Housing affordability and the empty homes scandal

housing-affordability-empty-houses
Housing affordability in world capitals. Photo of Melbourne’s Southbank by Ashley Rambukwella flickr CC https://flic.kr/p/KfdUMR

The inspiration to start writing (again) about housing affordability came from left field. I was sitting back enjoying an American roots band, The Brothers Comatose, at the Blue Mountains Music Festival in Katoomba. Lead singer and front man Ben Morrison introduced the band, saying they were from San Francisco but maybe not for long. “The price of houses is crazy there (man) and most of the musicians I know are moving out because they can’t afford to live in the area.”

“Maybe we could move here,” he suggested, and the audience groaned, knowing that housing affordability is just as big a problem in Sydney and surrounds as in San Francisco, Vancouver, New York or Paris.

“Can we sleep on your couch?’’ he jested, before doing what musicians do to avoid thinking about the cost of living. Great band, by the way (check out this bluegrass old-style tune around one microphone).

Morrison’s complaint rang true – I did a modicum of housing affordability research which quickly showed that the median price of a house in San Francisco’s Bay area clipped $US1.5 million in the fourth quarter of 2017. The California Association of Realtors Housing Affordability Index shows that it would cost $US7, 580 a month to service the mortgage. The average monthly rent for a two-bedroom apartment is $US3, 441.

Housing affordability is a myth in Vancouver, Canada’s biggest West coast city. The 14th annual Demographia affordability study ranked Vancouver the least affordable among 50 American and Canadian cities. Internationally, it is ranked the third least affordable city among 293 locations around the world (Sydney was 2nd). The British Columbia Provincial Government has made several attempts to rein in the city’s galloping real estate prices, including a 15% tax on foreign nationals purchasing metropolitan real estate. Another new measure attempts to tackle a problem that plagues Sydney and Melbourne, Australia’s housing affordability problem cities.

The BC government conducted a survey which found that 8,481 houses in Vancouver were unoccupied during a six-month period. That’s 4.6% of the housing stock. Now the government is going to levy a tax on people who own houses and don’t occupy or rent them. The tax will be calculated at 1% of the assessed value. So the owner of a two-bedroom condo in Vancouver valued at $900,000 and deemed to be unoccupied will pay the BC government $9,000 a year.

Meanwhile, the housing boom in Vancouver is on the downturn, according to the Vancouver Courier, and they should know. Still, with a median house price around $3 million (Dec 2017) and condos going at $1 million apiece, it’s maybe time for that bubble to lose some air.

Meanwhile Down Under, house prices keep rising

Melbourne and Sydney made into Demographia’s top 10 list of the least affordable cities in the world. Sydney’s median house price of $1.11 million assured it of that invidious claim. Demographia ranks middle income affordability using a price-to-income ratio. Anything over 3 is rated unaffordable. On this basis, some of the world’s most affordable towns included Youngston, Ohio (1.9), Moncton, New Brunswick (2.1) and Limerick, Ireland (2.2). There are no affordable Australian cities on Demographia’s watch.

The least affordable city is Hong Kong (19.4) then a gap to Sydney (12.9) and Vancouver (12.6). Melbourne (9.9) is slightly more unaffordable than the aforementioned San Francisco (9.1).

Studies have shown that Melbourne is one of the big culprits in hiding empty houses among its residential property stock.

Australia’s 2016 Census showed that 11.2% of Australia’s housing stock was described as unoccupied on Census night. Empty property numbers were up 19% in Melbourne and 15% in Sydney compared with the 2011 Census. This growing anomaly is a global trend in the world’s biggest cities which have allowed rapid apartment developments.

Just why 1.089 million houses and units were unoccupied on Census night is hard to explain. But it probably suggests the owner/s were not in need of rental income and would rather keep the place in mothballs for use when the wealthy owners or friends and relatives visit (for the Australian Open, Melbourne Cup or the Grand Prix) or are relying on capital gain without the need to bother with tenants.

Hal Pawson of the University of NSW wrote in The Conversation that the spectre of unlit apartments in Melbourne’s night sky prompted the Victorian government to introduce an empty homes tax. Like Vancouver, this is levied at 1% of the property’s value. Similar taxes have been introduced in Paris and Ontario. Mr Pawson, Associate Director – City Futures – Urban Policy and Strategy, City Futures Research Centre, Housing Policy and Practice, UNSW, (try getting an acronym out of that. Ed.)  says the Melbourne tax only applies to inner city and middle suburbs and, there are ‘curious’ exemptions for foreign nationals with under-used second homes.

