'Speculative Vacancies' - The Empty Properties Ignored By Statistics
16/12/2015
There have been four housing affordability inquiries since the early 2000s.
The “First Home Ownership” inquiry by the Productivity Commission (2004). The Senate Select Committee inquiry into housing affordability (2008). The inquiry into affordable housing by the Senate Economics References Committee (2014), and the current Inquiry into home ownership by the Standing Committee on Economics (2015).
The central recommendation of each inquiry has been to increase the supply of affordable housing.
However, missing from the analysis is any mention of the number of long-term vacant dwellings held for speculative gain across Australia’s major capital cities - not for sale, and not for rent.
Because they are not publicly advertised, these properties are overlooked by current short-term vacancy statistics based on reporting by real estate firms.
Prosper Australia’s annual Speculative Vacancies report uncovers these latent holdings. Using water data as a proxy, we provide a unique insight into the number and ratio of long-term vacancies withheld from the market for a full 12-month period in Melbourne.
Stratified by postcode, the report provides a detailed study to enlighten government on sound policy recommendations to drive prosperity and assist housing affordability.
We cannot have a serious conversation about Australia’s housing supply ‘crisis’ without addressing the fundamental drivers that permit – no-less encourage – owners to lay a significant proportion of prime urban land to waste.
There are many diverse motivating factors prompting owners to leave buildings idle. Some may be undergoing renovation or awaiting demolition. Others may be derelict and in need of substantial and costly repairs.
However, the notable trend underlying the data is the large divergence between residential real estate prices and rental incomes – including both actual and imputed rents on owner-occupation.
During the 2014/2015 financial year alone, Melbourne’s median capital city land price accelerated over 14 per cent.
At just over $700,000, Melbourne’s median house price is 8.8 times median income. Yet, at just 3 per cent, gross rental yields in Melbourne are at their lowest on record.
Real net rental incomes across Australia have been declining since 2001. Between 1994 and 2013, the number of negatively geared investors dependent on rising prices to profit escalated 152 per cent. In contrast, positively geared investors have increased by a much lesser 47 per cent.
The overwhelming majority of negatively geared investors (95 per cent) chase the capital gains associated with existing stock, rather than investing into new residential construction. Australia’s housing stock has been turned into little more than a vehicle for financial speculation, placing increasing pressure on prices.
To evidence further, since 1997, the share of loans for housing has increased from 47 per cent to 66 per cent. Only approximately 10 per cent of the flow of housing finance has been for the construction of new dwellings. Meanwhile, the ratio of business credit to total credit has been declining since the late 1980s.
Credit extended for enterprise is proven to be positively associated with economic growth and faster reductions in income inequality. Household credit (principally mortgage debt) provides no such benefit. Rather, it leads to a misallocation of credit, to feed an elevated level of speculative rent-seeking demand.
It is important to note that increasing land values are not borne from any productive activity undertaken by the owner who (as the classical economist John Stewart Mill termed it) “grows rich in their sleep without working, risking or economising.”
Rather, the value of land reflects its surrounds, growing primarily through increased demand generated by government-funded infrastructure.
Rising land-values yield a special type of unearned income known as “economic rent.”
As a broad measure, land prices can be calculated by multiplying current rents by 20 years. This is known as the capitalisation rate.
It is speculation induced by the capitalisation of the rental value of land into a tradable commodity that drives the boom-bust volatility of the real estate cycle.
Withholding prime locations from the market in an unused state generates artificial scarcity, raising prices and accelerating mortgage debt.
It underpins our cultural obsession of betting on bourgeoning land-price gains and using leverage to climb the mythological property ladder.
The consequential subversion to policy reform is inevitable, as the benefits of government-funded infrastructure flow disproportionately to landowners in the form of unearned windfall gains.
Large divergences between rental income and land price inflation are an unhealthy challenge to both housing affordability and economic stability.
They lead to ‘speculative vacancies.’
These are properties that are denied to thousands of tenants and potential owner-occupiers by landowners that have no motivation to generate any rental income. The result is a lowering of publicised vacancy rates, and increased land prices.
The regulatory environment provides a prime motivator for property speculation.
Landowners betting on a continuation of past high rates of appreciation are advantaged by preferential tax exemptions worth an estimated $36 billion a year.
Negative gearing coupled with the 50 per cent capital gains tax (CGT) discount for property held in excess of 12 months, have ensured high-income individuals are the main beneficiaries of rising land values. The top 40 per cent of income earners hold nearly 80 per cent of all investor mortgage debt.
First home buyer grants and other state incentives such as stamp duty waivers, owner-occupier exemptions from CGT and state land tax (SLT), changes to the superannuation laws enabling leverage into real estate (2007) – typify the commodification of property as a tool for profit seeking gain, advantaging existing owners vis-à-vis the young and the poor.
These incentives strip away any hope of a market aspiring to house people, rather than encouraging speculative greed. Policies that foster land price inflation and reward rent-seeking behaviour cannot deliver positive economic outcomes.
The IMF finds more than two-thirds of the world’s recent 50 systemic banking crises were caused by patterns of accelerating real estate prices relative to GDP.
