What we earn.

Discussions about housing affordability focus almost exclusively on the price of the real estate, movements in which are monitored by multiple organisations on a seemingly daily basis. There is comparatively little discussion about people’s incomes, which are equally as important as prices in determining what can and can’t be reasonably afforded. The income profile of what most Australian’s actually earn paints a sobering picture which could more often be taken into account in debates about housing and affordability.

It’s becoming fashionable again for business lobbies to complain about Australia’s high wage structure. It explains, they’ll argue, why we lost Holden, Ford, Toyota, and (almost) Qantas, among other things. And yes, Australia’s wages are high by competitor standards - but so are our costs. One of the most fundamental of needs, along with food and clothing, is shelter. And it’s the cost of shelter relative to incomes which has been stretched to beyond reach for a large proportion of young Australians.

Reducing minimum wages or reducing wage growth further, if at the same time allowing housing costs to further escalate, will only make this situation worse. Arguably, if we could substantially reduce the cost of supplying new housing, this would relieve upward pressure on wages and work towards improving our global competitiveness – along with repairing living standards for working and middle class families, rather than eroding them.

First, here are some of the facts on the infrequently discussed income side of the equation. (I am again indebted to the team at Urban Economics for making these available. These are top line numbers only: if you want more detailed analysis, please contact Kerrianne Bonwick).

Nearly two in three of all Australians earn less than $52,000 per annum. It doesn’t much matter whether it’s Brisbane, Sydney or Melbourne; the proportion is roughly the same.  It’s not much. Slightly more than another one in every eight earn from $52,000 to $78,000 per annum. Roughly eight in ten Australians earn less than $78,000 per annum.

Personal Incomes

	Brisbane	Sydney	Melbourne
< $52,000	64.4%	62.8%	65.4%
$52,000-$78,000	15.0%	13.8%	14.1%
$78,000 to $104,000	7.0%	7.2%	6.4%
> $104,000	6.3%	8.2%	6.5%
Not Stated	7.2%	8.1%	7.7%

Source: Urban Economics

Problem? It is if you’re trying to buy into the housing market. Take a modest house of say $400,000 (very modest depending on location). A worker on $50,000 – and these represent nearly two thirds of all workers remember – is facing a price multiple which is 8 times their gross pre-tax income.  Basically, two thirds of us are stuffed in terms of affording even a modest $400,000 property if we weren’t already in the market. A more reasonable price multiple of say 5 times income would require an income of $80,000 per annum or more. But there are less than 15% of Australians who fit this category.

But wait, shouldn’t we count household, as opposed to personal, incomes? A good point, particularly for younger families and young couples, where dual incomes are the norm due to necessity.

But even based on combined household incomes, a third of all households earn less than $52,000 per annum. Another 14% to 15% earn between $52,000 and $78,000 and another 11% or 12% earn between $78,000 and $104,000. A reasonably healthy 30% of all households bring in a combined $104,000 per annum or more, but seven in ten bring in less than that.

Taking our modest $400,000 home again, and  roughly half of all household incomes fall short of the $80,000 mark required for a price-to-income multiple of five. For one in three of every households, their combined income means a price to income multiple of eight times. They are pretty much stuffed, still.

Household Incomes

	Brisbane	Sydney	Melbourne
< $52,000	32.8%	32.2%	34.3%
$52,000-$78,000	15.5%	14.1%	15.5%
$78,000 to $104,000	12.3%	11.3%	11.8%
$104,000 - $156,000	18.1%	18.0%	17.1%
$156,000 - $208,000	7.7%	8.7%	7.3%
> $208,000	3.6%	5.5%	3.8%
Not Stated	10.1%	10.3%	10.4%

Source: Urban Economics

Hang on, isn’t it more relevant to focus on the demographic that’s more likely to be trying to get into the property market, because older people and retirees, who already own or are paying off homes, may skew the figures? Absolutely: this is the key demographic, especially if you’re a developer of new detached housing product - which is what this cohort mainly wants to buy to raise a family in (as opposed to the apartment they might rent while pre-children).

Personal income profiles of the 25-34 year old age group are pretty much in line with the Australia wide picture. More than half earn less than $52,000 and roughly eight in ten earn less than $78,000 per annum, which means eight in ten of this age group – who are at the peak of their family formation potential – would be faced with a price multiple of more than 5 times incomes on a $400,000 property, and more than half would be faced with a price multiple which is eight times their income, or more.

Personal Incomes 25-34 year olds

25-34year olds	Brisbane	Sydney	Melbourne
< $52,000	55.2%	52.9%	56.2%
$52,000-$78,000	23.1%	21.7%	22.9%
$78,000 to $104,000	9.3%	10.0%	8.4%
> $104,000	5.6%	7.4%	5.4%
Not Stated	6.8%	8.0%	7.0%

Source: Urban Economics

None of this is great news. For developers trying to provide affordable new housing in new greenfield estates in urban fringe locations, the reality of these income profiles can’t be escaped. I had the privilege of visiting one such estate in south east Queensland recently and what I saw was absolutely first class product at very good entry level prices in a very well designed environment. No ‘McMansions’ here – just quality new detached three and four bedroom homes, on small lots, priced from around $350,000 - and in some cases less.

But even at $350,000, only around 15% or so of the target 25 to 34 year old demographic could afford to get in with a price multiple of less than 5 times an individual’s income. That proportion would rise taking into account combined incomes for this age group, but it won’t rise beyond around a quarter or a third.  The reality is that more than half this age group would find an entry level $350,000 home would be six times their combined incomes or more. It would be tough going.

Granted, interest rates are currently very low and some governments are offering stamp duty and other concessions to first time buyers. But these are having next to no impact on this market. Rates of first home buyer activity are at generational lows.  And interest rates won’t stay this low forever. A significant rise in variable home loan rates could tip a substantial number of families in this age group from the ‘just making it’ basket into the ‘we’re stuffed’ basket.

