Challenging Conditions

The Gold Coast is often a very good barometer of how the residential market is travelling in South East Queensland.  It holds many people’s dreams and the lustre of living and working in one of the nation’s more popular playgrounds holds a lot of appeal.  It has also attracted a significant proportion of southern investment money as owners pre-planned their holidays, retirement or simply enjoyed the opportunities of geographically diversifying their portfolio.

However, in 2010 the wheels fell off the residential market.  Certainly not in price which remained relatively stable, but in volumes.  When agents claimed that last year was one of the toughest they have encountered, the record shows that land sales were the worst in two decades.  And whilst many have short memories and only think of the good times from the last decade, the following years need to be taken into consideration;

• 1991 – Paul Keating’s recession we had to have;

• 1997 – The Asian financial crisis;

• 2000 – The Tech wreck combined with the introduction of the GST;

• 2008 – The GFC.

So with all those events behind us, 2010 comes along and produces a year where one would think that the GFC had only just begun.  The reality is that the stimulus that was added to the market in 2009 was so effective that the pull forward in buyers did impact the following year.  Combined with this looming perfect storm was the decline in interstate migration.  The Gold Coast has always been a healthy recipient of interstate migration and when this starts to fall, so do the number of sales.  The other contributing factor that any retailer will unhappily bemoan is the high Australian Dollar.  Tourism and construction represent two of the largest employers for the Gold Coast and both have been severely battered for two of the last three years.

In 1991, the Aussie Dollar was worth $0.78 USD, in 1997 it was $0.74 USD, in 2000 it was $0.58 USD and in 2008 it was $0.85 USD.  For much of 2010 and 2011, the Australian dollar has been hovering around parity, despite various world economic shocks.  So when you compare the major economic events of the past, the Aussie Dollar has somewhat insulated the Gold Coast market.  The GFC being on such a wide scale has meant that many international travellers (those residing in other parts of the world that can afford to travel) are looking to cheaper destinations…and that applies to our own countrymen as well.  Australians are travelling overseas in record numbers as a result of the strength of our currency and generally settled employment conditions.

So whilst the land market has been badly interrupted, the sale of $1m plus house properties has only fallen back to levels somewhere between 2004-2005.  This was a market that did not benefit from any government stimulation measures, suffered at the hands of margin calls and was effectively devalued to the point where the market recognised what fair value was/is.  It is hard to imagine the top end declining much more given that the pain has been more evenly spread over the past three years.  It would be remiss of me not to state the obvious, but 2007 does highlight what happens when money is easily borrowed and confidence runs at all time highs.  In real terms this a bubble that popped, particularly in terms of volumes.  Ask any agent that made their living in this market segment.

The point to all of the above is that the Gold Coast is one of the most diversified residential markets in Queensland.  It appeals to the first home buyer right through to the retiree with their 50 foot boat moored to the pontoon at the back of their house.  There is quite literally something for everyone…and it is for this reason that the Gold Coast will be an important indicator as to the strength of the rebound in residential property in Queensland.  

Floods, Fears and Forecasts

Before I get into too much detail, happy new year to everyone and to those effected by the floods, our thoughts are with you.  On that note, I hope I don’t offend anyone in the following commentary as that is clearly not out intention.  And praise where praise is due, the media has been outstanding with this event as has the public “will” to get their hands dirty and start the clean up.  It is enough to instil faith in the general goodness of communities, it is unfortunate it takes an event of this magnitude to bring it gushing to the surface.

One of the most common questions we have been asked after the floods have subsided is, “what are riverfront property prices going to do?”  Well in the short term one would anticipate that those that went under will probably experience a softening in value, whilst those that stayed dry are more than likely going to attract a premium. However, and it is a big however, the values of the properties that went under will be significantly influenced by their ability to get insurance cover in the coming years.  If insurers are prepared to accept that the last major flood occurred roughly 37 years ago, it is not a particularly regular occurrence.  If insurers will underwrite properties for flood damage (on the basis of reasonable annual premiums) it is highly likely that the values won’t change too much at all.

Having said that, there was flooding and then there was FLOODING.  Brisbane in many respects got off pretty lightly.  There was enough warning that almost everyone was able to taking prized possessions and memorabilia with them.  This was not so in small centres such as Grantham that has been quite literally devastated.  Feedback we have been given by residents there is that some will find it difficult to move back in for fear of hearing rain on their roof.  A perfectly understandable reaction.  Brisbane was not threatened in the same way so the general reaction is likely to be significantly different as a result.

