The Need to End the Bust

When you work in property, the one thing you learn early on is that it is cyclical by nature.  There are good times and are there are challenging times.  Unfortunately those challenging times have been with us now for near on three years and people are getting fatigued.  Every time there appears to be some light at the end of the tunnel, government policy either local or abroad has everyone trimming their sails getting ready for the next storm…real or otherwise.  We have to stop taking rumour as fact and jumping at shadows.  It is very difficult to rebound when the collective conscience is on edge.

The last significant downturn occurred in mid 1985 and lasted approximately three years.  In 2000 the introduction of the GST combined with the Tech Wreck dented confidence and created a degree of uncertainty about a new taxation system.  This was shortly lived as the market bounced back after being in a five year period of below average performance.  In many respects, there are some similarities between the GST period and where we currently find ourselves.  Comparisons can also be made to the period surrounding 1987 and the stock market crash which saw the bottom of this building approval downturn.  Having stated that, most people were not so heavily geared back then.  This has changed the fundamentals of the market dynamics in ways which were not foreseen, however with hindsight, greater degrees of transparency and discovery it was obvious the eye was “off the ball.”

When you consider that the level of approvals are down, and typically not all approvals reach construction, the above graph is somewhat sobering.  Representing less than 4.0% of market activity, the purchase of new dwellings whilst having not changed dramatically as a proportion, it has in volume.  Herein lies the rub. The building industry continues to lose some of its long term capacity to the resource sector, which is after all a labour mobility issue which has helped many households stay above the bread line.  The big problem that looms is a shortage of apprentices and young people that will be able to step up to the plate when the housing sector recovers…and it will recover and probably with a rush.  Every recovery from a significant downturn has been equally steep in its upturn, making sure we have the skills to cope with this will be imperative to keeping a lid on affordability.

On that note, it is with some trepidation that a loophole in housing GST appears to be closing.  Whilst the intention was clearly that a loophole in the taxation system should not exist for new houses in the first place, the introduction of draft legislation by Bill Shorten could not have come at a worse time for the industry.  Not only that, if successful it will be retrospective back to January this year, meaning that many house builders may find their taxation bills significantly higher than was originally perceived.  As many builders are currently sailing close to the wind, the potential damage to this stressed sector of the economy will be felt on a wide scale.  Keeping in mind that for every house built, effectively seven jobs are created.

If the housing sector is to not only survive, but be placed in a position from which to grow from, change is needed on a broad scale.  This should be approached with a whole of industry focus in a unified front between the UDIA, Property Council, Master Builders Assoc, Housing Industry Assoc and someone from the relevant state and federal treasury.  Until everyone’s cards are laid on the table, the solution will continue to be pushed away like bobbing for apples in a bucket.

Market Volatility

The current volatility of the world economy will have some significant ramifications for property investors, owner occupiers and developers alike.  At this point in time, it is too early to tell just which way the market will go.  Historically there has been a link between the ASX performance and housing finance approvals.  When the ASX has dropped, finance approvals have followed the trend.  Essentially this means less supply into the market.  However the timing of the Queensland Government housing stimulus package may initially provide some form of a buffer.

With less supply into the market, one could make the assumption that rents will increase because in theory vacancy rates will tighten.  This is particularly true if you believe that Australia has an undersupply of residential property, the author does not share this opinion.  However (and there will be a few of those), there is an expectation that employment will soften as a result.  With Bluescope Steel making workers redundant and Qantas threatening to send jobs offshore, there is a very real economic restructuring taking place in Australia.  Already the most recent (July 2011) data shows that this is the case.  So people are going to be cautious about outlaying more of their income in rents.  Investors shouldn’t be seeing the potential tightening of the vacancy rates as an opportunity to lift rents. 

On the upside of this is that interest rates may actually start to fall.  Again it is too early to determine whether this is the case as the last quarterly CPI data came in at 0.9%.  This is outside the RBA’s guidelines of an annual band ranging from 2.0% to 3.0%.  So whilst inflation is up, many of the country’s major employment sectors are struggling; in particular retail, manufacturing, tourism and property to name a few.

With property prices having declined in most capital cities, the RBA would actually be quite happy that this is occurring in a very orderly and gentle manner.  The last thing the RBA wants is for house prices to drop dramatically like they have elsewhere in the world, which is unlikely given the strong fundamentals of our economy.  However they would like to see it become more affordable.  With annual wage growth continuing around 3.5%p.a and property prices softening, the affordability equilibrium will by default occur sometime within the next five years if current trends continue.  This is based on the assumption that no value shocks occur over this period of time.

