The Year of Change

Some of our Gen Y readers probably don’t know of the Leyland Brothers (you’ll have to google it guys), but at NPR, this year has seen us experiencing extensive travel across Queensland. We have always prided ourselves as being a business that does not rely solely on desk top research.  We wear out boot leather, car tyres and frequent flyer cards.  In our travels we get to see what is spruiked or simply negative media hype.  Often the reality falls somewhere in between.

As the press shifts its focus from one bad news story to the next, it is with a degree of scepticism that we note that the resource boom is already in a bust position.  Without question the resource industry is experiencing some head-winds, these are a combination of factors that range from the high Australian dollar, high labour costs combined with falling commodity prices.  At the recent UDIA State Conference, David Peever the MD of Rio Tinto raised some very real concerns surrounding Australia’s productivity.  He also noted that the country was losing marketshare to the rest of the world, despite its geographical and quality advantages.  In the last five years he stated costs have doubled to get a new mine out of the ground, clearly an unsustainable business position.

However the greatest threats remain in the Project Approval Process.  Whilst the development industry has long been frustrated by the burden of the various “tape colours” bureaucracies continue to use as part of the indecision process, it would seem the resource industry has been in a similar situation.  However, due to the scale of these projects, the flight of capital to other international projects that have more certain outcomes leave many resource businesses in Australia struggling to create their own future.  This can certainly make the edges of a cycle more steep than perhaps they need to be.

The Queensland government is well aware of this position and has given both the resource and property sector a commitment to make the approval process much more streamlined and accountable.  Much of this will occur through the Local Governments, an outcome that is both desirable but potentially problematic when larger projects require a higher skill set.  This will also necessitate good leadership and key accountability measures to ensure that the tail no longer wags the dog.

Coal, aluminium and beef prices per tonne 1995-2012

 As the staff of NPR have travelled across the State, the differences in the towns and regional centres is stark.  Those that have grown on the back of decades of agricultural production have generally more amenity and arguably a more stable population.  Those that have been growing rapidly in recent times as a result of the mining boom have tended to be playing catch up with regard to most aspects of good community.  There is also a broad range of opinions in many of these centres around small lot housing and the benefits it can bring to their population.

Whilst one cannot deny that the resource sector is under pressure, the good news and often overlooked part of the Australian economy is that the agricultural communities are again getting back on their feet.  What we need to ensure is that this sector does not get taxed as heavily as its cycle again enters a more positive phase.

In pulling this all together, again it seems that whilst we are being overloaded with information, many forget that we operate in cycles.  With the sharp growth experienced across many minerals and energy products in 2006-2008, these conditions are not likely to be replicated into the short to medium term.  China’s slow down in growth is healthy and successful in terms of China’s economic policy.  This is often overlooked as a controlled landing rather than the more popular scaremongering.  The reality is that they will continue to grow, that won’t be stopped anytime soon.

However as the RBA Governor recently stated when addressing the Standing Committee on Economics with reference to the domestic economy, “…domestic final demand rose by five per cent in real terms over the year to March, even with a small contraction in public spending. The strongest growth was by business investment in the resources sector but even consumption spending by households rose by about four per cent according to the national accounts.”

The final word goes to Glen Stevens, “Looking back then, the economy appears to have been recording reasonable overall growth, relatively low unemployment and low inflation. Looking ahead, the peak of the resource investment boom as a share of GDP, the highest such peak in at least a century, will occur within the next year or two. After that the rate of resource investment is likely to decline while the export shipments of the resources themselves will pick up. By then we might expect that some other sectors that have been weak of late, like residential and non-residential construction, might be starting to pick up. Overall growth is forecast still to be close to trend, albeit with a different composition from that seen in the past year or two, and inflation consistent with the target.”

Clearly another indication that the glass is half full and far from empty.

Don't Mock Me, I Drink Instant Coffee

I was listening to the radio last week as I drove to work. I was being berated by the planner being interviewed as one of those people that don’t live in the inner ring of a capital city.  Apparently my desire for a larger residential lot is no longer appropriate.  I am also one of the unfortunates that are financially marginalised because “that’s where all the poor people live”.  Not only that, I can’t walk to work so that allegedly makes me lean more closely to environmental vandalism.

This planning dribble has to stop.  I am a middle aged man with a wife and two boys.  My life revolves around being pulled in multiple directions, particularly on weekends when sport dominates where the family ends up.  You see, I NEED two cars…well actually my family needs two cars because it is inconvenient to catch public transport on a Saturday.  Our public transport system in Australia is in many areas a long way behind where the rest of the developed and even developing world standards are.  If I wanted to buy an apartment in the inner ring of Brisbane that had two car parks, chances are I would now be looking at a sub-penthouse.

Let’s take the dollars out of the argument though.  You can’t really compare the apartment versus the house on a square metre rate, the house will always come out on top as being the more affordable outcome.  What I propose is that for one moment, we don’t all bow down to the urban consolidationists and think about what life experiences we want for our families and ourselves.