Perhaps the question that is not getting enough airplay is why has it taken 37 years for another major flood event to hit Brisbane?  After the 1974 floods, Brisbane’s forefathers were clever enough to put in place the Wivenhoe Dam which has largely protected the City for more than three decades.  Whilst the latest round of finger pointing about the management of the Dam is disappointing, there can be no doubt that mitigation strategies will already be under consideration by engineers, geologists and hydrologists.  The point being, assuming that this is the case, riverfront properties will get another layer of protection that in theory should make another flood event of this scale even further between.

Towards the end of 2010, National Property Research was forecasting a skills shortage in Queensland that was likely to hit in the second half of 2011.  We are in the process of revising this to the second quarter of 2011.  Whilst the floods have created significant damage, they will also create enormous opportunity for those businesses that have survived.  Unfortunately driving around Rocklea as an example, it is likely that many businesses that were sailing close to the wind due to the GFC, may find themselves in unrecoverable positions.  This is the economic downside to the flood.  Jobs will be lost, however we anticipate that more jobs will be created than those that were/are lost.

The opportunities that come out of a flood disaster are numerous.  The most obvious is the localised injection into the construction sector.  For many Queensland businesses that have continued to downsize on the back of declining business, the rebuilding of Brisbane and many regional centres is a priority. Add to this the growing demand for trades and skilled workers in places like Gladstone to assist with major LNG and Coal Port projects and Queensland is actually positioned quite well to use this event as a springboard to a more positive outlook. 

Because our State has flooded does not mean the rest of the world has stopped requiring our natural resources.  The reality is that the bottle-necks have got worse and will require millions of dollars to open the supply chain.  Spending on infrastructure upgrades will require Federal government assistance, there is simply no getting around that.  Just when the Bligh Government would have been looking at spending the proceeds from the QR National sale, I suspect that their plans will have changed.  Let’s hope the rating agencies don’t downgrade Queensland’s credit rating any further, because the funds required to fix this mess don’t need to be borrowed at any higher rates.

Retail spending will also be a localised beneficiary of the floods.  Everything from carpet suppliers, furniture to electrical and white goods will see an uplift in sales for the first two quarters of 2011.  After a relatively quiet festive season by previous standards, many retailers will not experience the post Christmas hangover.

One shouldn’t forget the rural sector in all of this.  Many crops and livestock have been lost, fences removed completely from their boundaries and millions of dollars in machinery have been destroyed.  However as one farmer eloquently put it, “we can make money in the mud, but we can’t in the dust.”  Whilst they haven’t enjoyed the flood experience, they have at least got moisture in the soil that should make the next season a bumper.  Farmers are probably the most resilient bunch of people you are likely to meet, they are also the most finely tuned to the environment.  Perhaps there is a lesson in that for many of us.

Perhaps the most frustrating part of the many questions that we have fielded about property and the flood, has related to the lack of reliable data from 1974/75 where sample sizes are tiny and unreliable.  However, one should be very careful in comparing the 1974 floods to those of 2011.  Fortunately for many flood affected homes, the levels peaked and dropped within two days.  In 1974 the city was flooded for 1 week and no one had the benefits of mobile phones and 24 hour media sources to keep track of the events.

But perhaps the greatest problem with comparing the two events is the context in both the economy, world events and obviously the advances in technology created through time and growth.  In 1974, the total population of Queensland was approximately 2.033 million people; in 2010 the SEQ total population is likely to be around 3.13 million when it is finalised.  What this means is that the scale of the even in comparison to the broader community is by comparison much less.  It also means that any sort of clean up after the event is significantly enhanced by the fact that there are more bob cats, trucks and people to get in and get busy.  At certain points in the clean up process, volunteers were being turned away or asked to come back later.  This is astounding both from the perspective of people wanting to help and the resources available to clean things up.

Scarily, in 1974 Brisbane’s CPI peaked at 15.9% for the September quarter, the highest recorded for Brisbane in the 60 year time series.  So if you are concerned about inflationary pressure now, well 1974 is a stark reminder about what happens when the cash rate is not independently managed from the government.

Another interesting statistic is that the expected damage to property in the 1974 floods was $980 million as estimated by the Australian Insurance Council.  Insurance cover was only $68 million.  It will be fascinating to see if the ratio’s are so far out this time round.  One would hope that this is not the case however in 2009, the same council was trying to find ways to create greater access to flood insurance for Australian communities.  Ominously they state, “In 2007 dollar terms, should such a flood (Brisbane 1974) ever be repeated, this represents an insurance loss of $1.8 billion and a simply staggering uninsured loss for both government and the affected community.”

