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?

Sydney.




















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. 

Melbourne.





















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.

Brisbane.




















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. 

Observations

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. 

Thursday, February 5, 2015

Is it time for suburban renewal?

Addressing infrastructure deficits in our nation’s major cities has gone from drought to flood in recent times. For residents and business of inner city locations of many of our major cities, it’s now almost an embarrassment of riches. The same can’t be said for suburban communities of those same cities. Yet it’s the suburbs where most of us live, where most of us work, and where we largely play. Maybe it’s time to bring some focus back to our suburbs?

I’ll start this with a confession. In the late 1990s, as one of a number of leaders of the industry lobby The Property Council, I was an active proponent of building a national agenda for revisiting an urban renewal agenda. At the time, our cities were looking tired. Infrastructure deficits were widening. If cities were to be the engines of the new economy, those engines needed some major surgery to keep Australia competitive.

What followed was a minor flood of industry-driven policy initiatives focussed on rebuilding the cubic capacity of our city engine rooms. And mainly, that meant a focus on the inner cities of our major centres. Industry policy fell into step with public policy and the re-birth of a nation-wide “urban renewal agenda” – led first by former Labor Minister Brian Howe (of ‘Better Cities’ fame in the early 1990s) and later supported by Prime Minister Keating.  The case for ‘Building Better Cities’ found renewed support in almost every major urban centre, to a greater or lesser degree. 

In some centres, particularly Brisbane and Perth, the urban renewal agenda became a driver of planning policy, and other cities later followed. Brisbane’s then Mayor Jim Soorley was a particularly efficient advocate, and his appointment of former Lend Lease executive Trevor Reddacliff to the role of leading an Urban Renewal Task Force, funded under the Building Better Cities program, saw a massive inner city transformation begin to take place. Without those early initiatives in Brisbane and elsewhere and without subsequent bi-partisan public policy support from Liberals and Labor alike - Australia’s inner city areas would be nothing like they are today.

It all made economic sense. It was good public policy (with some notable failings – particularly the idea that urban renewal would lead to more affordable housing for working people, when it actually led to the opposite) and it was good politics too.

Fast forward to today. In almost every capital, there are a multitude of projects and even more planned, which are building further on the urban renewal agenda. Many are transformational, exciting and even overdue. But the price tag for these projects is becoming increasingly daunting, and the relatively few beneficiaries are becoming – to me at least - increasingly obvious. In short, there seem now to be no shortage of publicly funded initiatives focused on delivering a better quality of urban existence within a five kilometre ring of the CBD, and too few focused on the hard and soft infrastructure deficits that our suburban areas are still living with. 

Take the Sydney light rail extension for example. The cost has now blown out by an extra $600 million to $2.2 billion. Oops. That’s billion with a ‘b’. And the length? Just 12.2 kilometres. This project is almost entirely about improving circulation in and around the Sydney CBD, where the highest paying jobs are. That’s something like $180 million per kilometre for NSW taxpayers. Lovely stuff if you’re a resident within shooting distance of the light rail (in which case your home is probably worth millions) or a CBD worker likely to make use of it (in which case the evidence says you’re probably earning at least 50% more than your suburban counterparts). Even though you could quite probably afford a higher priced ticket to ride than the average punter, you won’t be asked to do so because public policy somehow now presumes that all public transport – even where it benefits a privileged few – should be massively subsidised by the taxpayer. 

So just this one transit initiative will cost NSW taxpayers $2.2 billion to build (not including the operational losses it will also need taxpayers to cover) but will only benefit a small number of relatively privileged passengers who won’t even be asked to pay an economically justifiable fare. "People are agog that they have managed to get away with it," one source said in a recent news article. I’ll bet they are. 

I could point to a number of other examples of bike ways, pedestrian bridges, parks and transport initiatives which will largely benefit residents and businesses within a 5 klm ring of our major CBDs. Some don’t stand close scrutiny in terms of ‘cost-benefit’ analysis. It’s as if it’s become accepted wisdom that spending tax payer dollars on the inner city is a good thing. Minimal justification required. Minimal public objection likely.

My problem isn’t with investing in our cities, or even with inner cities. It’s been a transformational period and what we have achieved in terms of urban renewal has been world best practice. My question is now whether we haven’t forgotten the importance of supporting and nurturing our suburban economies and our suburban communities: have we become preoccupied with cutting yet more ribbons on projects of inner city fiscal largesse?

There are three reasons we could think about returning some focus to the suburbs:

1. It’s where nearly all of us live. You can take all the column centimetres written about ‘inner city café lifestyle’ and the ‘inner city apartment boom’ and put them all in a pile and it would mean nothing compared with the raw statistics of where we actually live. Forget the hype and agenda-based marketing spiel; we remain a suburban nation and the overwhelming majority of us live not just in a handful of major cities, but also in the suburbs of those cities. 