Since the ‘do nothing’ policy approach doesn’t seem to be working, what could be done to turn the situation around? Basically, it’s a simple formula between incomes and prices. You either increase incomes or reduce prices. The first probably isn’t an option unless incomes can gradually creep up with inflation and with productivity gains over time.

But what could also happen is the cost of supplying new housing (not referring to existing stock) could be reduced. New housing is heavily taxed and over regulated (the same cannot be said of existing stock). Something like a quarter to a third of the cost of the new home in an urban fringe location is due entirely to various taxes, charges and compliance costs (which do not apply to existing stock). It is also affected by the rapid escalation in land costs due to policy induced supply constraints in areas of ample available land (the same can’t be said of existing stock in mostly built-out inner or middle ring areas). Most of these additional costs of supply owe themselves to policy changes made since the early 2000s – precisely the time when the affordability gap began to widen.

It does seem a compelling place to start.

We should aspire to a more competitive Australia but this policy effort cannot just focus on labour costs because our incomes, while high by competitor standards, are now generally insufficient to cover one of the basic necessities of life: shelter. We have made this happen because policy makers have deliberately increased the cost of delivering new housing with new taxes, charges and compliance costs, all justified on esoteric planning or sustainability principles but impossible to justify on social equity or economic grounds.

These policy changes were made to suit political agendas at the time: they were not needs-based or market-based policy changes. (It also has to be said the political agendas at the time were in the hands of Labor State governments, starting with Bob Carr in NSW but which spread rapidly to other jurisdictions. Why Labor Governments introduced policies which hurt people on working wages is as mystifying to me as to why Liberal Governments have continued to maintain the same policy positions, with minimal amendment).

The gap between the cost of supplying even relatively basic housing on the urban fringe, and the incomes of the people who in past generations could afford it, will continue to widen unless regulators and policy makers begin to grasp the wider economic consequences of policy-inflated costs for new housing supply.

Footnote: why a five times multiple? There is no strong reason. The authors of the global housing affordability report Demographia will argue that affordable housing should be around three times incomes. Moderately unaffordable they define as between 3 and 4, and between 4 and 5 is defined as ‘seriously unaffordable.’ The multiples of 7 or 8 times incomes, which we’re seeing in Australia, are off the scale. But for the purpose of argument, if even relatively high (by international standards) multiples of 5 times incomes seems like a utopian dream, it illustrates how far incomes need to rise or costs of new supply should fall before we get even close to the situation that prevailed for most of our history. It’s a big challenge.

In praise of accidental cities

Most of the built form we know as our cities of today was built before complex town planning regulations were developed. The irony is that it is the accidental parts of our cities – the parts developed during periods of the least regulation – that we now seek most to protect.

An increasingly urbanised world is placing pressure on governments and policy makers to more carefully control the use of land within recently defined urban boundaries. But this is, in terms of the history of our urban development, a largely modern construct. Regulatory town planning itself is largely a post-war concept, first notably embodied in the UK Town and Country Planning Act of 1947.  There had been previous ‘town planning’ Acts prior to this in the UK but the 1947 Act significantly overrode land ownership and required virtually all proposals to seek planning permission from the local authority.

Given the post-industrial state of much of urban Britain in the pre and inter-war period, it’s not surprising that regulators sought more control over how land was used and for what purposes. Well intentioned urban planners sought to segregate housing from industry and to carefully define and control how future urban expansion occurred. Higher standards of living, less pollution and the pursuit of a more equal society were among the motives. (The extent to which these hopes were achieved is open to much debate).

Fast forward some twenty or thirty years and to the antipodes, and Australia’s turn was to come. Our urban development history had largely been a free enterprise model until perhaps the mid 1970s but certainly by the mid 1980s regulators were having more say in land use policy and controls over private land. Prior to this, the 19th century had seen industrial and housing uses develop in close proximity, often centred on transport nodes such as sea or river ports. It was a walkable society back then because there was no other choice, expect the horse, which wasn’t so much needed when the factory or wharf was only a few blocks from home. Tiny workers’ cottages and terraces sprung up in amongst the tanneries, warehouses and factories of industrial pursuit.  

The 20th century witnessed a gradual transformation of work from blue to white collar. Australia by the 1960s was a very different nation – with a rising middle class, white collar employment and the post war baby boom in full stride (or should that be ‘crawl’ under the circumstances?). Suburban development took hold and an upwardly aspirant middle class quickly embraced the quality offered by modern brick homes with flushing toilets and fancy kitchens (by their standards), with yard space for children to play – all features which had largely been absent from the homes they and their parents had grown up in.  Land was developed for suburban use with minimal regulation or control. Cities expanded and entire city administrations had relatively small building divisions with perhaps a few city engineers to ensure what minimal standards existed were met. The notion of town planning departments was something new, and novel.

But as growth continued and society progressed, governments found themselves under increasing community pressure to control and regulate this growth. By the time comprehensive land use regulation took hold, most of the structure of our urban form - including major transport routes, suburban housing development, centres of industry, of white collar employment, the locations of hospitals and schools – all had largely been developed and delivered, as if by accident.

There is no question that modern town planning has helped deliver some very high quality outcomes. Witness in particular the large swathes of urban renewal projects which have leveraged private capital to transform brownfield and largely abandoned inner city industrial land into high quality (and high priced) inner urban housing and commercial developments. 

But the point should be remembered that there are limits to what regulation can provide and there are benefits of enterprise-driven development which are too quickly forgotten. ‘Accidental cities’ has become a derogatory term used by those who see benefit in increased planning control over public and privately held land. The price of not intervening through fine grained regulation, the argument goes, is inefficient cities which lead to inefficient economies.

For me though, this has a touch of Stalinism about it. There are huge sections of cities globally which are now feted for their character, and they are invariably parts which developed ‘by accident’ through free formation of common interests and private capital, unrestrained. Often messy, sometimes disorganised and invariably hectic, they are nonetheless the places that feature in tourist brochures. Think of Singapore’s Chinatown, or Hong Kong’s night markets. Think of Venice’s canals, New Orleans’ French Quarter, or New York’s many ethnic enclaves like Little Italy.

