A transcription of the Renegade Economists interview with Catherine Cashmore, regarding the 7th Speculative Vacancies report. Read the show notes here. Subscribe to the weekly the Renegade Economists radio show, featuring Georgist insights we wish were on the mainstream media.
Karl Fitzgerald: Alright listeners, you’ve heard it before but we’ll say it again, it’s time for the Speculative Vacancy Report Show Special here on 3CR’s Renegade Economist. For our seventh year we’ve released our investigation into empty homes in Melbourne and this year we’ve been very lucky to have Catherine Cashmore write and compile this painstaking report. So Catherine, welcome back to the show.
Catherine Cashmore: Thank you Karl.
Karl: Give listeners an overview of how we orchestrate this report and what some of the major findings were?
Catherine: Yeah, so what we do is we look at abnormally low water usage across Melbourne and the way that we do that is we get water data from the three major metropolitan water retailers, so that’s City West Water, South East Water and Yarra Valley Water, and we look at water usage that would be abnormally low for a household to use, and that is assessed to being anything less than 50 litres a day. We then compile the statistics to show those that are using no litres a day and those that are using less than 50 litres a day, because there’s a very small percentage of households that are assessed to use less than 50 litres a day – that’s only 3% of households. But the vast majority of the water usage that is below that amount is due to garden upkeep, say, on empty properties or leaks that most of which go unnoticed and so that’s why we set that benchmark, the threshold at that level. That gives us a really good picture across the metropolitan region of where investors are holding their properties vacant. Certainly within the inner city it’s assessed that the larger proportion (of vacancies) would be investors, in other areas it could be for other reasons. So, for example, a deceased estate, for example, if a family has inherited a property and they don’t want to immediately sell it and they could be just withholding it from the market, it could be full of furniture, we just don’t know, but we speculate that the larger proportion are investors that are hoping to get capital gains from their property and they’re certainly not concerned about getting any kind of rental income or utilising that home for any effective purpose.
The findings were really interesting and fitted in line with most of the previous reports to show that the larger proportion of vacancies are either within the apartment market in the inner city or out in the western regions of the state – the regions that typically fit into the investor budget of around $450,000 to, say, $650,000 and also because of that they have obviously a very low land tax as well, which I know you’ll probably prompt me a little bit more on later. But also these are the areas that are not so accessible for a lot of homebuyers because they lack essential family amenities and government taxpayer-funded facilities.
Karl: Catherine, what were the headline findings from the 7th Speculative Vacancies Report?
Catherine: We found a stunning 64,386 residential properties are potentially vacant. So that’s 4.4% of the total housing supply in Melbourne – 94.4% of the housing supply in Melbourne, (which is the area that the water retailers cover). I’ve also used vacancy rates by SQM Research, they’re possibly the most reliable indicator of current vacancy rates, to measure the available properties advertised for renters. To put it in some kind of context, if you add the Speculative Vacancy rate to the current published vacancy rate of 2.5%, then it comes to a figure of 6.9%. So nearly 7% of Melbourne’s properties are vacant, withheld from the market, potentially unused.
Karl: People often ask me, “Karl, why do you add the water-based vacancy findings to the published vacancy findings we see online and in print?”
Catherine: Because the long term vacancies are just as important as the short term vacancies when we’re assessing the data from an economic perspective. So for example, if you have a downturn in economic activity it’s highly likely that a lot of withheld supply would be put onto the market; investors would need to get some kind of income from their properties. This is precisely what we saw in 2008 and additionally in 2011 and 2012, and that was an abundance of small one and two bedroom apartments, for example, coming onto the market in areas like St Kilda and in Carlton and the inner city areas. And it just exacerbated the downturn in that sector of the market, the rental vacancy rates went up and the prices for apartments were depressed because of it. So it’s important for us to understand from an economic perspective how much of Melbourne’s housing supply is vacant and being unused, but also from a government policy perspective. I mean, surely it’s inefficient to have so much land that is lying idle. It causes problems for housing affordability; it puts upwards pressure on prices and rents; it means that while we’re concentrating on expanding our city boundaries outwards to build more and more housing, we’re not taking notice of what’s happening to our housing stock within the city; and, again, the economic inefficiencies that that causes as a whole.
Karl: The most staggering point to it is that we’re supposedly in a housing supply crisis and here we are finding some 64/65,000 empty homes. What have some your friends and colleagues been saying about this report?