2. It’s where most of us actually work. I have written before about the suburban nature of our economy, and where the jobs actually are. Across our major metro areas, only between 10% to 15% of jobs are in the inner cities. 85% to 90% are in suburban locations. Fact.

3. It’s where we mainly play. Inner cities are logical locations for major cultural facilities because they’re central, but for most Australians, weekend recreation involves backyard BBQs, or visits to a local suburban park, or (increasingly it seems) mixing recreation and retail at a suburban shopping centre. There are large proportions of our suburban community who have no interest in travelling into our inner city areas and dealing with congestion and exorbitant parking prices in exchange for the privilege. On special occasions (fireworks seem a big drawcard) they will come in droves but to suggest that continued investment in inner city recreational facilities benefits people who live 10 or 20 or 30 kilometres away, is stretching things.

So have I re-canted earlier views on the importance of cities to our economy? No. But I also equally believe that there are many worthy projects and initiatives, capable of better economic and social justification in suburban locations – projects and locations which maybe just aren’t getting the policy or financial attention they deserve. 

Urban renewal has been a fine and worthwhile policy pursuit and our city centres are better for it. But there are only so many taxpayer dollars available and we need to ask if we’re now at risk of imbalance. Has the time for suburban renewal come? 

More on this subject throughout the year. 

Wednesday, December 3, 2014

Developers: the real city builders

Developers are a much maligned breed but without them, nothing much happens. It’s not the town planners, or urban designers, or even governments spending tax payer dollars that build cities – it’s generally private money taking a risk that creates our urban environment. Why aren’t we celebrating this a little more, and why aren’t we teaching kids that developers are not the dirty word some sections the media, The Greens and various NIMBY groups like to make out?

Roughly a year ago I was following up on a healthy discussion about the role of urban growth boundaries and planning policy generally with a Government Minister. I looked out from the Minister’s office and pointed over the city, remarking that nearly all of what we were looking at was delivered without the complex maze of planning regulation we now consider essential. Most of the urban form of any of our major cities was delivered without what we’d call town planning today. 

There certainly weren’t legions of planners in government offices trying to exert a command and control influence over community choice by wielding an ideological stick in the form of planning policy. Instead “back in the day” there were a handful of city engineers, and applications for development tended to be approved if they met basic building code and engineering guidelines.

With this absolute minimalist approach to regulatory intervention in urban growth, we created large, efficient cities which somehow got it right. The roads, railway stations, commercial developments, hospitals and all sorts of community facilities and parklands grew mainly in response to market forces - shaped by consumer demand. Where people wanted to live and in what types of homes they wanted to live in created demand that developers responded to. Whole suburbs were developed in this way, and housing was affordable. In response to this, other developers identified opportunities for shopping centres, workplaces and other projects. Transport connections were delivered in response to the market driven locational choice of our urban inhabitants, and with them were developed the medical facilities, community facilities, parks and public spaces that also helped shape the character of our urban form. This largely market driven approach is how most of our major cities were shaped, with the exception of Canberra. 

Not only was the vast majority of our current urban form delivered without the benefit of complex regulatory planning, but apparently it was so successful that huge swathes of the community now believe that much of it should be protected from any re-development. This is a sweet irony: the structures and precincts that were originally created with a quick ‘how about we put it there’ discussion and approved for construction with basic plans in a matter of days (no one had heard of an EIS) are now the subject of fervent protectionist instincts. These are from among the same sections of the community that talk loudest about the need for even more government planning and development control. They’re actively espousing the conservation of an urban form that reflects a period of minimalist or non-existent planning.

But this same coterie of voices that champions preservation of suburbs, precincts, places and structures created by developers unassisted by the guiding hand of a regulatory planner, also somehow believe that only highly regulated controls over developers can achieve similar outcomes in today’s world. 

The community now views developers with suspicion and somehow we now place our trust in the hands of regulatory urban planners and academics, many of whom have never in their life built so much as a Stratco garden shed. This seems to be a widespread community sentiment which is a great shame because the longer it goes on, the more we are deluding ourselves about how our cities really grow and respond to the needs of their residents. 

Will it ever change? No, I think that horse has well and truly bolted. But it could be worth reminding some of the loudest voices in favour of more and more regulatory control of a few home truths. Here are some of my thoughts:

Developers know the market best. You can assemble as many thinkers and urban planners and futurists in a room as you like but the moment someone has to risk their own money on a project, the room clears. Those left are the ones who truly know what a market wants in a particular location and what they’re prepared to pay. They know the costs of delivery, the risk of time delay and the risk of market change. In this way developers are more acutely tuned to real consumer and business community demand. Their views could be more widely sought and respected in terms of what can work and what won’t when it comes to urban planning. Otherwise we create plans which aren’t based on reality and which – for that reason – are difficult to deliver without excessive taxpayer support.