I struggle to think of many places elsewhere in the world which were created under the rigid guidance of regulatory planning, which we’d like to mimic or replicate. To me it seems very much the accidental parts of cities that are somehow more ‘real’ and less reconstituted. It’s as if we can tell the difference, without even really thinking about it.

So it should come as no surprise that it’s also these parts of our cities that we tend to want to preserve. They aren’t necessarily just historical structures or places – sometimes, like the laneways of Melbourne’s CBD – they can be uses which have sprung up as if despite of – or in defiance of - the regulator’s rule book.  

What this means for modern town planning is that the efforts to control and command in fine detail the nature of urban outcomes – even down to deciding what type of retail shop should be allowed in one place or another for example – is actually counter-productive. It stifles competition and smothers creativity. 

There is a balance between the planned and the accidental and to find where that balance lies first means appreciating that accidental cities, or the things that are allowed to happen without intervention, can have as much appeal as those parts which have been carefully planned, controlled and documented. 

Perhaps once we begin to appreciate the design dividend that is delivered through accidental aspects of urban development, we might as a community become less wedded to the idea that only more regulation can achieve the quality urban outcomes we most admire.

Cattle and Cane

What has this Go Betweens song from the 1980s got to do with proposed changes to the south east Queensland regional plan? Surprisingly, there are some common themes…

In the early 1980s, when Go Betweens songwriter Grant McLennan penned ‘Cattle and Cane’, south east Queensland had a population of around 1.5 million. Today it’s around 3 million and predictions are that this figure will rise to 4.5 million by 2030. Much about the south east – one of Australia’s fastest growing conurbations – has changed in that time, most of it for the better in my view; some of it for worse.

But it’s some of what’s also been protected from change that is somewhat ironic. I’m referring to fields of sugarcane or expanses of cattle grazing land, which remain under a number of planning controls, protected from urban development. These are some of the landscapes McLennan referred to in his song, drawn from memories of the family farm in north Queensland:

“I recall a schoolboy coming home

through fields of cane

to a house of tin and timber”

A resident of south east Queensland when he wrote these words, McLennan would have seen considerable expanses of active sugar cane farms and cattle properties surrounding what was then the urban fringe but what we now know as established suburbs. A drive to the north or south coasts from Brisbane passed through these farmlands, many of which have since given way to housing and non-residential uses demanded by the rising population that now lives here. We need houses to live in, schools for our children, shopping centres, entertainment venues, roads, parks, hospitals, civic buildings and more. It all requires land.

In response to this growth, regulators sought to contain ‘sprawl’ and protect environmental and other features of the region while pushing higher densities of development into existing areas. This became a central plank of what ultimately became the ‘South East Queensland Regional Plan.’  In common with other metropolitan wide plans of the time, it introduced an ‘urban growth boundary’ beyond which future urban growth was virtually prohibited. And even within that boundary, some land uses were protected from development – rural land uses included.

This in many ways is a fine political sentiment for the middle classes of the inner city to ruminate on. The idea of protecting farmlands from urban sprawl hits a nerve with a community who no longer care where their milk comes from, or that buying it for a dollar a litre (less than they happily pay for water or petrol) is sending dairy farmers broke. The hypocrisy of expressing concern for the retention of farming lands while adopting consumer behaviour which renders these enterprises uneconomic is a topic for another day.

Protecting farmlands (as opposed to protecting farmers) needs to be about much more than protecting the view corridors enjoyed by residents en route to their coastal holiday locations, or appeasing the interests of planners who want to see swathes of green open space on their regional plans. If the enterprises are no longer economic, arguing for their preservation is forcing a form of poverty onto farming families that can in many cases only be relieved by the ability to sell the land for a higher and better use. And that use would be housing, which the regional plan prevents them from doing.

Take sugar cane for example. North and central Queensland have large and viable sugar industries (though some farmers in these areas would argue even that’s debateable). They still have operating sugar mills to process the raw cane for domestic or export consumption. But the sugar industry in the south east corner isn’t really viable any longer. Burning cane (described in the song as “and in the sky, a rain of falling cinders”) would no longer be tolerated in a heavily populated south east. Green harvesting is now the go. But the sugar mills long ago closed down, with the sole exception of Rocky Point near Pimpama. A mill at Eagleby closed in 1943 and the Nambour mill closed in 2004. Basically, better conditions for growing sugar cane are found in northern climates and the economic realities of life have a way of taking over. It’s probably why the sugar cane fields found in the 1860s around the Brisbane suburbs of Chelmer, Corinda or Bulimba long ago surrendered to the obvious.

But under our current planning scheme, fields of cane are a protected feature of the landscape. The cane grown on the fields near the Sunshine Coast must be transported to Maryborough for milling. Hardly economic but what choice is there? Are there environmental grounds to support their retention? Perhaps driving past cane fields in your BMW at 100kph gives an illusion of ‘green space’ but in reality, canefields have next to no ecological value. They are full of the appropriately named cane toads (a noxious pest), rats, and snakes and not much else. A hectare of land given to housing would support more native plant and wildlife in people’s backyards than a hectare of cane land.

Cattle country isn’t much different. Much of the grazing land around the outer edge of the urban growth boundary is marginal, at best. Soil types can be sandy or rocky (and not hold moisture) and irrigation isn’t feasible for most given limited underground water supplies and the lack of flowing fresh water rivers. Currently, much of this country is in drought. Take a weekend drive anywhere from Jimboomba through Undullah to Peak Crossing, Laidley, Esk, Toogoolawah or Kilcoy and have a look. Sure this is a seasonal problem and this isn’t a good season, but the country itself – with some exceptions - isn’t the best for grazing. New techniques in raising beef, including the advent of feedlots, new or improved pasture seed types and changes in farming practices mean that in good country with dependable rainfalls and good soil types, more cattle can be raised on less land, faster, than ever before.

Queensland and the NT’s cattle herd is over 15 milllion head, compared with less than 12 million in the mid-1990s. So we are not going to run out of cattle for meat. The question is: do we need to insist on raising it on our urban fringe by withdrawing permission for owners to put that land to alternative uses?