Catherine: It’s a report that is ignored overwhelmingly by the FIRE sector, so the real estate industry and the finance industry. Some colleagues would find it useful. Certainly it’s useful when advising investors where to purchase. I mean, if you were an investor the last place you would want to be buying is in an area where there’s a lot of vacancies because you’d understand as an investor the most important thing is to buy in an area that has consistent solid demand. And that means your investment is protected if the market goes soft and you need to sell it, you need to maximise the chances that you can sell it or get some kind of rental income. If there’s already a lot of latent supply there, then that’s not going to be a good area for investors to invest. So if they were wise about it, they would be looking at the report from that perspective.
But certainly as a policy tool it gets a lot of attention because it is a very effective starting point for analysis for government policy to assess what’s happening with our housing market and also to look at the underlying reasons why that might be the case. It’s not acceptable that we have so many properties lying idle. The housing supply crisis is a false crisis; we actually have an oversupply of housing. The trouble is that housing is a) too expensive, partly because of the withheld supply that adds additionally to that, and b) a lot of it is not being built for the biggest demographic of buyers and renters that need accommodation and also the biggest demographic that saw a downturn in the amount of people owning their own homes and an uplift in the number of long term renters, and that’s families with children. They’re the ones that we need to be looking at to house because that’s where the biggest demand is coming but where we’re seeing most of our supply, the vast majority of it, is tiny small one and two bedroom apartments within the inner city. The other proportion of it is in the outskirts of the city in areas, again, which are lacking amenities relative to the population in those regions. And that’s not acceptable, that’s not wise policy if what you’re looking to do is to assist families, increasing affordability, which would have a rollover effect on productivity as well.
Karl: Well, I would beg to differ that the report’s been largely ignored. It’s been picked up by over a dozen newsagencies this week and everything from ABC24 TV to Jon Faine, ABC Radio to Business Spectator. So there has been some widespread interest, but the question is going to be whether the policymakers are willing to really stare down the barrel of what western economies have become. Essentially we’re creating commodities for this Ponzi game, and this is the scary thing that this report reveals is that there is all this latent supply out there and the people who most need it can’t get it, but the people who do get it make the most money.
Catherine: That’s absolutely correct. When I say that it doesn’t get the attention that’s needed I’m not talking about the general media, I’m talking about the areas that it needs to be flagging attention, so for example, the policymakers. And also when I talk about it not getting much attention within the industry I’m talking about the ones that promote the Ponzi style of the market that we have currently, which would be real estate agents and so forth, that aren’t overly keen to flag that there are big concerns not only for the future of affordable housing, which they’re less concerned with, but they’re obviously more concerned with promoting housing as being a great investment and they wouldn’t want to flag that there’s a large number of vacancies across the city.
Karl: You’re on 3CR’s Renegade Economist this week with Catherine Cashmore, the report author for the 7th Speculative Vacancies Report that we’ve been banging on about for seven years now here on the 3CR airwaves, tantalising squatters out there with the thousands of empty homes and asking government to reform the tax system to encourage these properties onto the market. Now Catherine, you talk there about the importance of data and I’ve just chatted you a link regarding Williams Landing. What do you think? Let’s have a deeper look at what’s happening at Williams Landing.
So listeners, check www.EarthSharing.org.au for the show notes on this because I will have links to these pages from www.realestate.com.au that I’ve just sent Catherine, and we’re looking at Williams Landing, which is in between Laverton and Hoppers Crossing in the west of Melbourne. It has what I’ve nicknamed the Millennium Falcon of train stations that’s just been built for the area. It cost a whopping $110million as part of the regional rail link built in Melbourne’s west, our first major train extension in some 60-odd years. And Catherine, what I was interested in was the level of data on these pages. So we’ve got the median property price at $470,000, some 25/30kms out of Melbourne, the rent per week is basically $400 and, I thought this was interesting, the average demand on market for Williams Landing 31 people visit per property, versus 51 visitors per property on average throughout Victoria.
So the level of dig down data is pretty extensive in real estate, but I’m interested in how some of these properties are drip fed to the market to keep prices going upwards.
Catherine: In the outer suburban areas of our state the development process actually exacerbates house prices, it pushes them upwards. All of the urban boundary is zoned for residential development. Development can’t occur until they’ve undertaken a Precinct Structure Plan, until the Planning Authority has done that and that takes around three to four years. And over that process speculation obviously develops because that site is going to soon be released for housing. That pushes up prices initially, but also the infrastructure contributions are currently loaded onto the upfront cost of the house. It’s assessed that they account for 40% of a house and land sale price, all the current taxes that are very onerous to the buyer.