As a family, there are things I like to do.  I enjoy kicking a ball in the backyard with the kids.  It is probably of more benefit to my fitness than theirs.  But it also allows me the opportunity to teach them how to kick a ball, control it and the other vagaries of the game.  It too has the other more important benefit of a father and mother spending quality time with their children outside of homework and the four walls of a dwelling.  Backyard cricket is a favourite over summer.  Something many of us grew up with as children and have fond memories of.

I’m a fisherman too.  In fact many of the families in our street own boats or caravans.  These are lifestyle choices that might cost an initial lump sum outlay, but to have them tucked down beside the house costs nothing whether they are used or not.  If I am to believe the urban consolidationists, I should store them somewhere else.  I haven’t seen too many townhouse or apartment projects that have the capability of storing multiple 20 foot boats or vans.  To have them located offsite is likely to start costing upwards of $2,000 a year, in many cases more.  In terms of lifestyle and experience, I like to sit in the boat and tinker on the weekends if I’m not out using it.  I dream of places I’ve been, fish I’ve caught and those that will come in the future.  And the funny thing is, more often than not my boys are sitting there beside me talking it through as well.

The pool out the back is great…and also not unique in SEQ.  Do a google earth search of any suburb and you will see that a pool is one of the most common additions to any house.  My kids have learnt to swim in it, I cool off in it in summer and enjoy the privacy of having it in my backyard.  Whilst I know many well meaning planners will tell me that many apartments and townhouses have pools, it is not the same as walking out your back door, going splash at 10.00pm at night and then going to bed.  Having a quiet beer with friends around it on the weekend would probably be against most body corporates too.

Whilst this may seem like a rant against medium and high density, it is not.  There is a place for all of it in our cities and for our different life stages.  What I am growing immensely bored with is the moral high ground assumed by the urban consolidationists that have an agenda, that may in fact not be in the best interests of society.  Certainly urban consolidation is suitable for some household types; not all.  It is this blanket dismissal of all others and the self-righteous attitude of looking after “my” best interests that I find offensive.  It is also dumb to assume that all work is conducted in a capital city, quite clearly it is not.

Here are some things for planners to think about.

The separation of work and home is healthy.  It provides two distinct and important aspects to one’s social interactions.  SOHO is a great concept, but it is a small part of the urban fabric.  It also can be part of a house, it doesn’t have to be medium density.  Much of the population needs time to mentally switch off from work before reaching home.  That 30-60 minute drive or public transport trip is a good thing for many people…assuming that the public transport is up to the task and passengers are accommodated properly.  (Therein lies another debate for another day…my sympathies to the Gold Coast line rail passengers) I and many others happily forgo travel time to work to have the lifestyle benefits of living outside the inner ring.

Australia has a small population.  The debate surrounding a “Big Australia” is a farce.  Whether we are a continent of 40 million or 50 million people is the equivalent of essentially two large world cities.  Our growth as a nation in real terms is small on the world stage.  Our urban sprawl is not excessive, it seems that the State government has recently come to a similar conclusion with urban expansion at Caloundra South, Caboolture West, Flagstone and Yarrabilba.  Common sense may be prevailing.

So as I sit on my back deck, watching my kids run around with our dog,  I am enjoying my instant coffee that cost me 20 cents; not the $4.00 I would pay in a trendy innercity café where my middle aged ears struggle to hear what the person sitting across from me is saying.  I like suburbia, I like the life experiences my kids are growing up with and I like the fact that I have everything around me within an easy 15 minute drive.  This doesn’t make it superior to medium or high density, (though for my stage of life it does), it is simply an important part of the urban fabric that should not be looked down upon as wrong.

So next time we have a tropical thunderstorm, 30 plus temperature with 95% humidity or a freezing cold winter morning, enjoy carrying your weekly groceries home in your walkable city (an aspirational goal).  I for one will be coming or going from the suburbs, listening to the radio in an air-conditioned car with my boot full of the shopping.  The suburbs are the home of the masses and there is absolutely nothing wrong with that.  Life for many is more than a coffee shop and the clichéd glass of wine marketers would have us believe is the pinnacle of our existence.

Prices Up, Volumes Down. The Time for Change is Now.

The Queensland residential market has remained one of the most patchy in the country.  With the start of the year showing signs of recovery, only to falter in mid-February and March leaving the industry to ponder when the dead cat bounce will actually stop. 

Now for all those people wedded to the simplistic theory of “Supply and Demand”, the below graph demonstrates that despite the challenging conditions, land prices continued to grow in the face of significantly declining volumes for the majority of centres.  There is no guessing where the impact of the Coal Seam Gas (CSG) terminates with Gladstone having historically the lowest land values now almost on par with the Gold Coast.  The resource boom is real and the workforces to drive these billion dollar projects are massive, in their thousands.  However they are geographically isolated and bring their own sets of problems and benefits to each community.  The supply of land and accommodation being one of them.

