD - account for around 170,000 jobs.  That’s not a very big number.  As a proportion of state-wide jobs, it’s less than 9%. As a proportion of the 925,000 jobs across the metro region of Brisbane, it’s less than one in five – and that’s with including the near city areas like South Brisbane, Fortitude Valley and Spring Hill. 

In Sydney in 2011, the CBD accounted for only 8.3% of all jobs in New South Wales, and for only 13.4% of all jobs in wider metropolitan Sydney. Including the surrounding areas of Pyrmont, Ultimo, Potts Point, and Woolloomooloo raises this share to just 9.7% of all jobs in the state and 15.6% of jobs in metropolitan Sydney. So one in ten state-wide jobs and one in every six or seven metro wide jobs. 

In Melbourne, the CBD is home to just 7.6% of the state’s total employment, and to just 10.6% of all jobs in greater Melbourne. Including the ‘fringe’ locations of Docklands and Southbank sees this share rise to only 10.3% of the state and 14.3% of greater Melbourne, which is one in ten of all jobs in the state and one in seven metro wide jobs.

In none of these centres is the concentration of inner city jobs close to one in four metro wide jobs. Yet if you asked a room full of people – industry and planning experts included –a significant proportion will think the figures are much higher. I’ve done this several times at workshops and presentations and there are a worrying proportion of people who seem to think the figure is more than 50%. A wider survey of the general public might even put the figure higher – it would be an interesting exercise to find out.

Suburban employment centres are by nature much more widely dispersed. Teachers, doctors, dentists, tradies, factory workers, shop workers and so on do not rely on close proximity to each other to perform their work, as do CBD employment markets. In the suburban business districts of our metro regions, workforce concentrations typically fall into a band somewhere between 3,000 and 5,000 jobs per square kilometre. Places with super-regional shopping centres will tend to be at the upper end of that scale while industrial areas at the lower end. CBDs, by contrast, can easily have pockets where the employment density sails past 10,000 or 20,000 jobs per square kilometre.

But however dispersed these suburban jobs may be, it doesn’t make them any less important to the economy – particularly given their dominant role as employment and economic engines.

So why then the preoccupation with the inner cities and why the dearth of policy interest in the suburbs? 

Perhaps the inner cities are seen as more glamorous? There are more higher paying jobs and more CEOs to the square mile than anywhere else. It’s where cultural facilities and seats of government are found. It’s where the most expensive real estate is. Basically, any concentration of money plus power is always going to grab attention. It’s an age when celebrity tweets capture more media and public attention than important issues of economic policy. The CBDs and inner city areas are widely seen as ‘where it’s at’ and where the cool people are. ‘Nuff said?

Sadly, even policy makers seem to have fallen for the inner city bling over suburban substance. The importance of transport workers, freight workers, teachers, doctors, tradies or suburban white collar employment to the economy receives next to no policy comment. The performance of suburban transport systems, the need to promote higher employment density in key centres, the pathways by which property owners could be encouraged to partner with public sector agencies for suburban centre improvement – none of these seem to appear as workshop or forum topics promoted by any of the leading industry groups. 

I suspect there’s also a strong element of cultural cringe as it applies to our suburban heritage. Frequently mocked as a cultural wasteland or ‘home of the bogan’, there’s an almost desperate desire to prove we’re an advanced society by focussing on the lifestyles and achievements of our inner city areas and the people who live and work there, to the exclusion of all else. ‘Urbanists’ grab headlines and appear as keynotes at any number of planning conferences. Sub urbanists (and there are plenty of them) are evidently persona non grata.

It’s as if a prosperous, successful and highly efficient suburban economy simply doesn’t cut it in the global race for attention and status amongst cities, which seems almost exclusively focussed on the how much like downtown New York or downtown Paris every other city can pretend to be. 

The reality is that the inner city economy is reliant on – not divorced from – the performance of the suburban economy. In the same way that there can be no public sector without a profitable private sector, I suggest that a strong and prosperous inner city economy relies heavily on a strong and prosperous suburban economy. And in the same way that strategic infrastructure and policy decisions are needed for the inner city to operate at optimum efficiency, the exact same applies to suburban economies.  

The question is whether this balance is being achieved.

Thursday, April 30, 2015

Shabby chic not a good plan for tourism

Australia’s tourism industry has moments of optimism when external factors like a falling Aussie dollar auger well for international arrivals. But mainly it’s stuck in a rut, promoting the same experiences and the same, increasingly tired product. No amount of taxpayer funded advertising campaigns will change this fundamental problem.