One thing we can be grateful for, is that if the market and economy should start to trend into a major downturn, which is unlikely so long as China and India continue to experience such massive domestic expansion, the RBA does have quite a lot of stimulatory power with the cash rate at 4.75%.  With the start of the GFC in 2008, the RBA demonstrated it was prepared to move swiftly in order to help the economy through the tough times.  It will do so again if it feels the need to and if inflation is under control.

At present the property market is suffering largely from a lack of confidence.  This could not be more evident than in Queensland and W.A.  Both capital cities, and in particular their surrounding regions, are experiencing some of the toughest conditions on record.  If you believe in the longer term fundamentals of both of these capital cities then there are some very good buying opportunities to be had.  What the purchaser has to be sure of in their own judgement, is whether they are getting great value or market value.

One thing is for sure though, whether the market is up, down or sideways; most people have to buy and sell in the same.  The gap between the mid range properties and the top priced properties has shrunk considerably since 2007 in almost every market in Australia. 

The difference this time round is that the general public are arguably not as highly geared and unlikely to face the extraordinary number of margin calls seen through 2008.  What we may see is the market go back to working counter cyclically.  Residential property may be seen as a safe and defensive strategy in these uncertain times when shares have become and remain highly volatile.  This may prove particularly true for those approaching retirement who look to spread their risk across a number of different investment classes.

Confidence surrounding our economy, the international events of a “not so bright American congress” and a well put description that “rumour is treated as fact before it can be verified” continue to cause waves of instability.  Combine this with the carbon tax that is as clear as mud to the average person on the street and Australian’s are keeping their hands warm in their pockets.

What we all need to do is believe that Australia is essentially sound at present.  Our banks are solid and until the author hears differently, this takes a lot of risk out of the broader international turbulence impacting individuals.  China and India are strong and this is where Australia’s trade is focussed.  If this were to cease, then the picture changes dramatically.  The nation is for all intents and purposes at full employment despite the slight rise in unemployment.  In terms of stability, property has been resilient throughout recent adverse conditions and doesn’t show any immediate sign of a value crash.  For some, the buying opportunities and conditions to negotiate a deal may never be better.

Leadership and Consumer Preconditioning?

The importance of leadership should not be underestimated in times of financial uncertainty.  In fact, it is equally as important now as it was during the period of the Floods and Cyclones.  Unfortunately two of Australia’s resource state’s have been struck by a period of intense gloominess that is very slowly eroding away their economies.  Both WA and QLD have done the sporting equivalent of dropping their heads and resigning themselves to a position of disillusionment.

With this lack of self belief and poor consumer confidence has come the preconditioning that if something is not on sale, incentivised or the like, then it is not worth purchasing…at least not until the sale or offer recurs.  The problem with this pricing strategy is that the consumer is starting to recognise the “special” price as the actual price with the retail price as the over inflated price.  It is this disconnect between the vendor and purchaser that is literally getting out of control.

The reality is that from a psychological perspective, the industry is telling the consumer that all is not well.  If the purchaser is constantly having to be bribed into making a commitment, then perhaps the pricing mechanism is wrong.  The public need to again feel that a sale is a genuine sale and not a weekly event.

So why is leadership important in this scenario?  Leadership is important in instilling confidence in the public.  As our PM is currently learning, a significant part of leadership is integrity and having people believe what you are saying.  This applies to our State politicians equally.  If the message is not believable, then the public will react by sitting on their hands.

It is somewhere around there that the message gets muddied and the public switch off.  How can it be that the Nation’s unemployment rate is 4.9% with Queensland’s at 5.2% that consumer confidence is so low?  Now bearing in mind that full unemployment is considered to be 5.0%, there should be a general feeling of optimism.  We are at unemployment levels that prior to 2005 had not been seen since 1980 or thereabouts.  Do the public not believe the statistics or is it irrelevant if they are constantly told that their cost of living is spiralling out of control?  The message needs to change or provide a solution, preferably both.

So whilst the media would have us believe that retailing has fallen off the cliff, collectively retail is still growing in Queensland, albeit modestly.  This is an excellent result given that industries such as tourism which attract high spending individuals have softened dramatically over the past two years.  The fact Australia has participated in the GFC, despite what various politicians might suggest needs to be acknowledged and put to bed.  Australians are saving at rates that suggest an enormous fear that the economy of the world will collapse.  Whilst no one should begrudge a healthy saving ethic, it is the reasons behind this saving strategy that the author would question.

