Australia's obsession with bigger and better property is making it less and less affordable

By Catherine Cashmore

Tuesday, 03 April 2012

We’re about to launch into the mid-season compulsion with renovation programs.  It seems only moments since the last great furore over Channel 9’s The Block, which hit our screens mid last year.  During the course of the open house inspections, more than 300,000 people queued outside the homes to take a sticky beak over the intricacies of design.  Details of the price initially paid, previous owners and subsequent buyers were fished out and endless analysis followed. Such was the furore that many were convinced sales expectation would be achieved. However, the finale was heralded a disaster.  Only one property sold under the hammer and when renovation, stamp duty and subsequent sales costs were totted up, none of the homes – in and of themselves – made a profit.  However, that wasn’t the point.  Far exceeding expectation, it was the station’s highest-rating show of 2011 and factoring in the sponsorship and endless publicity, the “owner” (Channel 9) could have given away the homes and still made a healthy profit.

Obsession with property isn’t unique to Australia, however it’s manifested itself as one of the great foundations of our culture to the point of being heralded – above everything else – as “The Great Australian Dream”.  Go out on a Saturday in Melbourne and you’ll see street auctions attended by 50 or so people, of which three-quarters will be there for the fascination value alone, intently concentrated on the numbers and either comparing their own properties against the result or dreaming of pursuing a similar acquisition. Although the desire to own property doesn’t set us apart as a nation and no one relishes the thought of paying a landlord well into old age, other countries have accepted a culture far more adapted to renting than owning and consequently overall demand for the purchase of property has been lower along with price appreciation.

Germany is one such relatively well-known example. In Germany, the accepted culture is to rent rather than buy, with less than 50% of the population recorded as “owner-occupiers”. Because of this, rents have outpaced house prices since the year 2000. As with any country, the market is fragmented, with some cities performing better than others and there’s still a clear east/west divide. To accommodate a larger rental landscape, yields are monitored closely with a regularly updated publication called the Mietspiegel (Rent Mirror), which lists average rent prices in each district, and landlords are required to adhere to them. Leases are expectedly lengthy and agreed over years rather than months.  The responsibility to decorate or renovate falls upon the tenant, not landlord, and is often part of the negotiated contract. Tenants are given free rein to make the property at least “feel” as if it’s their own providing they return it to a “neutral” state upon vacation.

The rental market in Germany is tight and it can take months for families to secure suitable accommodation.  In some towns, at least half the family wage is dedicated to the task. You may wonder why more don’t decide to purchase, and there are various reasons attributed to this.  Unlike in Australia, banks don’t court the buyer market – there are no property grants and few tax incentives.  Deposits have to be large and there’s a general, inbuilt, reluctance to borrow or even spend on credit. Interest rates are fixed – thereby avoiding the inflationary tendances changes to a variable rate can evoke – and population growth is low and has been falling since the year 2000.

As with any country, Germany’s growth rates vary across different regions depending on supply and demand, however since the mid-1990s capital growth in the housing market has been unimpressive at best. Perhaps this is one reason we don’t see the same rate of real estate obsession in various European countries such as Germany as we witness here? For example, you won’t find streets lined with real estate agencies in Germany, or listen to discussions on “the state of the market” around the kitchen table. Property advocates are there to help people secure rental accommodation rather than purchase or sell. It’s a different landscape altogether.

Australia’s obsession is built into the very fabric of our culture. Even the modest backyard cubby house has started to take on grand proportions, with companies specialising in building “eco-friendly” models complete with solar panels and plasma TVs. For those interested, they can fetch prices, up to, and in excess of $15,000 – and when you see the work involved, there’s no surprise why.  At the root of this obsession lays the widespread acceptance that property always goes up in value. It’s looked upon not so much as a place to live, but a key to building wealth and establishing financial security. I’m not telling you anything you don’t know; investment in bricks and mortar is encouraged from every quarter, from 95% LVR loans to open-handed tax incentives and property grants.