Persisting with the retention of cattle properties on the edge of the urban fringe, only in order to suit some inner urban sensitivities about the loss of nearby farming land, is an unreasonable imposition on those farmers and illogical at best. Plenty of farmers would persist in being illogical and continue to run cattle despite what nature and the economy is telling them even if alternate uses were permitted: but there’s a difference when it’s their decision to do so, or a mandate imposed on them by others.

The same applies for sugar. The same actually applies across a range of land uses where privately owned land is prevented from adopting a higher or better use simply because a planning scheme says so, in defiance of economic logic or even common sense. If the community are so fervently attached to the idea that other peoples’ private land must be retained for these particular purposes, then perhaps the community should buy them out? At the very least, it ought to be the landowners right to seek economic uses for their land, especially if the pre-existing use is no longer economically feasible.

Cattle and Cane may have been a feature of south east Queensland life even as recently as the 1980s when the population was 1.5 million. But to persist with these practices out of nostalgia or to appease shallow and ill-informed community opinion will make little sense in the Brisbane of the 2030s - when the population reaches 4.5 million.

“from time to time

the waste memory-wastes

the waste memory-wastes

further, longer, higher, older”….

Office market drivers

There’s a lot of hand wringing at the vacancy rates being reported for office markets at the moment but in more than 20 years, the analysis hasn’t progressed much beyond basic questions of new supply and gross demand. Other factors are at work.

The latest Property Council office market survey reports Brisbane CBD vacancies as ‘the highest level on record’ at 14.2%. That’s up from 12.8% the year before. The report attributes this to weak demand, specifically a “reflection of the impact of the Queensland Government’s continued withdrawal from leased space, coupled with the mining sector’s revaluation of its office space requirements.”

No, it’s not a pretty number and according to the PCA figures it’s at present the worst of major markets in the country:

But these are just headline figures. Sure the Queensland Government has reduced its requirement for space, but that followed a sustained period of bloated public sector growth under the previous government. And sure the mining sector isn’t on fire any more, but no one seriously thought it would ever stay that way. That’s why mining related businesses were only taking space on 5 year leases: they knew themselves this wouldn’t last.

So beyond the headlines, what are some of the other things that might be driving change in the market?

First, remember that a 14.2% vacancy rate is the same as an 85.8% occupancy rate. Most industries with that sort of capacity utilisation would be over the moon. It’s a quirk of history that office markets have always reported on vacancies rather than focus on the occupancies. That’s unlikely to change but what it means to seasoned observers is that this isn’t the calamitous disaster media headlines might have us believe. Plus, take into account that a fully occupied market is generally regarded to be around 95% occupied; that 5% vacancy being required for normal movement. Any less and the market is under supplied. So really we’ve got about 10% of surplus space sloshing around in the market now.

Much of that space is sloshing around in lower grade buildings and what typically happens is that these are withdrawn from stock because they can’t compete with contemporary space and the facilities it provides. Owners can refurbish older buildings, or convert them to alternate uses such as residential or short term accommodation. Expect a lot of both to happen in coming years. Those stock withdrawals will to an extent offset stock additions through some of the new projects under construction.

On the demand side, apart from blaming a downsizing by government and mining tenants, what other factors are in play?

Rents are surely one. Talking about office space demand without mentioning rents is a bit like talking about demand for petrol without mentioning the price. High construction costs, site acquisition costs and development costs mean that delivering new CBD office buildings is not a cheap exercise. Our CBD rents are some of the highest in the world. This Cushman & Wakefield report makes for interesting reading. According to the report, Brisbane is roughly 80% of Manhattan Grade A prices, is more than Melbourne, is 50% more than Houston Texas and three quarters of Sydney rents. Sydney rents are higher than New York. Go figure that one. Ask Holden, Ford or Qantas about the globalisation of markets and what happens to Australian product that is overpriced. Will that affect demand for office space if companies simply shift operations elsewhere, or are they faced with no choice but to pay globally high rents for what are not global scaled cities?

The other effect of high CBD rents is also force some hard thinking about the relative benefits of CBD over fringe. A lot of companies have recently opted for the latter. This could also be affecting demand for space in key CBD markets.

Floorspace ratios are another factor at play. New tenancies for major business are often being designed around per person space ratios as low as 10 metres per person. Concepts like ‘hoteling’ where staff don’t have their own desk and where personal effects are discouraged, have fad surfers enthralled and financial controllers impressed. Personally, I can’t see this lasting. We’re human beings after all. Plus, it’s only ever a handful of companies that explore the boundaries of these management fads and seek publicity for doing so. The silent majority of office tenants are as inefficient as ever, with spare desks and large common areas so the average in my opinion still works out at around 20 metres per person. Either way, it’s an important factor on the demand side which isn’t discussed much.

Parking costs are another factor. This is more a problem for casual parkers than permanents but both are paying exorbitant prices. If you are CBD based and have clients visiting your office, you should feel some sympathy for the $50 they’ll shell out just for a two hour visit. These are some of the highest costs in Australia and equally some of the highest in the world. Those urban planners wanting to ‘keep cars out the city’ may succeed if this pricing response to limited supply keeps following the same trajectory. But if you keep the cars out of the city, you’ll keep the people out too, and along with them, their business. The very high cost of parking, both for tenants and customers of those tenants, could be another factor weighing against demand for CBD space.

These are just some of the considerations that reach beyond the basic numbers. There are more but the point is that a 14% vacancy rate owes itself to a wider range of market forces than superficial reports deal with. 

Is 14% a cause for concern? That depends on where the vacancies are… in someone else’s building or yours. 

Housing: positive signs but one worrying trend.

The real estate commentariat have kicked off 2014 with broadly positive views on housing markets and house prices. Media reports are running strong with headlines about ‘booms’ but amongst the positive signals in the market lies one worrying trend.

After such a long period of subdued market conditions, you can’t blame people for being positive when signs start to emerge of strengthening demand for housing. Developers, once struggling to find sufficient depth of buyer demand for their product and meeting plenty of buyer resistance, essentially put projects on ice for several years. Now they’re being dusted off, particularly for apartments, as buyer demand re-emerges from a long hibernation.