So where does this leave Queensland and her flood affected cities and towns?  Obviously in need of short term clean ups.  However the outlook will improve throughout 2011 assuming that there are no more events of similar scale and ferocity.  Insurers are either going to be the hero or the villain.  They will to a large extent determine what happens to values in our riverfront suburbs.  Our trades and construction workers will have a big year.  Disaster of this scale means a lot of rebuilding that has to be done.  There is no escaping that if Queensland is to get back on its feet quickly, the construction sector is going to be flat out.

So after what has been the most unusual start to a year that many of us have experienced in decades, our thoughts are with those who have suffered damage, had memories destroyed and lost loved ones.  Let’s hope NPR’s crystal ball about the resilience and character of Queensland’s population and better than expected economic performance at a personal level ring true.  And most importantly, I hope that our neighbourliness is neither lost nor forgotten.

Interest Rates and the Housing Market

Real research does take time, not just hot air.  The speculation about interest rate increases driving the market up is again more simplification of what is an inherently greater problem surrounding our industry.  Too many people are too prepared to make broad sweeping statements that in fact have little bearing on reality or truth.

The team at National Property Research enjoy busting some of the myths that are constantly bandied about.  In fact we were asked to do this exact thing at the UDIA’s State conference just last month.  So here is the latest one.  The thought that interest rates impact house sales volumes is quite simply wrong.

For those that are mathematically minded, the r squared correlation is 0.08, so far from compelling to actually be irrelevant. (…and for those who are not mathematically minded, a weak correlation starts around 0.8)  To suggest that when interest rates increase that buyers will come out of the woodwork to buy, fails to take into consideration so many of the other factors that are causing household stress outside of individual’s mortgages.

As an example, insurance rates have continued to escalate on average by 7.2% per annum over the past two decades.  By contrast, the long term average increase to wages has been 4.6%.  The rate of escalation in house prices over the same period of time for the median house in Brisbane has increased at 7.8% per annum.  It doesn’t take long to work out that with wages growing at 4.6% and most other household expenses exceeding that, the household budget continues to be stretched and eroded by higher costs.  

The old chestnut about interest rates impacting prices is also another one of those comments that continually pops up.  Again the reality is a lot different than the generally pursued oversimplification of interest rate increases being designed to slow property growth.  There is no doubt that interest rates if applied badly in the economy will slow housing, but the reality is that it will slow everything else with it.  Again for those who like their evidence in mathematical terms, the r squared  for this is a miserly 0.13.

So what is the message about interest rates?  For Brisbane at least it is that interest rates simply do not correlate with the volume of house sales nor the increases in house prices.  There is no doubt they are contributing factor in the movement of both, but the oversimplification of determining that interest rates going up will stimulate buyers or pull buyers out of the market is about as theoretically based as the world being flat.  There is considerably more at work here than the RBA’s decision every month and until everyone get’s their head around this, interest rate movements will continue to be treated as a national spectacle.

What Happens Now?

2010 will prove to be if nothing else, a year that promises hope for the development industry as many can’t imagine two consecutive years like 2009.  Certainly the optimism in 2010 is far greater than that experienced at the same time last year, however international uncertainty surrounding Europe’s capacity to service its debt recently loomed as the major headline across most Australian newspapers.  With this, the stockmarket has fallen by more than 10% and reminded us that the depth of the GFC will not allow for a steep rebound, but a more protracted and steady recovery.

So what does 2010 really offer the development industry?  Whilst many pundits are using the term “opportunity”, the reality is that opportunity is only going to come to those prepared to innovate. 2010 is perhaps the year that we should be steadying the ship and building a solid platform from which industry best practice that occurred prior to the GFC is again improved upon.  Those projects that have led the way in past have mostly benefited from improved sales rates and increased marketshare.

The reason to looking forward to innovation in 2010 is my recent travel undertaken throughout Australia.  Without meaning to be condescending, I am a little concerned that our planning policy and outcomes in an urban environment are all starting to become a little bland and a very much alike.  Gladstone’s residential subdivisions look like those on the Sunshine Coast, like those in Mackay, Townsville and Cairns and surprisingly very similar to those in Adelaide and Melbourne.  The challenge for 2010 will be to lift the bar and start to get a little more creative.  We need to challenge the common held beliefs that have existed about the market for the past decade.

