This cycle is arguably the beginning of an extended period of growth whereby land supply will force the market into positions it may not necessarily be comfortable with. Compromise will become a more common word and the traditional house lot of 600sqm will become a large house lot. In many of our new estates, lot sizes are starting to test the water at sub 300sqm levels.
The difference in this cycle compared to perhaps the cycle of 1995-2000 is that the industry is not starting from a position of oversupply. In various locations throughout Queensland, many markets will start the rebound in a position of undersupply. This will relate not only to the lack of approvals flowing through the system, but again the declining vacancy rates in rental properties. Having stated that, the lack of approvals has also been tied to the lack of capital made available through the financiers.
The residential cycle from 2000 to 2007 was largely a boom cycle that was fuelled by owner occupiers initially and then by investors. Capital gains were increasing at a rate that threatened to create an asset bubble and interest rate increases essentially had little impact on halting prices. The introduction of the SEQRP in 2005 dared developers to pay too much for land and not factor in planning risk, something that has since been rectified, but left many developers holding parcels of land that have limited profit margin. Their capacity to be more flexible on pricing strategies has been severely hamstrung.
Depending on where you start the current cycle, and the beginning of the GFC is arguably as good a place as any, this cycle starts from a position of financial uncertainty, poor availability of capital and many assets being revalued at significantly reduced amounts. In addition, the weight of legislation being applied to the development industry has compounded the level of uncertainty, rather than provide certainty, something planning should be aiming to do. As stated above, developer margins are often questionable and their capacity to meet the market in terms of pricing may also meet internal balance sheet resistance.
This cycle also starts from a level of relatively high prices across all residential sectors. We are arguably entering a period where the simplistic theory of supply and demand will be outweighed by other factors such as an increasing interest rate environment, low wage growth, higher energy costs, increased insurance premiums and increasing rents to name a few. The opportunity for a sustained period of average to above average capital growth is difficult to foresee despite the basic supply-demand drivers.
Unfortunately, this cycle also starts from a position of arguably being the most highly regulated in the State’s history of urban settlement. It will take the market a number of years to find its equilibrium. Unfortunately, the time it takes for this to occur, could see many businesses close and unemployment in one of Queensland’s most important industries track above the State average. This is quite simply an unacceptable outcome for the State and an industry that contributes so much to Queensland’s GSP. With some local authorities appearing to be anti-development, the short to medium term risk is the deskilling of the local workforce as people relocate to find better employment opportunities elsewhere.
The property cycle post GFC has started with higher demand, but with an industry that may not be able to meet that demand. The challenges occurring across a number of fronts will require the State and Local authorities to work in partnership with the development industry, rather than the current adversarial position. Without the co-operation of all parties listening to each point of view and attempting to find solutions amenable to all, the recovery in Queensland will fall a long way short of its full potential.