The recent ANZ-Property Council industry survey reported a significant lift in confidence, particularly in Queensland and NSW, when it came to housing market performance driven by investor demand.  Then there have been other reports equally buoyant about the prospects for growth in 2014. Take this one, for example, by credit reporting agency Veda which glowed about ‘the strongest levels of housing finance in four years.’ The headline finance figures are good, and the dwelling commencement figures will also strengthen during the year – mainly for apartments – as more approved projects move into the construction phase.

So with record low interest rates, which look like staying down for some time, and with rising housing finance commitments and rising prices, what could there possibly be to worry about?

As usual, digging a little below the surface of headlines can be revealing. While total new housing finance commitments are rising and this is a sign of stronger overall demand, that demand is coming almost entirely from investors and upgraders. First home buyers, despite the record low interest rates, remain largely still absent from the market.

The graph below shows the trend since 2000, when First Home Buyers (FHBs) represented roughly half the total finance as investors and roughly a third of that of upgraders. Over the decade, that broad relationship has blown out, as investors and upgraders have become more and more dominant in the market.

By late 2013, investor demand had risen from twice that of FHBs to more than four times that required by FHBs, with upgraders keeping pace with the investors. (The bump in FHB demand in 2009 represents the impact of temporary additional FHB incentives).

The growth in this spread is a clear sign that something has fundamentally changed in our housing markets. First time buyers are becoming an at-risk species of buyer while investors continue to add to portfolios of rental property every time their existing equity increases, and upgraders do likewise. At auctions and open homes, whether for apartments or detached homes, the competition from investors is intense, with first time buyers outbid.

Macrobusiness’ Leith van Onselen described this process as it’s been happening in Sydney as “speculators continuing to eat their young.”

For developers, this is not a market problem. Their role is to respond to opportunities and work within planning frameworks (as dysfunctional as they might be) to deliver a product that sells. It is not the market’s role to be concerned about the absence of first time buyers, or what this means for Australia as a society.  

This is, however, a legitimate role for public policy makers. If falling rates of home ownership amongst a younger generation of Australians is not of concern, then no policy action is needed. If we believe it’s not a problem for this generation to reach future retirement with large mortgages or never having owned and saved through housing, and for them to be more dependent on the future  taxpayer, then no action is required. But for a host of reasons, many of which I outlined here, it’s my view that some policy interest in this widening gap – and its consequences for our society -  is long overdue.

Don’t get me wrong. I’ve been hoping to see an upturn for some years now. This downturn has been longer and more frustrating than others I can recall, which were typically deeper but much shorter. The general improvement in housing and construction will generate significant employment, add to confidence, and restore depleted government revenues. So in the main, it’s a good thing. But it is hard not to be concerned about the lack of policy interest in the absence of first home buyers, and what that could mean down the track.

So while the media headlines continue to crow about a housing recovery in 2014 and beyond, it might be worth sparing a little time to question if this dominance of demand through investors and upgraders is a balanced market, and whether it is sustainable. If not, how long before the music stops?

Why our Federal Government needs to get into housing policy

There are many good reasons not to want more bureaucracy in Canberra. For starters, we can’t afford it. Second, more bureaucracy rarely leads to better public policy outcomes – often it makes things worse. Third, just because there’s a Minister and a Department for something, doesn’t mean it does anything (witness a Federal Education Department with no schools, or a Federal Health Department with no doctors). But housing, just maybe, is different – and here’s why.

The engagement of the Commonwealth Government in housing and housing policy has a sketchy history. Traditionally, if anything, the Commonwealth limits its role to some social housing programs and makes grants to the States under the Commonwealth State Housing Agreement. (Why call it an agreement though, when it mostly seems to involve disagreement?).  Labor Governments have been more prone to enter housing and urban policy through initiatives like the ‘Better Cities Policy’ under the Hawke-Keating era, or NRAS under the Rudd-Gillard-Rudd era. Liberal Governments by contrast have tended to consistently argue that housing policy is mainly a matter for state and local governments (which it is) and that the Commonwealth has a full enough agenda as it is (which it does). For this reason, conservative governments typically withdraw from the policy space after Labor Governments expand into it (witness the new Abbott Government’s early decision to scrap the National Housing Supply Council, formed under Labor in 2008).

But this aversion for close engagement with housing policy sits at odds with other areas of national life, where our national governments – irrespective of political colour – are expected to play a role. If petrol prices, for example, skyrocketed overnight to over $2.50/litre, I can’t imagine our Federal Government would leave it with a ‘no comment.’ If health insurance costs rose even faster than they are now, and hordes of people left the private system, you know the Federal Government would be there with its hands on the policy levers.

Housing is for nearly all Australians the biggest single investment they will ever make. Much smaller investments in superannuation are heavily regulated. Relatively small bank deposits and the meagre interest they earn, also heavily regulated. Even relatively inconsequential transactions with retailers arguably have more national public policy focus than the housing market (and of late, the rise of online sales will likely increase this involvement in the chase for GST dollars).

I am not for a moment suggesting regulation of housing markets, just that our national government (irrespective of politics) might want more of an informed say in how the market operates under national, state and local government regulatory controls, for the following reasons:

·      The Federal Government is a direct beneficiary of new housing construction via the GST (which only applies to new dwellings). A typical $450,000 new house or apartment includes $45,000 in GST revenue collected by the Commonwealth (and ultimately redistributed to the states). There are currently (roughly) 150,000 dwelling starts each year in Australia, so multiply that out and you get (even more roughly) a healthy $6.75 billion per annum in GST on housing alone. Housing starts are currently at a 30 year low. To return to the long term average, they’d need to rise by a third. That means another $2billion in potential annual revenue for the Federal Government if the market returned to its long term trend. I’d call that an incentive. (You could argue that the GST is a state tax, which it is. But the original deal by the states promised they would ditch stamp duty in favour of the GST. They didn’t. The Feds may redistribute the GST revenues but they also have a clear interest in how much revenue is generated and economic efficiency generally).

