A high-rise property bubble looms: Catherine Cashmore

By Catherine Cashmore

Tuesday, 01 November 2011

The world’s population ticked over 7 billion this weekend. Australia hosts only around 0.3% of this and is one of the least densely populated countries in the world – and yet we’re struggling to provide adequate affordable housing close to jobs and needed amenities for an increasing number of new bodies.  A recent report from the Department of Infrastructure and Transport entitled State of Australian Cities 2011highlighted some interesting facts.  Around 85% of our population live within 50 kilometres of the coast, and more than 700,000 dwellings are situated within three kilometres of the shore.  According to the Australian Bureau of Statistics the combined population growth of our capital cities increased by 257,800 in 2010 and accounted for over two-thirds of Australia's population growth – most of that growth was in Melbourne, with Sydney coming a close second.

When migrants land on our shores they have little choice but to head to the capital cities, where most employers are based and they stand the best chance of securing work.  The challenge our state governments face is where to place a growing number of bodies within our limited city borders without losing the level of lifestyle that attracts so many migrants to our shores.  The report made some bold statements, one of which points out that by in 2031 the projected population of lone-person households will be 28%.  It’s supposedly the fastest-growing type of household in Australia – outstripping the growth of family units and couples without children.  The data is broadly used to justify the accelerated construction of high-density accommodation in the inner-city suburbs – generally high-rise small one- and two-bedroom apartments.  However, a closer look at the numbers uncovers an interesting phenomenon which seems to contradict this prediction.

While it’s expected that loan person households would typically mean a decrease in the number of bedrooms per dwelling along with the number of people living in each property – which is exactly what’s happened in NSW – this trend hasn’t followed expectation in Victoria, Queensland or Western Australia.  In these states there has been an increase in the number of people per household and Increase in the size of dwellings – In other words, there may be more people projected to live alone, but when you break down the data, it’s not quite as cut and dry as presented.

Despite this evidence seemingly showing a reduction in demand for single-person accommodation there has been no slowdown in the churn out of high-rise construction. In Victoria there have been over 20,000 applications approved for high-rise apartments over the past two years – that’s a 35% increase, in Brisbane the government recently stated 1,725 buildings of 29 storeys each were needed before 2031 – it’s a trend being repeated nationwide. Yet who’s purchasing these properties?

When Melbourne’s Docklands were initially constructed selling agents were paid high commissions to flog the developments off to unwitting investors.  The apartments usually came with rental guarantees, which once expired, left the purchasers unable to achieve the same return.  Unit growth charts for Docklands read like a day’s trading on the stock exchange, with sharp rises and plummeting dips proving anything but stable capital growth. Averaged out the growth has been little more than 5% per annum – a level currently exceeded by many long term deposit accounts and a dim shadow of what other properties in Melbourne historically achieve.

How many of these apartments are currently sitting vacant is hard to assess, however SQM have the vacancy rate above 6%.  Considering our population growth and the predicted surge of single-person households, you’d expect these developments would be busting at the seams, however clearly they’re not attracting the level of demand that’s oft been spruiked.

The City of Melbourne’s website describes the new developments as being“relatively small one and two bedroom apartments largely targeted at the student market and owned by investors.” Construction is currently underway for 16,000 of them during the 2006-2031 period.  But with the investor market as the intended recipient, they are certainly not fulfilling the needs of home buyers, or – judging by the number of similar developments sitting vacant – renters.  It seems to me we’ve got the beginning of a high-rise property bubble forming.

Anyone who advocates purchasing one of these off the plan developments will have little – if anything – to prove that asset will continue to  appreciate.  Usually they have a lot of concocted figures based on what they think will happen and if everything goes to plan they are very good at showing the riches you can make in the short term. The question to ask with any purchase of this type is what will it be worth in five years’ time?  In short any option you consider needs to be assessed on its risk profile, and “high rise” has strong evidence to show it’s “high risk”.  There’s good reason why banks go through extra checks and balances before lending for this type of accommodation - an issue which I’ve addressed in previous articles.

We’re heading into a mass over supply for one type of property and not heeding to the real changing trend that’s taking place. New statistics have shown Melbourne's outer suburbs are growing faster than anywhere else in Australia – suburbs that cater for growing families.  This should be a clear signal to our governments that investment into increasing the liveability and amenities in the outer-suburban areas, as well as easing restrictions on development and decentralising jobs, is a greater need than disproportionally increasing inner-city density.

Australia is a teenager compared with her Western counterparts.  There is no reason why we can’t grow our population comfortably and sustainably while maintaining the quality of lifestyle we’ve all grown accustomed to.  We live in arguably the luckiest country in the world – but if we’re going to flourish, we simply have to learn to spread outwards, and not just upwards.  The growth in high rise accommodation and the disproportionally high numbers owned by investors is creating a dangerous precedent for a bubble that can’t be underpinned by demand.

Catherine Cashmore