Recently, the new Queensland Government pulled the pin on a proposed cruise ship terminal for the Gold Coast. According to its proponents, the project would have involved a $6.47 billion construction bill, $840 million in direct infrastructure impacts, 5,000 new jobs in construction and more than 15,000 direct and indirect jobs on completion. What they didn’t add is that it offered the sort of refreshed tourism product that places like the Gold Coast desperately need. These tourism businesses – created without relying on any taxpayer contributions – spend significant sums advertising their destination appeal. They do more work in this regard than any number of taxpayer tourism organisations can hope to. It would not only have meant new tourism infrastructure for the Coast, but a renewed appeal and additional marketing grunt on a global scale. It would certainly do better than a two week long, government endorsed underage drinking festival called ‘schoolies.’

But no. It was scrapped to appease some eco-warriors concerned that it would mean the demise of an artificial wave break island in the midst of a very busy water way where everything from jet skis to sailboats, seaplanes, paragliders, fishing boats, charter boats, boozy boat tours, tourist ducks and pretty much everything else has created the maritime equivalent of Times Square. Yep, it’s just the sort of pristine environment we need to protect.

The point though is that this latest news follows a long line of projects, announced with much fanfare but which then fall victim to a slow death by regulatory intervention, environmental impact studies, planning appeals, vocal interest groups and various often spurious environmental agendas. Some fall to a quick death by political intervention, which must surely be less painful and less costly for the proponents in the long run.

You begin to wonder why anyone would want to run the gauntlet of having a major new tourism project given the green light in Australia. They risk a great deal of money in the process with no guarantee of anything ever happening. It’s their money and they can take it anywhere, and Australia has a lot of competition up against it in terms of rival destinations. The South Pacific is littered with ‘beach culture’ resorts as is much of South East Asia. The climate is just as appealing and their cost base so much lower that even many Australians prefer to holiday there than locally.

These tourism investors are offering Australian destinations the chance to reinvent their destination image and reputation, and they should be being welcomed with open arms. Without new product in the form of attractions, hotels, resorts, restaurants, shops, entertainment and tours, all that our destinations have to rely on are the existing mix of operators many of them in charge of facilities which are now more than 20 years old – roughly since the last time we saw a wave of fresh investment into tourism. 

Our product range is dated and tired and our image and reputation is suffering with it. No amount of chintzy tourism campaigns will change the fact that we risk a ‘been there, done that’ reputation in global markets.

Back to our Gold Coast cruise ship proposal. Here’s a question for you. If it was Singapore, or Vietnam, or somewhere in the Phillipines or maybe Indonesia, or perhaps the Pacific Islands, do you think they would have said “no” to a brand new multi-billion dollar facility at no cost to taxpayers which would in turn help them create more jobs and training opportunities for young people, earn foreign income, do a lot of the legwork for their destination marketing and bring global attention to their destination?

I doubt it. 

Tuesday, April 14, 2015

Why raising the GST could hit new housing hard.

As Governments state and federal begin grappling with harsher budget realities and an electorate disinterested in listening when it comes to the necessity of budget cuts or asset privatisation, it becomes increasingly likely that Australia will follow the New Zealand path and raise the GST. This could hit housing especially hard because of the way new housing is taxed.

First, let’s recap on the current GST. First proposed in 1985 by Labor Treasurer Paul Keating, it was dropped for political expediency. Then in 1991, it was again proposed by Dr John Hewson as Federal Liberal Opposition Leader, but the GST died a quick death at the hands of interviewer Mike Willisee (and Paul Keating), who asked a pointed question about the icing on a cake. Hewson stumbled, momentum was lost, and Hewson lost the election. We didn’t see the GST return until Liberal Prime Minister John Howard took the proposal for the GST and major tax reform to an election in 1998, and won.

The GST, introduced in 2000, was originally to apply to pretty much everything, but lobbying by the Democrats (mainly) led to a negotiated GST which didn’t apply to things like fresh food, or books. The other part of the negotiation was with the states, who in return for receiving 100 per cent of the revenues created by the GST, promised to abolish a range of taxes, stamp duty included.

That’s where the housing equation comes in. Stamp duty on housing sales is a huge impost and a disincentive to more freely trading real estate. It’s also a big money earner for the states, but so was the GST. The GST revenue would have exceeded what the states then received from stamp duty, hence the agreement.