·      Our banks are heavily exposed to housing. Read the financial press and even if you disagree with the World Bank and others, it’s clear that if housing fails in this country, the banks fail too. Now I don’t think housing will fail and I don’t think there is a ‘bubble’ but I do think there is serious malfunction of policy as it applies to new housing. You’d think a connection between a healthy housing sector and the viability of the banking sector would be a good reason for some more formal public policy interest?

·      Our Reserve Bank is concerned. Read the many statements by Governor Glenn Stevens, and even go back to the era of Governor Ian MacFarlane. The Reserve Bank itself understands the importance to the economy of creating new supply rather than inflating existing prices and frequently passes comment on this. The RBA is also acutely aware of the relationship between monetary policy and the housing market, along with the rest of the economy. I’d call something of such interest to the RBA also something that should be of more formal interest to a Federal Government.

·      There’s a clear question of generational equity. Young people are finding it harder to enter the market. Low cost, new housing has all but disappeared. Income multiples for people on low to median wages are too high, so home ownership is either deferred, or abandoned by many. This also increases pressure on social and assisted housing (meaning taxpayer funds).  But as prices rise, those already in the market gain as their equity grows. These people can leverage their equity to buy more housing, as investors. They compete for lower cost housing against first time buyers or lower income households, and win. It is creating a new landed class, which is a tragedy for a nation which prided itself on its egalitarianism. I’d call that a compelling social policy reason.

·      There’s a demographic and retirement funding issue to consider. Research suggests that in the future, a small minority of retirees will retire owning their own home. Some reports estimate that in the future, more than 90% will retire with a mortgage. As our population ages and we live longer, that’s a very unstable economic base for future retirement funding and aged care. It’s looming like a massive demographic sink hole of increasingly welfare dependent old people, with fewer assets than the comparable generation today. Getting young people into the housing market and saving to own your own home has a very strong economic case going for it. I’d call that a good reason for the Federal Government to be more closely involved.

·      There’s evidence it is changing our society. People are deferring family formation, and having fewer children, and mortgages (if you have one) take up more and more of your household income, meaning less to spend on the rest of the economy. Peter Costello wanted us to have one for dad, one for mum, and one for the country. If housing were more affordable, maybe we would.

·      Politically, it’s more than important. Any government which moved to (for example) tax the family home would quickly find the voter sentiment on this issue transgresses all political boundaries. Supporters and opponents alike would turf them from office. Liberal Prime Minister Bob Menzies many years ago wrote of the central importance of home ownership (in his landmark ‘Forgotten People’ speech in 1942). Many national leaders since then have echoed those sentiments (though few expressed them better). If home ownership and housing is so central to our family way of life, and given we’re confronted with increasing concerns that this is being fundamentally changed by dysfunctional regulatory and planning policies, it would seem reasonable grounds for a more formal presence in housing policy debate.

This does not mean we need a Federal Housing department or a Minister for Housing. But it could warrant a small advisory unit with the ‘real world’ knowledge of how new housing supply is affected by the three levels of government, and what sorts of measures should be avoided and which promoted to create a healthier system with less distortion.

Land use and planning policies introduced around much of the country from the early 2000 onwards have had a serious impact on the strength of the new housing sector. That means not only less income for the Federal Government, but less economic activity (ie jobs) and potentially more long term welfare dependency.

In those circumstances, the Commonwealth is entitled to express a say in the efficiency or otherwise of planning and development policies that affect this market. In fact it’s entitled to demand it. 

The design dividend

When money is tight it’s easy to dismiss the importance of good design and focus instead on the lowest possible costs and build rates; the cheapest structures and cheapest materials. Ironically though, good design is even more valuable in difficult economic periods, because it is then that the difference between quality and mediocrity becomes even more apparent. In the year when we mark the 40^th anniversary of the Sydney Opera House, it’s worth reflecting on the economic value of design.

If you think back in Australia’s history, some of our most impressive buildings were public structures. Town Halls, Parliaments, and even train stations showed a commitment to design which continues to be valued today because these are usually the structures we are most concerned at protecting. Private institutions like banks, Churches and some schools also invested heavily in design, reflecting their view that these buildings and the businesses within them would be around for a long time.

In the post war period much of this changed, and that change is largely still in place. In the main, government buildings and public structures are now designed to fit increasingly skinny budgets. The Sydney Opera House, opened in 1973, suffered an ongoing storm of controversy over its budget for many years. The final tally was $102 million against an original budget estimate of $7m, and a ten year overrun in estimated program. The sort of public outrage this caused may have left an indelible mark on our psyche, but whatever the cause, government projects today are far more utilitarian in ambition. This often translates into structures which outwardly exhibit little apparent design effort.

On the surface, the reasons are easy enough to understand. Governments, under pressure to meet a growing list of social welfare and other priorities, simply do not have the funds for ‘lavish’ public buildings. Plus, the occupants of public buildings (mainly public servants) aren’t deemed worthy by the media or commentariat of anything more than purely functional space. This can also mean appearing to be penny wise in front of a critical taxpaying public by eschewing ambitious design.

But good design isn’t all about aesthetic features or flamboyant structures. And it is here that the value of good design perhaps needs better appreciation. Good design should also mean more efficient buildings: structures that use less energy, allow more natural light, are better ventilated. This leads directly to lower building operating costs, which reduces costs over time and which enhances asset value over time. Plus, we’ve all heard of ‘sick building syndrome’ and whether you believe it or not, there does seem to be evidence that well designed buildings foster happier occupants who take less sick leave and who are more productive. 

Good design has other economic benefits. It can mean that vacancies are lower even in competitive markets when supply is plentiful. Retail landlords know this well. A well designed retail centre will attract more customer support, which translates into more spending at the til, which translates into better occupancy. Retail centres are frequently redesigned for this very reason: they need to remain competitive.