Developers tend to be ahead of the trends. There’s nothing like a market driven psychology to keep you on top of trends and to know how fast they’re changing, and in what direction. Regulators on the other hand tend to learn by third party reference, through various conferences, talk fests and media reports. These are often well behind the trend because they’re referencing something someone else has already done. Once again, I’d be more inclined to put my faith in the views of a few developers when it comes to knowing the latest trends than an entire roomful of theorists who aren’t in the business of risking capital. Especially their own.

We need developers. The anti-development voices seem to think that taxpayers and governments are the means to improved urban environments and that developers should be highly controlled and their role limited. But without developers and the private capital (not taxpayer dollars) they bring to projects, all the plans in the world will never materialise. It’s the developers who create the houses, the shops, the cinemas, the restaurants, the coffee shops, ‘green star’ offices, industrial workplaces, medical centres, tourism resorts, hotels, theme parks, and other attractions that characterise where we live, work and play. 

Today, developers are also increasingly providing schools for our children and public parks, particularly in master-planned estates. They are providing aged care and retirement living for our seniors. Private health organisations are developing new and world class hospitals, operating theatres and health facilities for large cross sections of the community, usually at lower capital cost and greater operational efficiency than traditional government delivery models.

We are surrounded by the results of development and this development was in the main created by developers risking private capital to meet a market opportunity. We are not likewise surrounded by the evidence of unwieldy regulatory planning instruments which impose needless delays, are unduly prescriptive and rarely in tune with community or market need.

Does this mean there is no role for regulation of urban development? Of course not. Public policy should reflect community opinion in any healthy democracy, and this in turn should shape the future growth, development and redevelopment of our urban landscape. It should encourage and facilitate private capital that aims to meet a community or business need. It should not reflect the minority views of unelected policy makers, nor resist market forces which are clear signals of need and demand, nor treat applications for development with deep seated mistrust and suspicion.

If developers and private development generally managed to create entire cities across Australia with considerable success, unaided by the heavy hand of prescriptive regulation, how is it that we came to this view today that developers are the enemy of efficient urban development? And how is that re-development of areas that are reminders of historically unrestrained development is now opposed in the name of ‘heritage’ conservation? 

Maybe it’s explained by the word ‘profit’?  Is it possible that we’ve come to view profit as a dirty word, rather than a sign of something successful? Does it mean that community opinion is more likely to support taxpayer funded developments which consume precious tax dollars (at a loss) as preferable to privately funded developments which actually contribute to the community tax pool (by making profits)? If that’s the root of the problem, the problem is much larger than we might care to imagine. 

Tuesday, November 4, 2014

Australia's housing policy?

This could be a very short yarn because despite the almost daily media reports of a housing boom or bust (depending on which media you read) and despite regular jawboning on housing prices by no less than the Reserve Bank, and despite tumbling affordability for young families and talk of generational lock-out from the housing market, we don’t actually have a housing policy as such. Nor does it seem much of an official view. 

It’s almost remarkable that the Federal Government has resisted entering the debate about housing when the topic is so nationally contentious. It is one thing to say that in principle, housing policy is really a matter for the states (which largely it is) but it is another to resist the political urge to intervene in a subject which is so white hot as a BBQ stopper everywhere, from Martin Place Sydney to Moorooka Brisbane.

Even the chiefs of our major banks can’t seem to agree on whether parts of the market are overheated or not, whether negative gearing is contributing to problems in some parts of the market or not, or whether foreign investors are responsible for driving prices up in places like Sydney. Nearly every bank chief has expressed a view and to my way of thinking there has been very little consistency in those views. That in itself is extraordinary. 

Some like the Comm Bank’s David Murray have suggested negative gearing is a problem while Westpac’s Gail Kelly says not. Kelly is one of many resisting moves to introduce tighter capital buffers on bank lending as seems likely to be recommended by the Financial Services Inquiry. Various spokespeople for the Reserve Bank have been muttering their concerns about the housing market in Sydney and Melbourne, perhaps hoping that this voodoo may cast some sort of spell over the market and cool things down. 

But which parts need cooling down, if they do at all? Plenty of commentators talk about ‘the real estate market’ as if it’s one thing. Nothing could be further from the truth. While parts of Sydney are apparently red hot and Melbourne has been heating up, Brisbane is well behind, with perhaps the exception of some inner city apartment locales. As for Hobart or Adelaide or countless regional cities, it’s quite the opposite. Try telling someone on the Gold or Sunshine Coast that the market’s overheated and they’ll laugh at you. 

The problem with big sticks like those wielded by the Reserve Bank is that they have no capacity for regional differentiation. So if they do move to cool things down in places like Sydney, that could have calamitous effects on markets where things never heated up in the first place. Equally it could kill off the only part of the market that seems to be employing people at the moment: without all those high rise cranes on apartment projects, there’s not a lot of other activity in the property and construction sector – a big employer in Australia.