The flaw in the scheme is that it relies on self-reporting. Pawson says the lack of reliable data on empty homes is a major problem in Australia.

Census figures substantially overstate the true number of long-term vacant habitable properties because they include temporarily empty dwellings (including second homes).

Prosper Australia uses Victorian water records to estimate that about half of Melbourne’s census-recorded vacant properties are long-term “speculative vacancies”. That’s 82,000 homes. A similar “conversion factor” to Sydney’s census numbers would indicate around 68,000 speculative vacancies.

Labor Opposition shadow Treasurer Chris Bowen has proposed a national tax on homes left empty for six months or more.

Pawson says these “cruel and immoral revelations” come at a time when 400 people sleep rough in Sydney every night and hundreds of thousands more face overcrowded homes or unaffordable rents.

He says Australia has a bigger problem in terms of under-utilised occupied housing. Australian Bureau of Statistics survey data shows that, across Australia, more than a million homes (mainly owner-occupied) have three or more spare (read unused) bedrooms. A comparison of the latest statistics (for 2013-14) with those for 2007-2008 suggests this body of “grossly under-utilised” properties grew by more than 250,000 in the last six years.

While authorities are grappling with the issue and how to perhaps tighten foreign ownership laws, the ANZ Bank did its own survey. Foreign buyers were playing an increasing role in spurring demand for new houses and apartments, it found. The ANZ analysed Reserve Bank data to conclude that in 2015-2016, foreign investors bought between 30,000 and 60,000 dwellings in Australia. This equates to 15% to 25% of all new dwellings, 80% of which were apartments, which can be bought ‘off-the-plan’.

There is good reason to suspect that the new apartment markets in Hong Kong, Vancouver, London, Paris and other desirable world capitals are underwritten to some extent by foreign nationals (including Australians).

The problem which could arise, say in the case of a global recession, is what happens in cities like Melbourne and Brisbane where foreign investors have bought up to 35% of new stock, if these owners are forced to sell.

Not to worry, most big box discount stores will give you a large cardboard box in which to live. The dumpster bins behind shopping centres have perfectly good food that’s just been chucked out because it has passed the use-by date.

Trust me.

FOMM back pages

Travel safe this weekend, people

Housing bubbles here and abroad

(New housing in Pokeno, 57 kms south of Auckland city. Risky motorway photo taken by Bob, who will go to any length for FOMM readers!)

Kiwis and Aussies aged 45 and over share one obsessive thought at this moment in time: how will our kids ever be able to afford their own home? Unless the housing bubble bursts, they probably never will be able to, even when the Boomers die off and leave their kids a residual estate.

The housing market both here and in Aotearoa has got away from humble wage earners. On my all-too quick visit to the old country, Auckland’s steaming hot housing market was all anyone could talk about. After a January dip in median prices (a reaction to new tax laws introduced in late 2015), the March figures revealed a $100k hike in the median price to $820,000.

Stories abound of people who bought a cottage in a then-dowdy Auckland suburb for $100k or less in the 1980s and sold last week for $1 million. The New Zealand Herald’s front page on April 13 proclaimed “Here we go again” to head a story about Auckland’s median house price. The story continued on page 3 where Labour Housing spokesman Phil Twyford said the $70k increase in the median price in just one month was almost one and a half times the median income in Auckland.

Not surprisingly, investors accounted for 44% of the 3000+ sales used to determine this alarming figure. This is similar to the Australian trend, where for the past two years just over 50% of housing loans have been made to investors.

Buyers with cash and/or equity are surging into the Auckland housing market and many pundits feel it is inevitable that it will join Sydney in having a $1 million median house price.

Everyone I spoke to told me that Auckland/New Zealand has the highest income to mortgage ratio in the world. The crusty old journo in me demanded that this be verified. The International Monetary Fund, which keeps track of housing costs vs income, indeed placed New Zealand 1st, ahead of Germany, Estonia and Austria. In sixth place came the UK and in 9th place Australia.