2010 is going to be another year that challenges the concept and definition of what affordability is.  There is no doubt that with little if any correction in most residential markets, first home buyers will again be at the bottom of the food chain.  One thing I can guarantee is that without the release of new broadhectare parcels into the market, the level of competition will only get narrower.  Less competition simply means higher prices.  Look at what happened when Virgin entered the airline industry in Australia, domestic airfares have never been cheaper.  The same can be said about mobile phone packages, internet etc.  Where there is healthy competition, the consumer benefits.  With the restriction of new land entering the market, consumers are not going to get the best deal.  The reality and result of constraining land is that it continues to drive up the raw broadhectare land values making it difficult for the development community to provide housing product which is suitable for families on modest budgets.  Where the western corridor once provided affordable land on large lots at a reasonable price, this may well be a thing of the past.  At present, it is difficult to think of any one corridor which has the capacity to service the needs of families on modest budgets in SEQ who aspire to home ownership.  This problem is going to be exacerbated in 2010.

Finance and the availability of such at realistic margins will again be a yolk around the development industries neck in 2010.  The attrition of mezzanine funders over the past 24 months has taken a very important tier out of the options available to mid to small sized developers.  These are the same businesses that have proven to be the best suited to infill developments that are either two small for the bigger players, or of less interest because the profitability is generally not as high.  Without these mid tier businesses using innovative finance strategies, many good projects will remain on the shelf.  Density targets will struggle to be met.

But 2010 should, and will be a year that has the potential to be a defining moment for the years ahead.  It will be a year that we do things smarter, challenge some of the norms and potentially make headway on those projects that have been bogged down in a bureaucratic red tape.  It will also be a year where a valuer’s interpretation of the market will be more critical to the viability of those projects that need finance…which means almost all of them. 

And finally, it will be a year that sees the REIT sector rebound in addition to those funds that have been stashed away in superannuation trusts now looking hard for new investments.  And whilst National Property Research does not see 2010 as a boom year, it certainly sees it as 12 months of continued consolidation where hopefully new innovation will again “wow” the consumers.

New Carpet and Affordability

We recently had new carpet laid throughout our offices which meant there was a reasonable level of packing and unpacking.  Anyone who has gone through the routine of moving house or office, often finds things that they had either forgotten about or filed away for later use.  I came across one such gem.

In April 2002, the Queensland State Government released a discussion paper on “Affordable housing, residential development and community well being.”  I thought it would be interesting to see what has been achieved in the 8 years since this paper was released to the public.  Readers should also bare in mind that the SEQ Regional Plan was introduced in 2005 which changed the development landscape over night.

One of the initial recommendations for consideration was the admission that for State Planning Policy to be effective, a head of power in legislation may be necessary.  In many respects this has been achieved with the creation of the ULDA, however it is only recently that this well intended organisation has partnered up on a large scale with developers for the Ripley Valley, Yarrabilba and Flagstone.  The opportunities for the ULDA and private developers to achieve successful built form outcomes in a short period of time should not be underestimated.  The greatest challenge will be the resourcing of the ULDA to cope with this enormous workload.

One of the key definitions for affordable housing relates to rents.  It was, “rent levels for affordable housing should not exceed 30% of gross household income, after any applicable Commonwealth Rent Assistance is deducted from the rent”.  At this point in time, the department’s view was housing was only genuinely affordable if it was well serviced, well located, safe, secure and accessible to people in need.  Whilst the points raised are typical motherhood statements, the intent was clear that public transport, shops and personal mobility were important criteria.  So if we apply this broad interpretation to Brisbane’s suburbs, what does this mean?

A single person wanting to rent a 1 bedroom apartment in Brisbane’s CBD needs to earn a minimum of $65,000 to fall outside of the rental affordability category.  This is an entirely plausible outcome, though one that probably doesn’t apply particularly well to most who are in administration or retail roles or just starting their careers in a professional capacity.  And let’s face it, these are the people that need the most help and generally represent the greatest number of employed people.

If we look further out to West End as an example.  It meets the criteria of being close to work, arguably within walking distance but certainly within riding distance.  There are plenty of shops and it is an area that is growing in popularity.  A neat and tidy one bedroom apartment will mean that our admin/retail person or young professional is going to need to earn $52,000 per annum or above to find themselves outside of the affordable rent crisis.  This should be achievable for the young professional however the administration or retail person is likely to be suffering still.

The reality of looking further out to suburbs such as Mount Gravatt and Sunnybank as examples is that the rents don’t go down, you simply get another room or two as part of your accommodation options.  This is not to say that there is a critical shortage of one bedroom accommodation in our middle and inner ring suburbs, it is simply to point out that the options for a person wanting affordable rent and to not have to share a house are limited.  Over the past five years, there have been minimal additions in stock for one bedroom apartments or units in the aforementioned near city locations, despite the continuous increase in single person household formations.