Add to this the oversupply of commentary on an almost daily basis. For sticky long term assets like housing, analysis ought to be based on long term performance. The high transaction costs of trading real estate assets make this even more a reality. But the digital media’s appetite for stories that punters will click on is such that they now print almost anything submitted on the topic of housing prices. So much so we’re getting told, with great authority, that “house prices in city X moved up 0.3% in the month of October but fell by 0.1% in city Y.”  Pfft. Even that paragon of conservative market reporting The Australian Financial Review now devotes a large chunk of space every Monday analysing in detail what happened at auction clearances the weekend before.  Pur-lease!

It’s so ridiculous that in the space of time since our own house went under contract to settlement, I think we’ll have been through a boom, a bust, and a boom again. Who knows, it settles in two weeks, anything could change again according to the media.

On top of this, Liberal MP Kelly O’Dwyer, who chairs the House of Representatives Economics Committee, is spearheading an investigation into foreign investment in Australian real estate. It’s always good to give the punters someone to blame and foreigners are always good targets so this sort of witch hunt makes a pretty regular appearance in Australian public policy. Some of you would remember the early 1990s when there were campaigns against Japanese investment. Ironically, they were led by a bloke called Bruce Whiteside – himself a Kiwi resident on the Gold Coast and this at a time when Kiwi’s were the largest foreign buyers of Australian real estate outside the poms. 

It strikes me that this it is more important now to have a national view on housing policy settings than perhaps ever before. This doesn’t mean we need a Department of Housing (since when did more bureaucrats actually make anything better?) but some effort at a national level to bring some consensus to the issue would be helpful. Here’s why:

  • The Governor of the Reserve Bank is worried and says so -  often -  that housing policy settings aren’t working
  • The chiefs of our major banks disagree about whether there is a problem or not and what ought to be done, or not
  • Most of the respected (or noisiest?) commentators or industry experts are in heated disagreement about housing markets and housing policy
  • Global observations from groups like the IMF and World Bank have expressed caution about Australia’s housing prices (not that they’re experts but it is unsettling when they chime in)
  • There is an undeniable affordability problem for young families in major cities leading more to renting than at any time since WWII and some of those who buy often enter significant financial stress as the price

I could go on, it’s potentially a very long list.

In fairness, Treasurer Joe Hockey has made a number of comments about the issue – denying talk of a bubble as ‘lazy analysis’ and hosing down talk of regulatory intervention. He has rightly (in my view) identified supply side constraints as a significant problem via the planning policies delivered by various local and state planning agencies – policies beyond the regulatory reach of the Federal Government. 

But is ‘Keep Calm and Carry On’ enough of a policy response when so much is at stake? 

Is there anything wrong with our national government entering the fray to settle debate and point a way forward?

Tuesday, October 21, 2014

Three different office market stories. Same set of data.

There is a lot of pessimism about the CBD office market in Brisbane at present but is all of it warranted? A lot depends on how you think about the numbers. Here are three graphs dealing with Brisbane markets, all derived from the same data set provided by the PCA, which paint very different pictures of what’s going on. 

Let’s start with the more positive view of things. This graph shows the total occupied space in CBD and city fringe office markets over time. Occupied space simply takes the total stock of space, and subtracts the total vacancies.  It’s the sort of analysis suited to the people who don’t care if the glass is half full or half empty… they only care about how much volume is in the glass, irrespective of how big or small the glass is. 

 


What this indicates is a fairly resilient market. The GFC had almost no impact on occupied space - probably thanks mainly to the mining sector and a rapidly growing public sector at the time, particularly the ‘admin’ functions of government which tended to be housed in the CBD, as opposed to ‘frontline’ public servants (eg teachers, nurses, police etc) who aren’t.  Since the downturn in the resources sector from 2013 combined with the Newman State government pruning its staff numbers to more sustainable levels, occupied space in the CBD shrank somewhat from early 2013. But in the broad scheme of things, this picture is still relatively healthy.

The city fringe market, which was home to a large number of resource based companies and businesses who derived a healthy living from them, has by contrast not suffered much of a contraction. It may have stopped expanding but unlike the CBD, it hasn’t been shrinking.

Still, looking at the figures this way, you would conclude that both markets are generally trending up, with the CBD showing some relatively minor deterioration in recent years but nothing to suggest major alarm bells.

So why all the pessimism? Probably because the industry – along with the PCA who produce the figures – have traditionally focussed on the vacancies. This is the sort of analysis that by its nature appeals to the glass half empty pessimists. They’re not focussed on how much is actually in the glass, they’re worried that they’ve got a very big glass which isn’t as full as they’d like it to be. If anyone brings an even bigger glass and the same contents are poured into it, they become desperately worried. 