A comprehensive analysis of historical data demonstrates a clear pattern of repeating real estate and construction cycles topping-out some 24-48 months prior to the world’s major economic downturns.
This cyclical top has been a precursor to all of Australia’s economic recessions.
Yet, it is not the recession that damages the economy. The damage arises from mounting levels of leveraged debt extended for the purpose of land speculation.
In a little over two decades, the share of investment property loans as a proportion of total debt has tripled from one-tenth to three-tenths.
Investors now account for 40 per cent of total housing loans outstanding.19 Australia is the third most indebted household sector relative to GDP in the OECD.
At just over $2 trillion,21 the unconsolidated household debt to GDP ratio sits at an eye-watering 121.5 per cent.
The burden of diverting an ever-increasing proportion of incomes to debt-servicing by both business and buyers has progressively undermined the health and competitiveness of the Australian economy.
The long-term risks to our financial system are precarious. The economic impacts for low- to middle-income Australian’s are disastrous.
Ownership for 15-34 year olds has been in a downward trend since the mid 1970s. For 35-44 year olds, since the mid 1980s.
Even those able to step onto the fabled property ladder, long-term security of tenure is not guaranteed. Significant numbers are ‘churning’ on the edges of owner occupation.
Between 2001 and 2010, one in five homeowners (22 per cent) dropped out of home ownership - for 9 per cent, this move was enduring.
For those that do purchase, there is a spike in the chances of a termination back into rental housing after just one year.
Importantly, the trend is accompanied with episodes of poor health, unemployment and financial stress.
After exiting homeownership, 34 per cent of Australian ex-home owners require access to housing assistance. Additionally, one in 10 Australians has been homeless at least once in their lives.
The incidence of housing stress for owner-occupiers declines with age, however, for long-term tenants and those under 35 years, it remains stubbornly high.
Current policy cements this demographic at the bottom of the pile.
Ineffective use of residential and commercial sites further stimulates the volatility and inequity of the real estate cycle. Land’s locational supply cannot be increased to accommodate rising demand. Buildings banked and withheld from use exacerbate this disparity.
As such, the SV rate can be likened to the unemployment rate for land.
It results in the productive capacity of the economy being ruthlessly compromised as citizens and businesses are forced to pay higher prices and commute greater distances for employment and lifestyle needs.
Prosper Australia’s Speculative Vacancies report gives a unique insight into the impact of current housing policy.
The report identifies 82,724 residential dwellings and 30,085 commercial properties in Greater Melbourne likely vacant for a period of 12-months or more.
As government and real estate industry vacancy statistics are neither impartial nor comprehensive, this report adds a valuable dimension to understanding the divergence between real estate industry short term vacancy rates (the percentage of properties available for rent as a proportion of the total rental stock) and the number of potentially vacant properties exacerbating Australia’s housing crisis.
We advocate these figures should correlated along side our Speculative Vacancy findings to produce the widest and clearest measure of vacant housing supply to guide policy makers.
... extract from Executive Summary:
....If just those residential properties consuming 0LpD were placed onto the market for rent, this would increase Melbourne’s actual vacancy rate to 8.3 per cent. If 82,724 properties using under 50LpD were advertised for rent, the vacancy rate could rise to an alarming 18.9%. (1)
Further examination of 130,610 non-residential properties across 254 postcodes over the same period identifies 7,941 or 6.1 per cent of Melbourne’s commercial stock was also vacant over 2014, i.e. having consumed 0LpD.
Government failure to address Australia’s housing affordability crisis is indefensible. Access to affordable shelter is a basic human right and underlies national prosperity.
Vacant properties impose a needless economic burden. Residents and businesses are forced to leapfrog vacancies to lesser sites at great cost, increasing commuting times and placing upward pressure on prices.
Latent supply is usually not visible without a significant downturn in economic activity. If withheld stock were put to use, it would reduce cost-of-living pressures for tens of thousands of low and middle-income families and businesses marginalised by the cost of land.
This report recommends fundamental reforms to reduce the propensity for volatile boom-bust land cycles fuelled by speculation and unsustainable levels of household debt.
Current property taxes discourage investment into new housing, inflate the cost of land, stagnate housing turnover and hinder putting property to its highest and best use.
The report advocates that profound inefficiencies could be significantly alleviated if current transaction taxes were phased out and replaced with a holding tax levied on the unimproved value of land, alongside enhanced infrastructure financing methods for new developments.
Policy makers have thus far ignored Melbourne’s speculative vacancies and their effect on property prices.
With some 4.8 per cent of Melbourne’s houses showing severe under-utilisation, there is no housing supply crisis. Rather, rising prices indicate significant distortions created by policies supporting rent-seeking behaviour.
Government and statistical bodies need to recognise this disparity and employ a more comprehensive data analysis of vacant housing stock.
Footnotes:
[1] Residential per capita consumption in Melbourne is currently 183 LpD.
http://www.afr.com/real-estate/leaky-data-water-use-shines-a-light-on-occupancy-20151207-glhewz
http://www.businessspectator.com.au/news/2015/12/9/property/vacant-properties-soar-victoria
http://www.macrobusiness.com.au/2015/12/the-melbourne-ghost-city-revealed-2/
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