The ratio compares housing valuations to average income, the higher rankings showing that house prices have risen much faster than income. (Conversely, if you can score a job in Spain, where unemployment is still running at 22%, you can buy a cheap apartment and go running with the bulls in Pamplona).

If you were wondering how this is relevant, Spain’s economy went pear-shaped after their real estate market tanked in 2008. Caveat emptor!

The problem when housing markets get hot is the price rises are not matched by the prospective buyers’ incomes. In 2015, the median house price in Auckland increased $83,000, against a median income of $46,800. The data for this NZ Herald story, headed “Does your house earn more than you do?” was sourced from NZ Work and Income and the New Zealand Real Estate Institute.

In Sydney’s over-heated market, house prices are up to 12 times median income, according to a Sydney Morning Herald report in November. In mid-2015, the median Sydney house price was a headline $1,004,767, against a median household income of $85,067.

Meanwhile in Aotearoa, those determined to get their toe on the first rung of the housing ladder are fleeing south, as far as Huntly (a former mining town 97.2 km from the big smoke on State Highway 1), and north to Wellsford 77.3kms away. The plan is to buy, commute, save and over time upgrade closer to Auckland.

Pokeno, once a small Waikato hamlet just outside Auckland city limits, is now a forest of houses, if not nestling, then sprawling over the once green rolling hills. New housing is evident on both sides of the four-lane motorway which now extends to Hamilton and beyond. I had a trawl through real estate.com and was unable to find much new in Pokeno under $600k. So the early birds have already got their worms and now it is just another suburb of Auckland, a 57 km commute to the city.

Others have absconded to small towns like Te Aroha, Wairoa and Dannevirke, where a decent house and block of land (known as a ‘sixtion’) can be had for less than $150k.

New Zealand has few barriers in the way of investors – until recently there was no capital gains tax (as such) and no inheritance tax. Prime Minister John Keys introduced new measures in last year’s Budget, one of which was a tax payable if the (investment) property was sold within two years of purchase. Keys refused to call this a capital gains tax, saying New Zealand already had one, but the government has to prove “intent” to make a profit.

New Zealand also tightened its foreign investment rules and now requires all foreign buyers to declare a tax identification number from their home country. Kiwis don’t call it negative gearing, but as in Australia, expenses relating to investment housing (depreciation, interest, maintenance etc) can be offset against rental income.

Those who support a continuation of negative gearing in Australia claim that if it was abolished the property market would collapse. The Real Estate Institute of Queensland (REIQ) said 79% of its members and landlord clients believed that investors would abandon the strategy if Labor’s negative gearing changes were brought in. (Labor proposes to restrict negative gearing to new homes and ‘grandfather’ or exempt existing investment houses.)

REIQ Chairman Rob Honeycombe said the findings confirmed that changes to negative gearing would be disastrous for the Queensland property market.

“That will have a crippling effect on house values and on the rental market, where the private rental market plays such a critical role in keeping rents affordable,” he said.Prime Minister Malcolm Turnbull, no doubt sensing the pre-election atmosphere, has declared he will make no changes to negative gearing in next week’s Budget. The estimated 1.5 million people who invest in residential property would be sure to vote for the politician with the least disagreeable tax policy.

Meanwhile, the 25-44 age group, once the heart of the first home buyer cohort, is struggling to save for a deposit, faced by high rents and stiff competition for affordable housing. Assuming they could find a house in Sydney or Auckland for $700,000, it still means they have to save $140,000 for a deposit (about 14 years at $200 a week).

Their plight creates a dilemma for well-intentioned property investors, those who have simply decided that bricks and mortar is the best form of investment. Sure, they get the tax breaks, but they also have to take the investment risk in the first place and then the secondary risk that they might get the tenants from hell. The third risk may be a Pamplona-type charge for the exits if Labor gets up and changes the rules.

Part of the solution lies with the 814,000 Australians (2011 estimate), who have paid off their mortgages. Whatever their circumstances, they are the only people who, either by gifting money or using their equity for a loan, can help their adult children buy a house. Waiting for the bubble to burst is another option. Or you could move to Spain…there are apartments in Pamplona priced from 39,000 euros (about $A58,000). Buena suerte con eso

 (Thanks to Laurel (She Who Also Sometimes Writes) for being a splendid substitute when I was abroad )