This graph shows total vacancies in CBD and fringe markets over time.  Little wonder people are feeling a bit glum. Office vacancies, on the back of some shrinking in occupied space plus the addition of some stock, are approaching 350,000 square metres. That’s like six Waterfront Places of space, all empty (but not of the same grade). Not only that, but there is more stock in production, which will mean bigger glasses and more empty space. The city fringe has fared relatively better. CBD vacancies have more than trebled since 2003 but fringe vacancies have only slightly more than doubled. Not a huge compensation, but maybe some relief to city fringe owners. The contrast with the very tight market conditions in 2008 is stark however, and the growth in vacancies since then, dramatic. 

Of course the real story is in what these dynamics are doing to rents. Incentives are rising and real rents are falling. Some of the sublease deals doing the rounds in Brisbane at the moment are said to be ‘very attractive’ – which is industry-speak for dirt cheap. Certainly well below replacement cost. Tenants can exploit the current market and move up a grade or two of space but still pay the same rent. Low grade office space will be the hardest of all to lease, and owners will explore alternative options – as they have been doing in the form of hotel or apartment conversions. (Why haven’t more explored education related options, or even retirement living options? If they have, they’ve kept it quiet).

The city fringe markets I’m told have fared better in terms of rents and aren’t exposed to the same levels of discounting. It’s reaching the point where the cost of high quality space in city fringe locations isn’t much cheaper any more than sublease CBD space. My guess is that’s going to discourage any further major moves from CBD to fringe locations, for a while at least.

The third chart, also drawn from the same data set, shows a very different picture altogether. This is the chart for people who like to think about the larger picture. This chart shows the CBD’s share of the combined occupied space of both the CBD and fringe. In other words, combine the volumes in both glasses and work out who has more.



In 2003, the CBD had 70% of the occupied space in the combined CBD+fringe markets. I would bet my left you-know-what that prior to this, the proportion was higher still. Go back another decade and it wouldn’t surprise me if the CBD had 85% of the combined space. It’s now at 55% and the clear trend is down. In short, the importance of the CBD is shrinking relative to the total inner city office market.

So what? This brings into focus a whole range of additional questions: are businesses being driven out of the CBD by cost-push pressures; is there something fundamentally more attractive in the fringe; what role does the cost and availability of carparking play; what are the implications for public transport which relies on a CBD centric hub; to what extent does the shift represent a change in the nature of how businesses and people work with new technology; if the trend continues at this pace, what are the longer term implications for development, investment and public policy?

In all the discussion about CBD office market trends, it strikes me that some more time investigating the third chart would be time very well spent. 

Tuesday, September 9, 2014

Never mind the bollocks! (Growing old disgracefully)

If you were aged 25 when The Sex Pistols first crashed onto the music scene in 1975, you’ll be 65 years old next year. This isn’t so much a lesson in demography but one of attitude. I can’t imagine this generation of ageing Australians wanting anything to do with the style of retirement living or aged care we’ve dished up in the past.

The endless statistics now being churned out on our ageing population are becoming a blur. The ABS will tell you that the proportion of us Aussies aged 65 and over in the 1970s was just 8%. Within a decade or so, that will rise to one in four of us. And the Productivity Commission’s report of late 2013 will tell you that “the population of people aged 75 or more years is expected to rise by 4 million from 2012 to 2060, increasing from about 6.4 to 14.4 per cent of the population…”

We get it. There will be lots and lots more old people, supported by fewer people of working (and tax paying) age.

Where they’re all going to live has large parts of the property industry belatedly starting to focus on the response.  Again according to the Productivity Commission: “Total private and public investment requirements over this 50 year period are estimated to be more than 5 times the cumulative investment made over the last half century, which reveals the importance of an efficient investment environment.”

So, lots and lots more investment is needed, a lot of which translates into built form. In other words, lots more housing for oldies.

This usually translates into two types of market response – retirement living, and aged care. Some organisations provide for both but many (surprisingly to me) opt for either one or the other.

The retirement living side is defined by housing designed for seniors who remain active, mobile and capable (mainly) of looking after themselves in independent living. Here there are some very big numbers. According to research presented by villages.com.au at a recent PCA event, in the short space of time from 2015 to 2018, there will be a requirement of $7.3 billion new capital required to meet demand from this market.

That’s billion with a ‘b’ people, and in the space of just three or four years. And that’s presuming the current take up rate of 5% of people who are eligible for retirement living options and who actually take up the option, remains the same.  If the rate at which Australians eligible for retirement living actually making use of it rises to 8% (a more globally typical level), that $7.3 billion gets exponentially bigger. Some research presented by Stockland at the same event pointed to a $35 billion capital requirement at current take up rates by 2040. As I said, very big numbers.

The residential aged care market - really a better term for what used to be called ‘nursing homes’ – is just as daunting in terms of forecast demand. According to Bentleys Accountants, we will need 9,000 new residential aged care beds per annum for the next ten years. This translates into around $20 billion of new construction, just to keep pace with demand, in the next decade. This is in addition to what’s needed in retirement living.