So when you purchase a home you’re paying this inflated price which is on face value charged to the developers for infrastructure contributions. But you never actually see the infrastructure being built a lot of the time because over 50% of the land within a Precinct Structure Plan can be held off the market by land owners that haven’t sold out to developers and have absolutely no intention of building, but also do not have to pay the infrastructure contributions for the infrastructure that the council needs to build that will inevitably push their land prices higher. The builders, because they pay such a high price for land in the first place and because they need to get a return on yield to make the whole exercise profitable, are required to drip feed their stock onto the market. It’s called “staged releases”. So they have, say, 25 releases or 50 releases in one go, it can be up to 100, and they assess how fast they’re going to do those releases just based on how the market is reacting. So they decide what price they want to get. It’s got nothing to do with supply and demand pushing prices; they decide what price they need to get and then they structure their releases accordingly to target that price range.
Karl: So Catherine, I would say that they’d have more detailed figures than here for Williams Landing, for example, and they would not release the next tranche of properties unless they had probably 40 visitors per open house inspection and then, I don’t know, maybe they’d have some stat of what, five or 10 people taking the contract?
Catherine: That’s correct. They use a whole range of tools to assess how they’re going to structure their releases and so forth, and also they’re aware that they need to appeal to quite a wide demographic of buyer. So if it’s going through a market that is being constricted by affordability constraints, for example, because they need to support that land price they’ll cut the blocks down smaller, so that the land component isn’t such a big component of the house and land price, to appeal to that market. But there’s so much data that’s available out there for homebuyers, like you say, like this where you can see what’s happening within the market. So it’s quite easy to assess what’s going on and it’s easy for these development companies to structure their releases accordingly to what the market is demanding at any one time.
So it’s all important information to have and Williams Landing, because they’re outer suburban areas, capture the biggest swathes of population which are generally families with children that are moving in from nearby LGAs (Local Government Areas) in search of affordable land. Unfortunately, when they get out there the land isn’t all that affordable; it still exceeds what is affordable for those people that are in the lowest percentage of incomes, the lowest 40% of incomes. And all of that we’ve detailed on the Speculative Vacancies Report really highlight how, even with the vast land releases that we’re doing in the outer suburban areas, we’re not improving affordability for the large majority of homebuyers that really need prices to come down.
The thing about these median prices though is they cover up such a lot. I mean, the median price is elevated because a lot of the accommodation that’s being released is new accommodation. So for example, if you were to buy a house and say you want to sell it as an investor in five years’ time, you’re not actually going to make essentially anything on the actual house price. The median price may still be elevated, but of course it takes in the premium aspect of the property being new and the developers, because they have control over the land releases, can control how much is coming onto the market at any one time. So they can let a flood of supply out or they can really constrict supply, but meanwhile any property that you purchased, say, five or ten years ago is starting to age, compared to the new stock that’s available.
So for a lot of homebuyers the compensation of moving so far out is to buy something that’s shiny and new. They’re having to move far away from where all the savvy restaurants and shopping strips and best schools are and so forth to these areas and often they’re looking for something that compensates for that distance. It covers a lot. It covers over a lot of the median prices in these areas. The house prices – the developers win in other words. The developers get the price but if you’re an investor, as we know a lot of people are that invest in these areas because of the vacancies, they’re not winning in terms of growth.
Karl: You raise an interesting point there that a number of new indices are opening up on the resale value of homes, the second sale of a property, because in a way they’re acknowledging that this drip feeding process is distorting prices and a fairer market valuation is looking at what properties can be sold for on their second sale.
Catherine: That’s absolutely right and what you find often with, especially in the inner city and anything that’s new, you pay a premium and the property price starts to depress before the land value can lift high enough to bring the property price upwards. So to explain a bit further, in the inner city any new apartment that you buy where you think you’re getting savings because of the depreciation that you can claim against income tax because of rental guarantees and also stamp duty savings, for example, on off-the-plan: it’s all added onto the upfront cost of the property. What I find commonly in the research that I do is that you will find people paying 20-50% above the market value of those properties and the first thing they start to do is age. The newer stock that’s being built therefore is more desirable to a lot of homebuyers and a lot of investors, particularly overseas investors. And you find that the property actually goes down in value. It can take say three, even longer than three years to even get to a point where it equals the value that was initially paid.
So these properties, the way that they are pumped to what is often quoted your mum and dad investor, as if we’re assisting mum and dad investors to save for their retirement, is actually taking them backwards. It’s not advancing them at all from an investment perspective at all; they’re actually extremely poor investments. So the whole system is set to fail.
Karl: So Catherine, after that segue into real estate theory, can you bring us back to what the report found in Williams Landing? They’ve just had this $110million station built for them, what happened to vacancy rates?