Some of this fear may have arisen as a result of house prices having softened, both in real terms and actual prices.  Quite simply the same house today is unlikely to be worth the same as it was at the peak of the cycle in late 2007 and early 2008.  That is the reality of the market which is a positive if you are a glass half full individual because wages have continued to grow and the interest rate cycle appears to have reached or neared its top.  Those people that bought through 2008 to the present whilst they may have experienced a slight loss in value, the financial institutions had tightened their lending criteria sufficiently to ensure that positions of negative equity were minimalised.

With the changes to the market, it is very easy to argue that now is probably one of the better times to be buying real estate.  If you are cashed up and don’t have to sell, there are very good buying opportunities to be had.  If you do have to sell, you are buying and selling in the same market, a market that is offering more bang for your buck than three to four years ago.  The value proposition now is excellent.

The banks continue to assure the public they are open for business, albeit under stricter lending criteria.  Westpac suggests rates are on their way down.  Unemployment is low and more jobs are being added monthly to the workforce.  Retailing is robust in broad terms.  The resource boom is real, just take a trip to Gladstone, Western and Central Queensland, Karratha and northern South Australia.

It seems to the author the one thing we are lacking at present is leadership.  Leadership in politics and industry, strategies that don’t panic the buyer into believing that things are worse than what they are and some good old fashioned pride in where we live.  It wasn’t that long ago that Queenslander’s consider themselves to be living in “Gods’ State”.  Having been to China recently, I still believe we do…how about the rest of you?

Can't See the Forest for the Trees, or Catch 22?

For those who have missed the recent news that infrastructure charges are to be capped at $20,000 for studio to two bedroom accommodation and $28,000 for three bedrooms plus is going to positively impact the building industry in the short term might be mistaken.  The implementation of the charges at the end of the development process rather than an upfront fee is arguably a better stimulus to the development cashflow given the time taken to make sales and develop land.

So whilst we agree that this is a step in the right direction, the reality is that the building industry will continue to struggle as more government “steering committees” and “workshops” are formalised to network the problem.  In addition to this, nothing has really changed with the planning mechanism which has profoundly eroded the speed at which development can occur.  In fact, much of the more recent planning mechanism was implemented when the economy was strong, population growth was at record highs and government feared there would be no green space remaining from Cairns to Melbourne as the entire coastline would be developed into houses and highrises.  Now that the economy, population growth and property sales have dropped, one wonders whether the planning scheme is as relevant now or if has the flexibility to cope with the changing cycles.

However, one of the major reasons that the building industry is struggling is because the government has privatised many of the functions it used to provide in the “good old days”.  Like power, water and a host of other services that have gone the way of the private sector, so too did much of the non-private sector accommodation work.  The adjoining graph shows just how little government spending now occurs in this part of the economy.  And whilst there is an argument that the Private Sector can often do things more efficiently than the Government, there is the counterargument that the private sectors’ interests are not always aligned to those of the community.

With the government’s stimulus package during the GFC that helped with school building, haff schemes etc, there is yet to be even 5% of house building commencements that can be attributed to the government.  This is during a time when housing unaffordability is at near record highs and rents in certain locations are out of control.

So if the government is interested in getting the construction industry back on track, particularly house building, there is arguably just cause to suggest that they should become involved in allocating more resources to public housing.  As shelter often represents the biggest stress for anyone that either doesn’t have it or is borderline losing it, a lot of anxiety would be removed from society.  It would also provide the opportunity for people to actually save in order to buy a house.

However the flipside to this argument is that a lot of people would be removed from the rental pools.  This would take pressure off rents, but at what cost?  When investors are already difficult to find for both new and/or established property, falling rents are not going to inspire any buying decision.  In fact, the investment market is so tough at present because rents in the vast majority of properties are not paying off mortgages and in many instances have a long way to go before they do.  

So asking the government to step up and provide significant numbers of housing for those people who need it is arguably counterproductive to many developers and investors best interests.  Like most things though, moderation seems to be the key.  Additional funds for public housing wouldn’t go astray and in the broad scheme of things, it is unlikely the government could provide enough housing to detrimentally impact the rental market, at least in the short to medium term.  The upside though is that many people who work in the construction industry would be put to full time employment and again start to hire new staff.

If one was to adopt a different economic perspective, it is highly probable that a well funded housing strategy would provide benefits outside of creating more jobs for a struggling house building industry, it is suspected that it would also provide better health for individuals as there is a causal relationship between homelessness and health, overcrowding in housing and mental illness as well as a bunch of other issues that positively impact other aspects of the economy.

Perhaps it is time that the Government no longer relied on the private sector to provide another of its core functions, providing housing for those who can’t provide for themselves.  As a society we will be better off and people will again be able to save their way into home ownership and move off the welfare train.  This may well be the “win:win” that both the public and private sector needs.

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.