So there are the numbers, or some of them at least, which demonstrate how big this wave of demand is about to get.

But what I don’t hear much about – although some savvy operators are onto this – is the question not of numbers but of attitude.

You just can’t presume tomorrow’s 70 year olds will resemble anything like your grandparents may have been at 70. For one thing, they’ll be fitter and more active. The Sex Pistols Generation – if they haven’t died already from drug abuse in their early years – will have access to the most sophisticated health care ever, and the means to pay for it.

The idea of leaving the family home for some low-grade retirement living unit that once happily housed prior generations of retirees just won’t appeal. Their demands and standards will be completely different.

To attract this market, switched-on retirement living developers are creating product which is more closely aligned to the tropical resorts our generation of punks have probably been frequenting in recent years.

They may have been singing ‘no future’ in their youth but it turns out most had a pretty good future, and accumulated housing assets and opportunities for travel as they went. Unlike today’s ‘generation rent’ who may retire still with large mortgages and low savings, our punk generation are more likely to own high quality homes outright, matched with healthy savings balances.

Just because they’re getting old, they’re not going to tolerate being treated as if they’re somehow deficient. They have enjoyed high standards of living and they aren’t about to compromise. Indeed, I’m told that one of the biggest hurdles faced by today’s retirement living providers, even when the quality of product is better than a Balinese resort – is the stigma associated with the term ‘retirement living.’ Maybe ‘rock n roll living’ might have more success?

A similar revolution in product is happening at the aged care end. Pokey rooms, dim corridors, grey vinyl flooring and the depressing smell of hospital antiseptic will have the older punks doing 180’s in their wheel chairs and disappearing.  Oldies in need of higher levels of care will still want that delivered in a higher standard environment than previous generations, or no deal. More natural light, better quality facilities, personal services and overall amenity will be in demand and those with the means will be prepared to pay for it.

And if our geriatric punks are suffering from dementia or other forms of debilitation, it will be their families who insist on higher standards on their behalf.

There will be plenty who don’t have the means to pay of course, and this is where government will inevitably find itself forking out truckloads of taxpayer cash in the future. What if even the people without the means and without the savings have higher expectations in the future? No wonder Joe Hockey’s worried.

At the root of this change is a massive change of attitude. Previous generations of elderly went through life with little in the way of assets and just ‘made do.’ They endured parsimony (even self-imposed) and were grateful for the basics. First the baby boomers, then the punk generation, enjoyed much higher standards of living and personal wealth. Not only that, their cultural experience was one which challenged social norms. Prior generations were more respectful, more compliant, and less demanding. Boomers and punks are more demanding, expect and want more, are less tolerant of conforming to social norms and more likely to demand personalised approaches to care rather than institutional ones.

We may all be getting older at a faster rate, but we’re also going to be handful once we do. Myself included.


God save the Queen. 



Monday, August 4, 2014

More than wishin’ and hopin’ needed

The collective view of what the various property industry lobby groups are asking of government has become a confused picture. Little wonder governments can so easily divide and rule, or simply ignore. 

Dusty Springfield’s enduring classic “Wishin’ and Hopin’” opened with the line “Wishing and hoping and thinking and praying, planning and dreaming.” This is nice for a wistful love song lyric but hardly sound strategic guidance for an industry’s advocacy platform. But if you combined the wish lists of the various property industry lobbies all jostling for ‘peak body’ status, you’d be forgiven for thinking that it was driven by wistful starry eyed dreamers, not hard-nosed business people. 

Here’s what I mean. Recently, the Property Council renewed its call for the abolition of stamp duty and land taxes. This was in response to a Business Council of Australia report that called for workforce mobility barriers to be removed. It’s been a long held position of the PCA and the abolition of stamp duties was even a promise by the States in exchange for the rivers of revenue they would get from the GST. They (the states) lied. 

Now, the States have become even more dependent on property taxes than ever before, and most are subject to juggling very difficult demands for more services against high debt repayments. Calling for the abolition of their biggest direct revenue source, without proposing a replacement, at a time when every State is being forced into cutbacks and unpopular asset privatisations, is unlikely to get much traction.

At almost the same time, the Housing Industry Association renewed its call for first home buyers to be able to access their superannuation to fund a deposit on a home. This is a populist argument that seems to get reasonable airtime, but there are plenty of problems with it. 

What of the first time buyers whose first purchase is an investment property? What of the fact that young people – typically the first time buyer demographic – have precious little in their super fund anyway? What of the reality that over our working lives, what we put into super is going to be nowhere near enough for the job it was initially intended (retirement funding) let alone trying to repurpose super to other things like a house deposit. The answers are not provided.