Catherine: Well, vacancy rates lifted, as they did in many of the suburbs that we assessed, quite markedly. So the vacancy rate judging on just the 2012 water data for the 2013 report was 3.1%. This year that vacancy rate had lifted to 8.3%. So if you add the 8.3% SV rate to the published vacancy rate, there’s actually over 10.2% of properties vacant in Williams Landing. What you find though is that prices aren’t actually getting any cheaper for homebuyers because of the process that I explained previously and if you do a quick search of online listings it’s clear why. You’ll find an awful lot of sites that are close to Wyndham Vale and marketed as Landbank Investments, in other words sites that you can sit on, do nothing with and just watch the price grow.
Karl: Well, the other thing that interests me is this regional rail link out in Tarneit, a bit further out. Dennis Family Homes owns the land out there and has had two $50million train stations built on their land, Wyndham Vale and also at Tarneit. And the Tarneit vacancy rate had increased as well, though not quite as extensively, I think it was only 5.6%. But it sort of gets me thinking, supposedly when supply goes up prices come down; supposedly when we build infrastructure it’s a good thing for the community; but we’re starting to see a bit of a trend here that when the public builds a new train station the vacancy rates go up and the prices go up. So it’s a market in turmoil when it comes to housing and to call it a housing supply crisis, we’re certainly shedding another light on this phenomena?
Catherine: Yeah, we have no housing supply crisis; we have an affordability crisis which is being exacerbated by the whole process. So for example, you think building a train station, everybody cheers when a new train station is announced, except it never actually helps homebuyers. The value sinks into the land price and the only person that it’s helping are investors in the area or homeowners in the area that see their house price go up quite markedly and get windfall gains from the process. Our market is bent towards the investment sector. The home market and the residential market has got nothing to do with homebuyers; it’s got everything to do with investors. And government has manipulated policy to make sure that investors win out, but homebuyers searching affordable land and first homebuyers that can’t even get a foot into the market are the ones that miss out.
Karl: You’re on 3CR’s Renegade Economists. We’re discussing our yearly vacancy report, the 7th Speculative Vacancy Report, which found 64,386 empty homes throughout Melbourne. And it’s not just infrastructure where vacancies tend to rise but also culture, Catherine. What about what’s going on in areas such as Carlton South and Brunswick and those sort of hipster hot spots? Sounds like the insiders are there again exploiting what the community wants to do?
Catherine: Yeah, well, seven out of ten apartments in the inner city are owned by investors and they’re built for investors.
Karl: That’s insane, how do they get those stats, seven out of ten?
Catherine: Seven out of ten, well, you can work it out from the rental stats, but the research that’s been done is pretty comprehensive. In the Docklands it’s even higher than that and in areas of Sydney you’ll find it higher than that. So when I’m saying “seven out of ten”, in many areas it’s actually in excess of seven out of ten investors own properties in those areas. But these properties are built for the investment sector. Don’t believe anyone that tells you that we’re a downsizing nation and that everybody is moving into apartments; it’s actually just completely untrue. What you’ll find from the data – and the stats that are exploited most are the ones that say that we have a rise in percentage of single person households. What you find is only 14% of single person households, for example, live in a one bedroom apartment; the vast majority are our ageing population that are widows or have lost their partner and they’re rattling around in three or four bedroom family homes because, once again, policy just doesn’t make it economically advantageous for them to sell their properties and to downsize. Even from people that are in their early 30s, the biggest demographic that live in apartments, figures only peak at 27 years. Then what usually happens is people get into a couple and they need something that’s more substantial because they’re thinking in five years’ time they might have a child or they want to have a house where they’re not going to have to move or not going to need to upgrade within a sort of seven to ten year period, which is the average holding period for housing stock in Melbourne.
So the apartments to the degree that we’re building them – I’m not saying we don’t need apartments we do – but to the degree that we’re building them it is a massive excess of oversupply.
Karl: So we’re talking here about in effect this neo-serfdom-type era jumping ahead at a rate of knots with seven out of ten homes owned by investors in many areas that most people want to live. What about the commercial sector Catherine? That’s one where so much of economic policy is supposedly built around providing greater employment opportunities and people are told to perhaps live out in the suburbs where these new employment hubs are being established, but what were some of the findings that came through from our commercial vacancy rates?