That may well have worked, but they all broke that promise. The states kept stamp duties and other taxes they had promised to abolish, and also said ‘thanks very much’ for the new rivers of gold in the form of GST revenues. As a result, new housing immediately had 10 per cent added to its price, while any compensation in the form of abolished stamp duties didn’t eventuate.

Take a modest $500,000 new home or home unit in Australia today. The purchaser – in addition to various local and state infrastructure charges – is paying 1/11th of that purchase as GST. That’s around $45,500 in GST going to the states - a very big tax bill on a single purchase. Plus, depending on the state, there’s anywhere from around $10,000 or $20,000 in stamp duty. Many first home buyers are exempt from stamp duty, but the nature of grants and exemptions vary.

Those exemptions also apply to second hand homes, while the GST only applies to new homes (houses or units). Plus, infrastructure levies and other ‘developer costs’ only apply to new housing, not to existing or second hand stock. Already new housing is punitively taxed whereas second hand stock isn’t, via the GST and via other state or local charges on infrastructure.

What happens if governments turn to an increase in the GST to fill multiple budget black holes? Plenty are talking about it, as are plenty of economists. Many will argue it’s a good thing, but it isn't if you’re in the market for a new home (as opposed to second hand), or if you’re a developer creating new housing stock.

If the GST was raised to 15 per cent - as many suggest – our $500,000 property jumps by nearly another $23,000 overnight. A second hand house sitting right next door experiences no change in tax treatment. So the new home buyer is now paying $522,727 for our hypothetical house, of which now $68,100 is GST. Add to that the various infrastructure charges, duties, charges and various taxes or levies, and people buying a new house in this scenario could easily be paying well over $150,000 in total taxes on their new home.

Housing in Australia is expensive enough as it is. Failing to create a healthy volume of low cost new housing supply, rather than stoking the already hot fires of the existing second hand property market, has worried a lot of people from the Reserve Bank Governor down.

If changes to the GST in the form of an increased rate are allowed to go ahead without some balance being restored to the new versus second hand treatment of our housing stock, it is likely that genuine new housing supply (as opposed to investor product though even this would suffer) will stall further. Unless I’m wrong, and an extra $23,000 tax bill on a single transaction isn’t something that bothers people these days.

Wednesday, March 18, 2015

Where we live: the case for suburban renewal

The advent of ‘urban renewal’ in the 1990s has been such a blistering policy success that it’s now arguably well out of proportion to the realities of need based on where people actually live. It’s as if the magic “5 kilometre ring” around our city centres has become a policy preoccupation and an industry obsession. One look at the evidence though suggests perhaps it’s time we turned attention to the suburbs, where the vast majority of us live, to restore some balance.

The middle and outer suburbs may not capture the interest of intellectual elites or (with some exceptions) provide the homes of the wealthiest in our society, but they do continue to house the vast majority of Australians. All the hype and excitement about “inner city café lifestyles” belies the statistics which show in stark reality that Australia is not only a nation of city dwellers, but within those cities we are overwhelmingly a nation of sub-urban, as opposed to urban, dwellers. 

Gushing media reports about inner city real estate markets and frantic development activity, public transport projects, parkland projects, bikeways, cultural facilities and the like fail to mention that only 10% of us, at most, live within the 5 kilometre ring. A thumping majority of 90% to 95% of Australians, in the major cities of Sydney, Melbourne and Brisbane, live outside the 5 kilometre ring of privilege. As a rule, 70% to 80% of us live further than 10 kilometres from the city centre, in outer-middle and outer suburban areas. It’s also true that the majority of us not only live beyond the inner city, but we also work outside it. Our pattern of living is not only overwhelmingly suburban, but so is our economy. (More on this next month).  

So how do our three largest cities shape up on the evidence?


There are just over 330,000 Sydney residents living within 5 kilometres of the city centre. There are a total of 4.34 million people living within 50 kilometres of the city centre, so that’s a fairly small 8% of the total who call the inner city home.   Twice as many people – 675,000 – live from 5 to 10 klms out and the numbers and percentages continue to rise the further out you go. They may live at lower densities in the outer suburbs but numerically they outnumber inner city residents ten to one. If we think of suburbs from 10 to 20 klms out as ‘outer middle’ areas and those over 20 klms out as ‘outer’, then 80% of the Sydney population lives further than 10 klms from the city centre. 