Then there’s the thorny issue of negative gearing. Here, pretty much all the property industry groups agree: don’t touch it. I tend, mostly, to agree with the arguments why it serves a purpose but a blanket ban on refining negative gearing doesn’t make a lot of sense given the complexities of the economics and the very obvious excesses in some quarters. But to me it looks as if the industry’s collective view of negative gearing at present is that any discussion is simply off limits. As for capital gain tax on the family home – you daren’t mention it or all hell would break loose. 

How about the supply side? Here, the HIA, UDIA and PCA are all pretty much in agreement: artificial planning constraints on new land for housing have been responsible for driving up land costs and for our worsening affordability problem. Their remedy (which I support) is for land to be less constrained, so that competition and more available supply will release the pressure on land prices and flow through to more affordable housing. 

That’s fine, but what’s the view then on restrictive land use planning when it comes to retail? Hell no. The pro-free market view takes a 180’ turn and all of sudden the high retail rents which are product of high retail property prices which are in turn a product of highly restrictive land use rights on retail property, are a good thing after all.  Now it’s a case of an orderly planning scheme and retail hierarchies and the prevention of retail sprawl into dormitory areas. The inconsistency in positions between land for housing and land for other uses is remarkable. 

Put all the collective views together and imagine yourself a Minister for Property. What does the industry want? 

They want stamp duties abolished, and land taxes too. Effectively, better they pay no tax. They want favourable tax treatment through things like negative gearing retained, along with the tax exemption on the family home. Don’t even think about tinkering with that. To address affordability issues they want more land released and less planning control, and for first home buyers to access their meagre superannuation to get them into the market. But while freeing up land for housing to keep costs down and stimulate competition, don’t even think of freeing up planning permissions for retail uses, because if retail rents – which are some of the highest in the world – fall, then it’s the end of the world as we know it. Sovereign risk and all that. 

You’d have to forgive our imaginary Minister for wondering what they could actually do.

This isn’t intended as a cheap shot because as a former industry advocate, I appreciate just how hard it is to prosecute the case for reform with limited resources, an unsympathetic public, and cash strapped governments. And you’d be mistaken to think I regard the current taxation and regulatory approach to property generally as anything but a mess of over-taxation and over regulation. 

But lately the collective comments by the various industry groups seem to have become more one dimensional. Maybe it’s just me but they appear, through their media comments, to be acting the same way Unions did in the 70s and 80s: proposing logs of claims for wages and conditions without also proposing productivity improvements or other trade-offs in exchange. The collective view of the property industry, if it is to have some impact on government policy, might benefit from more collaboration amongst the various groups. 

If a more unified voice on some of these pressing issues could be heard, and if that voice also identified solutions that didn’t leave governments hopelessly out of pocket, then this can’t be a bad thing. If, for example, as an industry we wanted lower stamp duties and land taxes and in exchange were prepared to publicly campaign for a 15% GST, along with a fairer system of distribution of those funds amongst the states, then that solution should form part of the overall industry-wide campaign. Ditto to finding a logically consistent approach to the issue of restrictive versus permissive land use controls, where some of the industry groups differ. If we intend to advocate both at the same time, this logically inconsistent position needs simple and plausible explanation. 

The alternative is to fall into the trap of simply wishing and hoping, and thinking and praying, planning and dreaming.

Tuesday, July 1, 2014

Parking

Australian cities have some of the highest carparking costs in the world. Why? Can anything be done about it? And what might happen if it gets any worse?

It’s hard to fathom but the cost of parking a car for a day or even a couple of hours can apparently cost you more in an Australian CBD than downtown Manhattan, or London, or Paris. The latter are  global centres of commerce, with populations that dwarf that of Australian cities. New York City’s 8.4 million residents are the almost the equivalent of our three major capitals - combined. Ditto London, with its 8.4 million residents or Paris with 10.5 million residents.

Manhattan Island alone has 1.6 million residents, plus it adds another 1.6 million commuters, every day, swelling daily to over 3 million people. By comparison, the City of Sydney (the CBD plus surrounds) is roughly equivalent in area to Manhattan Island but home to only around 190,000 residents and a daily influx of workers and students of around 450,000. Yet it can cost more to park in Sydney, or even smaller cousin Brisbane (under 200,000 employees in the inner city), than Manhattan. 

Why? 

On the supply side, there has been a history of anti-car planning culture in many Australian cities for some time. Sydney was the first to impose a parking tax on CBD car spaces, in a bid to force up the price of parking and divert people to public transport. It forced up the price alright, with a number of subsequent increases in the tax over the years (the tax is now around $2000 per car space), but it made no real impact on public transit. 

Here’s an example of the thinking from then NSW Transport Minister David Campbell back in 2009: 

"The parking space levy is all about encouraging people to leave their car at home, and take public transport," he said. 

In the same story, it took someone from the Nature Conservation Council (the irony is delicious) to point out the bleeding obvious:

“I don't think it will have too much of an impact on congestion… Any increase in parking levies probably isn't going to make too much of a difference to the people who can afford it right now, what it will make a difference with I suppose is the people who really don't have any other options and are currently driving in."