Graph 1 : Median Land Prices for Queensland’s Major Centres, 1991-2011

Over the last three years, many of these centres have experienced declines in land sales by as much as 68% despite prices increasing and lot sizes falling.  If you are in the business of building homes, quite clearly your volumes are going to be well down on what many have forecast in their budgets.  You simply can’t have a strong home building sector if land sales are at record or near record lows. 

This is even more relevant in the South East corner of the State where the volumes are the most significant.  This has historically been the engine room of the State.  This has certainly changed in the short term, but balance will again be found within the next three years.  While Gladstone is the shining light at present, it still only represents 600-700 new house starts per annum in a very good year, a fraction of what SEQ should be achieving. Given that every house generates four direct jobs and three indirect jobs, this is a substantial part of the economy that has gone missing.  So whilst the previous government targeted the housing sector through the building boost, perhaps one might argue that they put the horse before the cart.  Without strong land sales, new house sales realistically can only be weak.

Graph 2 : The Change to Land Sales Volumes SEQ, 2009-2011 (old LGA boundaries)

As we started the article discussing dead cat bounces, the mandate the new State government brings to the table should allow for some fresh consumer confidence.  Clearly the public wanted a change and that is hopefully what they will get.

If NPR could influence one aspect of the changes that the government could effect and effect quickly, it would be a decrease in stamp duties.  By raising the stamp duty in the past combined with the building boost (a mixed message if ever there was one), instead of increasing funds into the government coffers, it has only served to weaken the sector through declining volumes.  A three year moratorium on reduced stamp duties would help the sector recover whilst adding more income into the state through greater volumes in land sales and by default, the general housing sector. 

If the industry and government can get the grass roots fundamentals right, Queensland will be well on its way to discovering the prosperity it was so well known for.  Do this and interstate migration will again start to ratchet up.  The new cycle will begin.

This will be the test for Campbell Newman.  As Ross Noble in his English accent put it, “will it be Can Do Campbell Newman or Candy Newman…”  Virtually all of Queensland is hoping for the former, the results of the election speak volumes for how flat consumer confidence was in this State.  The rebuilding of Queensland now begins, pardon the pun.

Affordability and the Return to a More Balanced Market

I know this topic has been done to death and there have been numerous ratio’s used to support one argument or the other depending on who is paying the bills and level of independence involved.  However the real measure of affordability I am going to suggest might be something different.  It will also be something that can be measured when the most recent data from the census is released.

In looking at the affordability matrix, analysts have typically looked at household incomes or individual incomes to determine what the level of repayments that can be sustained or the multiplier of income to median house prices is.  From this, the market is either at, above or below historical levels.  What it fails to take into consideration is the time value proposition for money, duration of debt and equity achieved.  The average loan size tells more about what is going on than any ratio.

Interestingly the research actually shows that what people can afford to pay as a measure of average loan sizes suggests that a temporary ceiling has been reached.  The average loan size in Queensland has been hovering around $275,000 for the past 2-3 years which is essentially the centre point for the bell curve.  Fixed at five years this equates to a weekly repayment of around $660 per week.  However as interest rates appear set to fall, there should not be the expected inverse correlation of purchasers looking to borrow more.  The expected outcome is that some of this money will find its way back into retailers pockets.

Another important factor to note is that over the past twenty years, the average monthly growth in loan size is 0.59%.  If this was applied to the starting point in the time series, the current monthly loan size for Non-FHB’s would be $279,631.  The actual loan size at this point in time is $279,900.  Quite clearly the excesses of the 2003 to 2009 period can be seen in the graph below with the impact this has had on the average monthly increase line.  Having said that, the graph also gives consideration to the difficult economic times of the 1990’s, so there is some degree of balance.

 The above graph doesn’t show the changing market sentiment, however recent history allows us this quick view in the rear view mirror.  The 2003 to 2009 period saw the market shift from the Non FHB to the FHB.  Hence this actually exacerbated the residential market run.  So whilst the author acknowledges the peak in 2007 in the residential market, structurally it changed to take on unprecedented characteristics not seen since reliable data collection occurred.  This change is outlined in the graph below.

The interesting aspect of the average home loan size is that for the majority of the last two decades, Non-first home buyers have typically had the larger average mortgage.  This has been turned upside down in the last five years with first home buyers taking on mortgages that have at times been over $30,000 more than the former.  Admittedly this occurred when they received stimulus funding both at a Federal and State level which in hindsight probably saw some purchasers biting off more than they could chew.  It is too early to tell whether this correction back to more normal cycles is underway, though the expectation of NPR is that by this time next year, Non-FHB’s will again be taking on slightly larger debt than the first home buyer market.

This is a really important trend for the residential market.  The benefit of having a stronger Non-FHB market is that it represents a much larger part of the buying cohort and signals that a more normal cycle is likely to get underway.  The other really important part of the change back is that the equity that this buyer has allows them to purchase both new and established dwellings more easily.  This is the sector of the market that needs to gain in confidence and will also be the one that benefits the residential sector the most from a decline in interest rates.