To put this in perspective, the highest minimum wage for retail employees is $38,480 per annum or $740 per week.  This equates to a 30% threshold of just $220 per week in rent.  The worst case scenario is for someone employed at a retail level 1 position is just $600 per week which would make the 30% threshold of just $180 per week.

The point that I perhaps have laboured to get to is that someone who is employed and trying to make headway is struggling trying to pay their rent, let alone a mortgage.  Now many will say that the capacity to own a house is not a right but an aspiration, but since when did trying to rent a single bedroom apartment become an aspiration?  And whilst some will also suggest that highlighting retail employees is part of adding credence to the above argument, the reality is that retailing is the second largest employer in Australia, only slightly behind healthcare.

So what does this have to do with new carpet and old documents?  Quite simply that in eight years, as a society we have not been particularly good at looking after those who are trying to make an honest living.  And whilst it is easy to point the finger at any number of different organisations, financiers and government agencies, the problems of eight years ago when the document was released remain despite our awareness and generally very good economic times.

There is only one solution that I can see.  Government and the private sector needs to work together to provide suitable outcomes that will see the relaxation of various fees and charges.  Whilst NRAS (National Rental Affordability Scheme) is a good start, many of the developers we work with have struggled to make projects stack up, struggled with the number of hoops to jump through and the complexity of the system.  

It’s time to make things simple, find mutually compatible solutions and help create suitable accommodation that looks after our Aussie Battlers.  After all, the country was built on the notion of a fair go for all.

Councils, Be Careful What You Wish For

As many of the country’s local council’s head down the path of urban consolidation and adopt the principles of higher density over sprawl, a lesson learned in the 1970’s is coming back to haunt us. That lesson was the impacts of placing high numbers of welfare recipients in the one location and the subsequent creation of dysfunctional communities.

To this day we still see councils in the outer suburbs striving to achieve higher densities on often quite ambitious scales. Ninety percent of high density product is being sold to investors and rented to the bottom end of the market. Effectively the cycle is beginning all over again with the only exception being that the housing authorities are no longer the ones owning the properties, rather the investors are.  Socially speaking, the risk is that the socially dysfunctional communities of old are being created all over again.

When the government insists on driving planning policy, no matter how well intentioned, it typically goes against general market economics and fundamentals and often the outcome is not ideal.  To further compound this issue many developers know they are at risk of creating projects that will not be a legacy to their brand, in fact it could be quite the opposite.  Their fear is to walk into the council chambers and ask for a change to their DA.  This fear is grounded in the risk associated with a long turn around time and the potential that no D.A will be forthcoming. 

Whilst the market can be pushed and shoved into certain shapes, marketers learnt a long time ago that a market needs to be guided, not forced. The power of persuasion is a very impressive tool when applied correctly.  However marketers also learnt to understand the market, as well as the economic forces that work within it and how to use them to their advantage.  In using the term “marketers”, I am not specifically referring to the term property marketers or the investment property marketers who end up selling these projects to unsuspecting investors; I am referencing the general discipline of marketing.

If we look at a typical purchaser of new product in our outer suburbs, they are generally first or second home buyers with young families and dependent children, or couples looking to start a family in the near future.  These are people and households that are upsizing, not downsizing.  Some of the most successful medium and high density projects are found around our inner ring and middle ring suburbs where apartments offer the potential to upgrade to a new product instead of something that has been renovated within an inch of its life or is dated as 1980’s brick and tile. 

The composition of purchasers is often more highly skewed to the owner occupier than the investor in our near city apartments (depending on the developer).  However, for some reason we find it acceptable that a medium or higher density apartment project in the outer suburbs should be more heavily skewed to the investment community.  If the same ratios were applied to general residential housing, stigmas would be created immediately as 80% of houses would be rented. 

The point being, our double standards are fine for vertical communities, but not so for horizontal communities.  This is an outlook that needs to change quickly, particularly within the council.

When the government draws a line in the sand and suggests that our outer-lying suburbs should adopt higher densities, they are actually doing the residents in those areas a disservice.  Densities will be achieved in their own time when land supply diminishes and the services and amenity are there to support them.  To suggest that the need for higher density starts now is akin to putting the horse before the cart. 

The greater problem remains that we are building communities that will once again remind us of the lessons we failed to learn in the 1970’s, but feel compelled to revisit again.