There are fewer people living within 5 klms of the Melbourne City Centre than even Brisbane. Of the total 4.154 million people who live within 50 klms of the city centre, this is just 5% of the total. There are a further 13% of Melburnians who call the 5 to 10 klm band home, while a very substantial 82% of Melburnians call the outer-middle and outer bands home.  Even if the number of people living within the 5 klm ring of Mebourne’s CBD doubled, it would have next to no impact on the overwhelmingly suburban distribution of the population across the Melbourne metro area.


In Brisbane, there are around a quarter of a million people within 5 klms of the city centre. That represents 11% of the total 2.15 million people who live within 50 klms of the centre. A further 17% or 356,500 live from 5 to 10 klms out, which actually makes Brisbane the more centrally populated of the three cities studied. 72% of Brisbane residents live further than 10 klms out in middle-outer and outer suburbs which is still a very large majority but not quite the 80% of Sydneysiders nor the 82% of Melburnians. 


One observation worth making is that our governance systems aren’t well designed to deal with large metro regions. Sydney has an astonishing 38 local governments across its metro area, and Melbourne has 12. Brisbane is the exception, with one large local authority providing local government services to 1.13 million people. But even in Brisbane’s case that leaves a further 1 million people living within 50 klms of the city centre governed by a number of different local authorities.

I am not suggesting we should have single local governments for our entire metro areas. In fact there are some good reasons for the ‘local’ in local government to focus on smaller areas. However, if we want metro wide solutions to apply policy attention and taxpayer funds equitably to suburban and urban areas, local governments may not be best vehicle. You could hardly expect, for example, the highly exclusive Sydney City Council – which at 25 square kilometres covers an area not much larger than its CBD and nothing more – to put up their hand and say “we don’t really need NSW taxpayers to subsidise our outrageously expensive light rail extension because we understand there are higher priorities for people in Bankstown or Hornsby.” 

Which means that state governments, working with local and federal agencies, are the ones needed to adopt a broader governance approach to metro regions, with a focus on sustaining and developing the suburban economy along with the inner urban.

The other, more glaring observation is that democracy seems to be failing the suburbs. Nine out of ten city dwellers may live in the suburbs and more eight in ten also work there, but increasingly it’s hard to shake the suspicion that it’s the people who live and work within a 5 klm ring of our city centres that are making the decisions and spending the money. 

From politicians to heads of government departments, media organisations and industry leaders: the well off and the influential are overwhelmingly from the inner city. They live there, they work there, and primarily socialise and circulate within this hot house of privilege and influence. It may also explain why in some urban planning circles, there is an increasing sense of anti-suburban elitism creeping in. The suburbs and their ‘McMansions’ are topics of disdain for some, which is a pity. 

The people who live in the middle-outer and outer suburbs of our cities in the main don’t live there because they have to: they live there because they want to. They don’t deserve derision, nor are they looking for sympathy. It may surprise inner city elites, but many have little interest in battling congested inner city traffic or paying excessive real estate prices or living in crowded inner urban arrangements or paying exorbitant parking fees for the privilege of working or living in or simply visiting in the inner city and what it has to offer.

Yet while numerically superior in every way, the suburban existence remains largely shunned in policy circles. The more that the intelligentsia become isolated from the suburban heartland of our economy and way of life, the weaker we become as a nation. 

Thanks to the team at Urban Economics for providing the raw data for this yarn. If any readers want more, they’ve got the numbers and the breakdowns and I’m sure they’d be happy to hear from you. But don’t blame them for my conclusions – which are entirely my own. Call them on +617 3839 1400.

Wednesday, February 25, 2015

High density housing’s biggest myth

Advocates of higher density housing development in Australia’s major cities – inner city areas in particular - are fond of pointing to a range of statistics as evidence of rising demand. Dwelling approvals, dwelling commencements, tower crane counts and various other sources, both reputable and dodgy, are referenced and then highly leveraged to support claims that our housing preferences have fundamentally changed in favour of high density apartments. But what’s the one inescapable fact that these advocates are missing?

“Higher density living on the rise” is typical of the light weight PR puffery that passes for market analysis these days.  This piece is typical of the boosterism: 

“Since 2008/09 multi-unit housings’ share of dwelling approvals in Queensland has jumped from 31 per cent to 46 per cent. Much of the increase can be attributed to an increase in approvals for high-rise apartments, with the sector’s share of dwelling approvals doubling between 2008/09 and 2013/14, from about 12 per cent to approximately 24 per cent.” So far, correct.