There is also a social dividend from quality urban designs. As a community, we want to feel proud of our built environment. We may not want to see our taxes paying for too much of it, but we nevertheless are quick to express disappointment or outrage when ‘ugly’ public or private buildings appear on our landscape. Quality public spaces which have invested in good design are also some of the most popular destinations for locals and tourists alike. Think Southbank in Brisbane, or Federation Square and surrounds in Melbourne.  This builds a civic pride in public spaces that is hard to value, but places with little civic pride are easy to identify.

Good design also applies to our homes. Architect designed homes (particularly the good ones) hold their value over time, and tend to attract market premiums. Even when the original materials and fittings have dated through time, the structure and the way in which spaces are organised is usually evidence of good design. Materials and finishes can be updated when needed but getting the design right first is what provides the long term value.  

New developments also benefit from quality design. There are many good architects and developers who appreciate this, so it is hard to single any out. But if I had to choose, the Anthony John Group’s ‘Southpoint/Emporium’ project at Southbank in Brisbane is one example. This is evidently achieving a lot of early success in sales, due no doubt to the group’s past reputation for investing in quality design (the developer is himself an architect) and also no doubt due to the design effort that has gone into this development. The market can sense quality, and will pay a premium for it. Other product also on the market which has been more driven more by cost than design isn’t enjoying the same success or achieving the same premium in today’s market.

None of this should be interpreted as a call for public monies to be squandered on aesthetics of public buildings when basic economic services are competing for funds and deficits need to be repaid. It applies as much to private developments as public. But for public or private, maybe we need a rethinking of the value of quality design as something that provides measureable economic benefit and long term civic value.

The Sydney Opera House may have cost $102 million against an original budget of $7m but Deloitte recently estimated that it now contributes $775 million to the Australian economy each year with a cultural value of $4.6 billion. It has become synonymous with brand Australia itself. Imagine that sort of rate of return across our entire built environment?

For some case studies of the Design Dividend, have a look at www.designdividend.org.au  and some of the examples there, along with one rather famous supporter. I’m proud to say that I was involved with this campaign and hope it continues to promote the value of the design dividend.

Bubble bubble, toil and trouble

Apologies for distorting Shakespeare’s Macbeth, but recent talk of a housing ‘bubble’ in Australia is increasingly reminiscent of Soothsayers with bubbling cauldrons of economic brew.  While dire warnings of impending doom are taking things too far, there are good reasons to be concerned about housing dysfunction in Australia.

The definition of a market bubble is where prices trade at high volumes and at prices which are detached from intrinsic value. We usually only spot a bubble after the event – when prices drop sharply. Australia’s housing markets may be dysfunctional and structurally distorted by taxes and regulation, but to suggest they are in a ‘bubble’ is a simplistic observation based mainly on some recent positive movements in the established house markets of Sydney and Melbourne. 

One of my main complaints with many economists and much of the media is that they treat Australia’s housing market as a single product, equally subject to the laws of supply and demand. Apart from obvious geographic differences, there are very large differences between the established housing markets (trading of second hand homes in established areas) and new housing development. Few commentators, policy makers or reporters seem to understand the significant impact on input prices for new housing of things like complex planning regulations, the long lead times on new supply, the distortions to supply imposed by urban growth boundaries, the differential tax treatments on new supply through the GST and the per-dwelling infrastructure levies - none of which apply to established housing.

This weight of this regulatory and tax burden has largely been created by various state and local governments from the late 1990s onwards. It’s had a dramatic impact on new housing construction, pushing our rate of new dwelling supply per thousand of population to a thirty year low. Anyone looking at this depressing graph would be hard pressed to be talking about a ‘bubble’ in the Australian housing market:

While new taxes and regulation have succeeded in pushing the new housing market to a 30 year low in terms of new supply, the same can’t be said for the established housing market which has largely been left untouched by regulatory or tax creep for decades. It would be political suicide for a government of any persuasion to tamper with taxes or regulation of existing housing. (Somehow though, the same political caution hasn’t been felt in terms of new housing).

So the performance of the established housing market has been in stark contrast to the new housing market. And it is graphs like this which have ‘bubble’ proponents staring deep into their cauldrons:

The latter shows that established house prices in major centres have risen dramatically, relative to measures of economic growth and to average incomes. Does this constitute a bubble?

Certainly, for people on average incomes, entering the housing market via the established house market, especially in inner city or mid ring areas where supply of vacant land has been all but exhausted, can now be prohibitive.  Supply is constrained because established areas are built out. More people wanting to live in these areas means rising demand relative to supply, and when economic conditions permit (as they do now) prices rise.

With median house prices (based as they are on the sale of established houses) hovering around the $500,000 mark in many cities, you would ideally need a combined household income of $100,000 for this to be anything like affordable. $150,000 would be better. Having said that, there are enough families with two incomes bringing in over $100,000 per annum so that housing at this level is still accessible for some. But if your combined household income is less than $70,000 per annum, you’d be pretty much locked out of many housing opportunities in established areas. And there are also plenty of families and individuals who fit that description today.

So while I don’t see a ‘bubble’ I do see a structural problem which needs to be addressed. And that problem is that where once Australian cities offered a ‘pressure valve’ via low cost, entry level housing on the urban outskirts, the price advantage of this option has now been removed by public policy changes.

The arrival of Urban Growth Boundaries (UGBs) in the late 1990s to early 2000s created an immediate shortage of low cost land for new housing. Market pressure built up within these artificial boundaries and vacant land prices shot up, while lot sizes fell – a double whammy. The GST - which applies only to new housing - added 10% to the cost of a new home, and infrastructure levies compounded the problem, adding in many cases $30,000 to $50,000 per dwelling. Soon enough, we reached the point where between a third and 40% of the cost of a new home could be attributed to new policy initiatives delivered via our planning regulators and Treasuries.

Remember, the actual building cost of detached housing has remained largely unchanged for decades – at around $1000 to $1200 per square metre. But the land cost on which that house sits has skyrocketed, as have taxes on new housing, as has the regulatory compliance cost. So the new house and land option, which was once a low cost pressure valve accessible to young families and low to moderate income groups, quickly became just as expensive as established housing in inner city and middle ring areas. Little wonder the rate of new supply collapsed so quickly.