Incredibly - and idiotically - the South Australian Government is trying the same thing with Adelaide, where a $750 per annum parking tax takes effect this July. You’d think they’d be desperate to bring any economic life they could find into Adelaide, but evidently if that economy arrives in a car, they don’t want it. Great place Adelaide. All it needs is an economy to go with it.

The punitive policy stance on CBD parking visits itself in other forms too. Restrictions on building new CBD parking spaces has had the effect of limiting supply as the cities grew. New multi-deck parking stations could alleviate the supply-side problem, and there seem to be enough sites suited to them in most cities, but the policy stance doesn’t support them. New commercial towers are also limited in terms of the numbers of additional basement spaces they can deliver into the pool, in a bid to limit the supply of additional parking. 

This public policy view is connected to deeply held faith (and the operative word is ‘faith’ because there’s little evidence to support the view) that by pricing or policing private vehicles out of Australian CBDs, the same people would be forced to use public transport, and we’d all be better for it. “We just need to get the cars out of the city” is the sort of view you’ll hear often on talk back radio (particularly the ABC; sorry Aunty but your listeners have been drinking way too much Kool-Aid). 

The problem is simple: if you take the cars out of the city, you’ll take the people too. And then the businesses will follow. 

Bear in mind is that parking is not just about commuters. CBDs and inner cities are places for business to interact with other businesses, and with government. They also interact with customers, clients and suppliers. They have restaurants and retail shops that rely not just on the CBD worker but also visitors to the CBD, for the retail dollar. Many of these people invariably rely on the private vehicle to get there. Casual parking costs – at up to $55 for a couple of hours – have long passed the point where they’re a deterrent: they’re a real disincentive to visit the CBD for casual business meetings. Permanent parkers with paid company spaces won’t notice this. But they may begin to wonder at the number of meeting requests for out-of-centre meetings, where the parking cost isn’t ten times the cost of the coffee. 

If the intent is to ‘punish’ the private vehicle in the belief that this will encourage higher rates of public transit patronage, the irony is that the consequence could see more businesses relocate to outside city centres, where parking regimes are more favourable and occupancy costs lower. If that happens, the numbers of office workers for whom train and bus services are a convenient option will actually fall – because public transport options in non-central locations are notoriously difficult to service and often require mode or route changes for a single trip. 

Centralised employment is what works for public transport so it ought to be in the interests of public transport advocates to support more CBD employment and more widely available parking (both in supply and pricing) than to argue for punitive agenda-based policy positions which may deter businesses from city centres. In short, if you succeed in chasing cars out of the inner city, you may also chase business out and end up with more private vehicle transit for work journeys than if they had stayed in the CBD.

The reality too is that public transport will only go so far. In Australian cities, the highest patronage of public transport by CBD workers is by people who live close to the city in the first place. Travel beyond a 5 klm or 10 klm ring and the mode share by public transport drops quickly to below 10% (see here for an excellent analysis). 

The reason is that – contrary to popular opinion – only around 10% to 15% of metro wide jobs are in the CBD and inner city. If you have a CBD job, you tend to earn more, and will want to live closer to your work. Ironically, this makes you also more likely to take advantage of very generous taxpayer subsidies for your train or bus fare to work, than the suburban worker who gets no such subsidy for commuting by private car to their lower paid job in a suburban location. And because most employment is distributed throughout suburban locations of our metropolitan areas, these are always going to be more suited to private vehicles than public transport. 

To get our public transport usage up to even half the rate of somewhere like New York – where 55% of commuters use public transport - we would need to see employment concentration in our CBDs quadruple to 40% of metro wide jobs while suburban employment didn’t grow at all. 

Hardly even a remote possibility. 

On the demand side, we seem to have a capacity to pay when it comes to parking that is allowing operators to charge what they do. However expensive the spaces may be, they do seem consistently full. Arguably, for many there is little choice. There is also little competition, with only a couple of operators seemingly controlling the market. But it is fair to question whether the exorbitant rates now being charged – especially for short term parking – won’t in time begin to change behaviour. If that behaviour begins to lead an exodus of activity to non-central locations, prices should fall as demand weakens. But that may create other, larger problems as suggested above.

So how should we deal with congestion and parking policy and public transport? 

There is no easy answer here but I’d suggest that reliance on proven failures like parking taxes or similar pricing policies in the Australian context is not a good option. It might be helpful instead to get a solid grasp on all the factors driving the high cost of parking – including oligopoly pricing by a small handful of operators. 

We also need to understand clearly the benefits of city parking before treating it like a disease and trying to eradicate it, or the patient will suffer. And we also need to be very clear on what alternatives exist and the genuine likelihood and extent to which public transport can replace the private vehicle, given our urban scale and the nature of our urban economies.