However, we seem to have worked ourselves into a catch 22 situation because as the market ebbs and flows through its cycle and the supply of affordable and appropriately located accommodation diminishes, rental demand increases and yields rise, thereby locking a large section of society out of the market all together.  Consequently, gaining a foothold on the property ladder for first-home buyers is both a huge commitment and celebrated achievement. Once the first acquisition has been secured, it’s no wonder expectation and anticipation surrounding property prices feeds the obsession we feel when analysing price growth. However, in this respect, there’s a fine line to be drawn between obsession and greed.

As entertaining as they are, programs like Channel 9’s The Block play to the latter, feeding the concept that it’s possible to renovate and “flip” a home immediately back onto the market, covering costs and gaining a healthy profit on the outlay.  Updating an old-styled home through a carefully thought out renovation is a fantastic idea if the owner is a)careful not to over capitalise and b) hold the property for a period of time suited to market conditions.  The first rule is perhaps the most important because one person’s tastes are not universal. Most potential owner-occupiers want to place their own stamp on a home, so while a good floor plan and effective use of interior space will provide a backdrop for a new buyer to do this, few want to pay a premium for someone else’s extravagance and it takes experience to recognise how to balance the difference.

Interestingly, from all the “serious” buyers who viewed the properties used on The Block last year, three of the four homes were purchased by investors and subsequently rented for around $1,000 per week. No doubt most of the home buyers would have been interested in adapting the renovation ideas to their own tastes rather than paying a premium for a completed version not specifically tailored to their needs. It really was a perfect example of over capitalisation; however clearly that was half the fun of the program and proved great entertainment. Whether the properties will attract current yields in years to come as the initial shine wears off, especially considering the compromised position opposite a multistorey car park, is debateable. However, no doubt this year’s series will attract a similar level of obsession as the last.

Back in 2010, the consequences of a nation obsessed by renovation was discussed by Phillip Lowe – assistant governor at the Reserve Bank. He, along with others, argued that our obsession with renovating homes and building ever “bigger and better” is stagnating investment into new dwellings and exasperating the nationwide shortage of affordable accommodation.  The more we pour into renovating existing dwellings not just for our own living :wants”, but with a view to expecting a return “plus profit” on the initial outlay, the more expensive property becomes and the harder it is for first-home buyers and renters to secure a foothold. However, higher prices aren’t limited to homes renovated in inner-urban locations; government overlays and strict building regulations imposed on builders to ensure every new home meets the new “six-star” energy rating now adhered to in most states places additional and arguably unnecessary premiums on prices.

It’s yet another example of how this obsession to build bigger and better has somehow traversed itself into policy proving that “affordable” isn’t the priority, less carbon emissions are.  Consequently, prices are unnaturally high in the growth regions of our capital cities – or at the very least, higher than they should be. As the population slows and affordability continues to take a hold, it’s likely that those who purchased new developments in the boom phases of the market cycle will lose money on their investments, at least in the short term.

This requirement and obsession with property along with overcapitalisation on renovation hamstrings the market making property ever more unaffordable for a large section of our society. It’s not unique to Australia; other countries have similar issues providing affordable housing under strong population growth. Israel is one such example. Israel’s recent “Occupy movement, during which a record 7% of the population moved into a tent city, was initiated by a single renter unable to secure affordable accommodation in the inner-urban localities – areas with adequate facilities not available on the periphery. However, in Australia we have something these other countries don’t have, we’re different.  We have an abundance of land along with a comparatively smaller population and one of the best-performing economies in the world!

It’s therefore should be a priority that we move the focus onto the low-income groups and come up with a broader debate on how we can make property more affordable for the larger percentage of our population most at need – both renters and home buyers.  It’s not just about building more roof space, it’s about doing it in combination with adequate facilities which will provide options for those stuck with high cost accommodation in inner urban suburbs, combating ever rising house prices and extreme rental yields.  These policies must be addressed nationwide if we’re to secure a prosperous future for all Australians – not just a privileged few.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.