Look again at the graph above. The market distortion took hold in the early 2000s. It doesn’t matter whose graphs or analysis you use, it was around this time that prices for housing started to move well out of sync with incomes or measures of economic activity. It was also around this time that State Governments were busy extolling the virtues of growth boundaries to ‘contain sprawl’ and plan for ‘sustainable futures.’ It was around this same time that State and Local Governments latched onto the idea of per lot infrastructure levies on new housing as a means of raising revenues. It was around this time that the GST arrived, applying as it did only to new housing. It was a triple whammy effect that has so distorted housing markets that there are virtually no low-cost entry-level options left. The pressure continues to build on existing house prices while the new building market continues to suffer. That pressure isn’t coming from first home buyers, but from people already in the market: upgraders and investors. It’s also coming from overseas buyers, and (worryingly) from geared Self-Managed Super Funds.

Talk of an Australian housing market ‘bubble’ is too simplistic but appeals to media appetites for ‘boom’ and ‘bust’ scenarios. The real story behind Australian housing markets is more complex. For those prepared to invest some time looking into it, the signs of markets distorted by inequitable regulatory and tax measures are immediately apparent, particularly as they apply to new supply.

Older not wiser

Australia has an ageing society and while living longer is good news for many, there are some major economic issues we need to understand to avert a huge problem in the years to come.

According to a recent UN report, roughly half the children born in developed and developing economies after the year 2000 will live to 100. Australia is no exception to a worldwide trend of increasing life expectancy. We are ranked equal fourth in the world, with a current average life expectancy of 82. The number one spot is shared by Japan, Switzerland and San Marino, where the average is just another 12 months (83 years).

To put this into some perspective, the global average life expectancy in the early 1900s was just 31 years. In early modern Britain (from 1700 to around 1900) is was somewhere between 25 and 40 years. In Classical Rome and Greece, it was 28. Most of you reading this now would have been long dead after 40 if you’d been borne at any time prior to the late 1800s.

But modern diets, standards of healthcare and higher quality of life in developed economies mean that we’re all now living longer, on average. The only problem with this is that we’re still working on a pre-industrial model of employment, with an expectation that we’ll all retire sometime around 60 or 65. So if we’re going to start living on average well past our 80s, that’s going to mean a longer period without an income. For children being born today who might live to 100, that could mean a working career of 40 years, and a retirement period also of 40 years.

Compounding the basic maths of this problem for Australia is the baby boomer ‘bubble’ which has tilted our demography toward the older end of the scale. This means there are fewer and fewer people of working age, paying taxes to run the country, and also (somehow) to support an increasingly geriatric population.

Few of us it seems believe that superannuation is going to come anywhere close to supporting ourselves in retirement. Repeated surveys reported in the media point to a sceptical view of even semi prosperity in retirement. And the high cost of housing could make this all potentially much worse for Australia for two reasons.

First, fast forward 20 or 30 years. Fewer Australians are going to own their own home on retirement. At present, roughly 78% of retirees own their own home at retirement age. This report tips that could plummet to just 2% by 2050.  That could be a touch on the alarmist side but the consensus of these sorts of forecasts tends towards a gloomy view. Rates of ownership are falling and, as policy makers continue to fiddle with failed planning dogma, there’s little prospect of that changing. So at the oldies end of the scale, not only are there going to be many more of us aged over 65 (there were 2.5 million over 65s in Australia in 2002 and this will rise to 6.2 million in 2042) but for the majority of us, we may no longer even own the home we live in by the time we stop working. That’s a pretty fundamental component of today’s retirement planning up in smoke.

Second, at the younger end of the scale, the prohibitively high cost of new entry level housing is seeing more and more young people rent rather than enter the market. I am talking particularly here of new house and land packages on the urban fringe, the supply of which has been artificially restricted under land use policies introduced since the mid 1990s, and the supply of which was also discriminately taxed since around the 2000s (the GST combined with infrastructure levies and other charges apply ONLY to new housing supply).

There’s a growing class of investors who applaud every increase in house prices. But their enthusiasm should not be shared by sensible policy makers because this generation of today’s young people are not only being denied low cost entry level housing, but they will also be expected to pay a disproportionately high burden of tax. That’s because they’ll be among the minority of the population with jobs, supporting the rest of us without them. On top of this, they’re going to live a lot longer. Maybe to 100. So for some of them, their working lives will be spent renting other people’s property, paying higher taxes to fund a disproportionate number of old people, and then somehow fund a 40 year retirement.

It’s not sounding pretty, is it?

To me, this makes it all the more imperative that today’s policy makers understand the primary importance of promoting home ownership for all Australians. As an enforced means of saving, it beats superannuation, it promotes long term wealth generation and continues a long and successful tradition of home ownership for all in a prosperous and egalitarian society, as Australia has been.

That promotion of home ownership should not come through failed grants or financial stimulus to the demand side, but removing barriers and costs from the supply side. The rigid urban growth boundaries and densification policies which became fashionable under a succession of Labor State Governments since the mid 1990s are proven failures and should be abandoned. The discriminatory system of taxing only new supply through both the GST and per dwelling infrastructure levies is highly distortionary and has meant that between one third and 40% of the price of new house and land package can be attributed to taxes introduced only just over a decade ago.

Not only is it distortionary, it doesn’t even work: to the best of my knowledge, these upfront per lot levies account for only around 3% of local government revenues and there’s no way of linking the money raised to the things it’s supposed to be spent on (local infrastructure). Plus, it’s all but killed off the new home building industry, which is now producing fewer dwellings per thousand people than any time in the last 40 years, with the economic signals (unemployment being one) to show for it. Some achievement.

In summary, there’s almost no disputing that we’ll all be living longer, or that there will be more aged people as a proportion of our population than ever before. This can be cause for celebration, but it will also mean that the importance of home ownership as a broad social and economic objective for Australians needs to be returned to a central place in policy thinking, not shunted to the periphery of fashionable planning ideology as it has been.