Monday, February 6, 2017

The wrong kind of supply

When it comes to housing affordability, we have a bit of a mantra here at the Brown Couch: it's not supply and demand, but the type of supply and demand that matters.

Jennifer Duke's recent article in the Sun Herald shines another light on this. Drawing on data provided by Don't Rent Me's Anthony Ziebell, Duke writes:
The vast majority of apartments in NSW are two-bedrooms – with 2298 – followed by 1322 one-bedroom apartments. And in many suburbs, one-bedroom apartments aren’t substantially cheaper than two-bedroom apartments, forcing some tenants to change their wishlist.
Ziebell is a friend of the Brown Couch, and he's run his data by us as well. He points out that more than half of new rental listings across the eastern states of Australia are 1 and 2 bedroom units. In New South Wales it was at 56 per cent the last time he pulled this data, which he obtains by regularly scanning online rental advertisements. This data comes hot on the trail of our own Rent Tracker report, which last week showed how rents have climbed even in parts of Sydney where thousands of new rental bonds have recently been lodged, indicating growth in rental supply.

So what's going on?

Ziebell suggests activity in Australian housing markets places too high a focus on investors' interests, rather than housing need. From Duke's article:
Don’t Rent Me founder Anthony Ziebell warned too much of a focus on investors, rather than those who will actually be living in the properties, is leaving Sydney filled with “inappropriate” homes.  
“Sydney’s rentals are the smallest in the country,” he said.
“If you’re building an apartment block, how many one-bedroom apartments can you sell compared to three-bedroom apartments? 
“It’s not about providing suitable housing, it’s about getting the maximum profit. This is leaving renters without anywhere suitable to live,” he said.
He's onto something. But before we get to that, let's back-track to October 2013 - when first home buyers were still vaguely a thing, and Catherine Cashmore penned an article for Property Observer called Investors or owner-occupiers: who are we really building housing for?. (Hint: it wasn't owner-occupiers then and it's not owner-occupiers now.) Cashmore was talking about conditions in Victoria, but the general themes could be applied anywhere:
The relatively small one and two bedroom units featured as 'affordable' tend to fall into the investment sector of the market, not just because of tight lending restrictions banks impose on first home buyers for this type of accommodation, but also due to high owners’ corporation fees set aside to service the lifts and other security features.
A great deal has happened since 2013, including the steady decline of first home buyer activity and a slowly rising interest in the plight of the poor old renter. But as we can see, those still standing in our dysfunctional housing system are yet to catch on. Or perhaps they just don't want to?

Like others, we've often cited the ABS Lending and Finance data, as we did in December 2013, to show that about 92% of money lent to property investors goes towards established dwellings. The remaining 8% contributes to new supply, as landlords are far, far more likely to trade in existing housing stock than invest in new construction. Property investment finance has more or less continued in these proportions despite recent development activity.

Even so there are considerable chunks of money being poured into new apartment blocks by investors, and this has been particularly so in areas close to jobs and transport over the last couple of years. Whether these dwellings are purchased by investors 'off-the-plan' or through a subsequent sale is beside the point for this discussion. What's not beside the point is that development is being propped up - if not driven - by this investment, and investment is being driven by something other than what Australian households need.

So what's driving investment?

We've written extensively about the impact of federal tax settings on the type and nature of investment in Australia's residential property, so we won't go over it again today. Suffice to say that it has changed the shape of the rental market. Investors purchase dwellings with prospects for capital gains in mind rather than any consideration of need or demand from tenants.

The recent insights from Don't Rent Me and the Tenants Union are yet more evidence of this.

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