But it goes on to draw this unjustified but widely supported conclusion: “the popularity of apartment living in the larger capital cities had been driven by a number of factors including decreasing housing affordability and the changing lifestyle of baby boomers and young professionals.”

Or how about this piece of PR chasing nonsense pumped out by a bank no less: “Australians are favouring smaller, more affordable homes, with approvals for the construction of flats, townhouses and semi-detached houses nearing their highest level in 20 years.”

What’s wrong with these conclusions? Simply this: rising dwelling starts for apartments in inner city areas do not necessarily reflect ‘changing lifestyles’ or any ‘popularity’ for this product by home buyers. What it does reflect is a (so far) ravenous investor appetite for the product. This is entirely different to an owner occupier appetite. If owner occupiers were buying these apartments in large numbers, you could then conclude that inner city apartment living was becoming more and more popular. But speculative investors have no intention of living in the product they’re buying.

Owner occupiers in the main aren’t looking for tiny one or two bedroom units. Some developers have targeted the owner occupier unit market, and their designs feature more three and even four bedroom units, spacious in design and with features designed for living in as adults or families. The price points are vastly different. This is so far a niche market which is performing strongly, but it’s completely different to the cookie-cutter apartment stock which is driving the stats.

What is happening in Australia now, and which is being reflected in the dwelling stats for apartment construction, is a nation-wide frenzy of speculative investment in inner city apartments, fuelled by negative gearing, SMSFs, foreign buyers and the search for returns in a very low yielding market. For many apartment projects, more than 80% or 90% of the stock is sold to investors, not to people with the intention of living there. This includes a significant proportion of first home buyers as investors, as Michael Pascoe recently pointed out. 

To meet the investor market, apartments are getting smaller and smaller – to meet the price points demanded by investors. Typically, most projects offer a mix of one and two bedroom units only – and these are designed to squeeze every square inch of efficiency out of them. Construction economics and pricing is all about size, features and finishes and every dynamic is put under the microscope and cut from the project if it means the unit offering can be sold for less without sacrificing margin. Many continue to be offered through project selling agencies or “investment channels” in order to achieve a certain level of pre-sales. ‘Rental guarantees’ from developers provide investors with some certainty that their investment will perform predictably for the first year or two. A successful project is one that is sold out, preferably pre-sold. Actually being occupied is another thing altogether.

What this is doing is creating a large pool of rental units of similar size and design and in similar locations. And contrary to the sort of froth and bubble many commentators attach to the ‘rising popularity’ of apartments, many are vacant: simply locked up and not used by their owners (often overseas buyers). Others are looking for tenants, but can’t rent for what investors need to get. Inner city apartment vacancy rates are rising, and rents are starting to fall: a sure sign of market where supply is beginning to exceed demand. 

‘Official’ vacancy stats produced by Real Estate Institutes only count the properties actively being marketed for rent. The ones that are simply unoccupied and not available for rent don’t form part of the figures. A recent study in Melbourne reviewed water consumption in a number of Docklands Towers and concluded that those apartments with next to no water consumption were effectively empty. They put the vacancy at nearly one in four. Or you can simply look at these towers at night, and count the lights that are on, and draw your own conclusion. Or maybe ask some restaurant or shop owners who took leases in new projects on the promise of “a bustling inner city café society” what the trade is really like.

Increasingly, smart developers are selling sites with approvals in place but before a sod has been turned. In some cases they’re selling even before the approval has been obtained. Why go through the grief of developing something when someone else is happy to pay you a premium many times what the site cost you? 

I don’t actually see anything wrong with any of this. Property markets going through booms and busts are not a new thing. Just ask industry people on the Gold Coast. Or have a look at CBD office markets. Plus, if it weren’t for the frenzy of activity we’re seeing in the apartment market now, there’d be precious little else going on. So it’s keeping an industry alive, and all those whose jobs depend on it. Investors are entitled to take risks and they are just as entitled to lose money as make it. There are no guarantees. 

But please, stop suggesting that what we’re seeing is anything but a case of investor-fueled activity. Investors are buying a financial product, not a lifestyle choice. To suggest it means Australian society is surrendering a three or four bedroom home in favour of a one bedroom apartment is stretching the conclusions that can be drawn from the stats way way way too far.