With property, there's something in the water
A new report speculating property vacancies looks beyond the lay of the land and takes to the water, giving investors a more complete picture of Australia’s housing market.
Through the lens of residential vacancies in Melbourne, non-profit Prosper Australia’s ninth Speculative Vacancies report shows supply and demand in a different light.
Prosper tapped into water metre usage data from Melbourne’s three providers – Yarra Valley Water, South East Water and City West Wester – admitting that Sydney may have hit home harder, in terms of how the data could speak to the state of the market, but different water legislation makes it difficult to carry out a comprehensive study there. Based on the 2016 census, the research constituted 95.1 per cent of total properties available in Melbourne.
That brought 60,901 residential properties to the surface, as likely to be vacant during the 12-month period the study was conducted in 2017. These properties used less than 50 litres per day, while the average household was using around 161 litres per day.
This measured as a speculative vacancy rate of 3.9 per cent for all residential property in the Melbourne region.
But there were also 21,326 residential properties using zero litres of water per day – definitively vacant. All up, that would put the vacancy rate around 7.8 per cent. Some of these sites could also be subdivided, with Prosper inferring that dormant supply could actually be two or three times greater.
Swapping property for people, and imagining an Australia where the unemployment rate shoots up to the same level as this other kind of underutilisation rate, that would be a real headline.
Undersupply has been pinned as a contributor to the run-up in property prices. Could we be looking at another set of problems?
A different view on supply and demand
Prosper uses one particular chart to illustrate its side of the housing supply debate.
As shown below, Prosper believes when there is a chance for affordable housing to be delivered during a market correction, the theory of supply and demand falls apart. There’s an opportunity for catch and release, in terms of developers capturing the market and releasing new stock, but it’s never pursued. Prosper paints a picture of a catch-22:
“Private developers withdraw stock from the market during these times, and it’s a really important point that we have lost a decade or more waiting for housing supply to deliver affordability, but the core design fault is that it does not make economic sense for developers to keep building in order to reduce house prices,” Fitzgerald told Eureka Report.
“That is the key statement. Right now, we have housing listings down 28 per cent, a CoreLogic/HIA land report coming out recently showing landlocked prices around Australia rose 8 per cent to the September 2018 quarter, but supply, or the number of residential land lots sold, had fallen by 16.2 per cent.
“To me, that all indicates we probably have further to go in this correction considering land prices are still increasing from September. They are thinking it’s going to be a 20 per cent overall correction, which I think seems relatively minor — since 2012 prices have gone up 50 per cent nationally, so a correction like that wouldn't have the same shock value as a 6 per cent correction in 2011/12.”
What’s wrong with investors?
For investors, unreported vacancies may lull them into a false sense of security about an area. If a suburb appears more tightly held, rents might trend higher, which may read as a positive for investors, all the more if they can find a tenant. But if the market loses its equilibrium, tenants become harder to find, and the investor must rely on capital gains alone.
That’s fine when house prices are rising, but most of the benefits for investors fall away when the market starts to slip.
“In the frenzied real estate market, we had capital gains 2-3x greater than rental incomes, so it’s not as great a priority to rent out,” says Karl Fitzgerald, the project leader of Speculative Vacancies.
“And with the number of property investors growing that own six or more properties, if these people have 10 per cent of their portfolio vacant, it doesn't really affect their earnings.
“The role of scarcity is the prime driver in vacancy, which drives up land prices and delivers more than rental income.”
A foreign demand story
Box Hill topped this particular vacancy list for the first time (see right), making this a story about foreign demand too. Less than 20km east of the CBD, Box Hill has been viewed as a major growth corridor, even a second city to Melbourne, for several years. In the year to March 2018, prices in Box Hill fell around 25 per cent.
As per 2016 census data, around one-third of Box Hill’s residents were born in China or Hong Kong. While Box Hill’s vacancy rate isn’t up there as the worst in the world – China takes that title as a nation with a 20 per cent vacancy rate – a 9.6 per cent vacancy rate is still relatively high, even by Melbourne standards. (Although, playing Chinese whispers, Melbourne commercial property is getting up there, with the top 20 vacant suburbs averaging a 13.5 per cent vacancy rate.)
Vacant property soon to be a first-time Budget line
Victoria introduced a Vacant Residential Property Tax in 2018, after the Speculative Vacancies team completed this research. Prosper says to expect a Budget line item in the next few weeks highlighting how much revenue has so far been raised from this tax.
If the Budget produces a show-stopping figure, perhaps this marks the beginning for more reform, and elsewhere too. Fitzgerald describes the recently introduced tax as “incredibly weak” given its focus on inner-ring Melbourne suburbs only (see right again).
“We would love to see no revenue raised from this because everyone is chasing rents, but I dare say, there are conflicting pressures coming through at the moment."
Right now, Prosper is focused on campaigning for other measures such as an escalating, sliding tax scale, so that a longer a property is left vacant, the higher the charge. As well, a reformed state land value tax to replace stamp duty, a view gaining more traction.
Soaring land values have been a major factor in price appreciation, and yet the affordability debate is usually contextualised with houses, not land.
Although, further flipping the narrative, this may in fact be a data access problem, even more than anything else.
Why isn’t the ABS going knocking?
Prosper believes that media reports are painting an incomplete picture, relying on REIV measuring vacancies as voluntarily indicated by real estate agents, and SQM scraping online real estate advertisements that have been promoted for longer than three weeks. Theirs is the only report that considers off-market vacancies.
Prosper is open about its bias, to raise taxes on land, mining and other natural resources, so to reduces taxes on the ‘productive’ sector, being jobs and companies, to ultimately remove GST. Equally, however, it’s openly calling for more independent property data. Currently that’s hard to come by, which adds to the complexity of making forward-looking market projections.
There is a call for the Australian Bureau of Statistics to bring vacancies under its reporting scope, and treat the data the same as employment. Water is understood as a solid metric as consumers can't change providers mid-cycle, unlike with electricity, so the data isn’t fragmented.
The ABS is already believed to be modelling data on vacancies internally.
Regardless of where investors stand on either side of the debate, it seems all would benefit from freer access to property data.
Denmark is the surprising benchmark for open property data, Prosper tells Eureka Report, but there are many other countries, like the US, where you can access geospatial analysis for free, such as your neighbour’s land value and the regional average. (The US in fact distinguishes between seven different categories of vacant housing, including vacant for rent; sold but not yet occupied; even maintained for seasonal, recreational and occasional use.)
While we’re waiting, Fitzgerald says some investors read Prosper’s reports to take a punt on vacancy hot spots, planning to snap them up at market lows, which could prove a silver lining for some. As he also puts it though, “the resilience of the Australian economy continues to surprise me”.
Australia’s resilience aside, having better access to data, and paying more attention to land and demand, than supply and housing, would likely help investors beat the odds of a nasty surprise.