Catherine: Well first of all, Caroline Springs stood out as it did last year. There was a slight reduction in the vacancy rate from 2012, which was 54% of commercial vacancies, to 2013, where in this report we found 46.7% were vacancies. You can look at the vacancy rate like the unemployment rate because if a commercial site is being unused then it’s not generating any employment for the area and it’s having an effect on local jobs, it’s not attracting local jobs, and it also has a rollover effect on the small industries surrounding it. So for example, in the inner city we found an awful lot of office vacancies and if an office isn’t being used that means that there’s less people that are going to use the little newsagents, for example, or the café that’s around the corner. It also means that if a place isn’t being used – and again this applies to the residential sector as well – that people have to go further to find employment opportunities, we’re not using our land effectively. But there are plenty of things that play into the commercial market as to why sites are vacant. You get the usual scenario of big retailers, supermarkets, for example, retailers like Bunnings, buying up sites under the guise of future development. Often that is just to keep their competitors from getting onto those sites and there’s no time limit of when those sites can be developed. So once again it’s withholding land from the market that could be used for more effective purposes.
Within the inner city a lot of our office stock is low-grade office stock. So in other words, it’s not attractive to the prime industries that work in the city, which are business services – read the FIRE industry – the financial services and business services that want the updated apartment blocks that were built post-2000. So you find a lot of those are vacant and, once again, there’s no policy in place, no improvement-minded policy to stimulate renovation. So we really need to look at our commercial vacancies. Also in the middle ring suburbs, in areas like Highett and Darebin for example, which also again feature quite highly on the vacancies report, these are areas where demand is not high. We need to assess whether some of those commercial areas would be better utilised for housing or other community facilities, parks, community centres and so forth. There’s no advocacy into this, there’s no studies that concentrate on this, and there’s certainly no policy in place to stimulate behaviour into that direction.
Karl: What concerns me is that we have this supposed infrastructure government, it’s all about improving transport times for some of these industrial hubs and if they’re a third to half empty, then no wonder transport is taking so long. We’re sprawled out so far and I just wonder whether this hollowing out in the manufacturing sector, the online focus of so much business, is going to see perhaps the commercial front being the Achilles’ heel that finally whacks investors over the head to say, “Look, things are meant to be based on the real economy, the productive economy” rather than this fantasy land that investors live in where there’s all this marketed scarcity?
Catherine: Yeah, we’ve pushed prices up so far that we’ve got exactly what I said in the report, and that’s a misallocation of credit that’s led to greater and greater private household debt and funds going towards buying housing and the associated living costs. It’s not just the house that you have to buy; it’s also, like you say, the travel involved in commuting to areas that are on the outskirts of the city, electricity costs and other costs, food costs, which go up because, once again, if we have to transport food from areas that are further away then that increases the price of food. So it has a rollover effect across the whole of the economy. High house prices are bad for the economy. They’re never a good thing and unfortunately the culture that we live in always promotes them as being a good thing, as a sign of economic prosperity. They’re not, they’re a sign that the economy is effectively in a housing bubble and at some point that bubble is going to collapse, that the borrowings, the loans that they’re taking out are not going to be able to be supported because, like you say, we’ve eaten out the productive industries in the state.
Karl: Catherine Cashmore, finishing off, when you look on page four of our report you see the Melbourne Top 20 Vacancy Heat Map and you can see there quite clearly that probably three-quarters of the Top 20 vacancies exist in the western side of Melbourne. Why do you think there’s such a prevalence there and how do people in suburbs like Sunshine feel the brunt of this?
Catherine: Firstly, as I said earlier, they contain a large proportion of stock fitting into the typical investor budget, which is around $450-$650,000. But additionally, Victoria makes really ineffective use of the State Land Tax and there’s a zero rate levied below an assessed value of $250,000. So that effectively implies that a property that’s valued at $450,000, for example, which a lot of the homes right on the outskirts of the state (particularly in the west of Melbourne), they’d only be liable for a $675 annual land tax or approximately, say, $900 per year in council rates. So that’s a total of $1,600 which is just nothing in comparison to the capital gains that you get, particularly with the infrastructure that’s going into the west. So we’re pouring money into building train lines which is just going to stimulate further the capital gains. So even if you look over the last 12 months alone, in areas like Sunshine you’ve seen, say, $30-60,000 capital gains on some of those sites and many of those sites are withheld from the market, that are not being put to any effective use.
So you can see what the incentive is behind investment in the housing market and you can see why it’s of no consequence to a lot of investors to keep their homes vacant. The rental income and the amount that they have to pay in land tax is trifling compared to the rewards that we gift them. So for example, owners in the local government areas of Boroondara and Whitehorse, for example, where they have excellent facilities, education facilities and public transport facilities, got windfall gains after 10 years of holding their properties in excess of $500,000. If you contrast this to the areas in the west, in Melton and Wyndham for example, the difference was that homeowners selling after around 10 years in those areas only received gains of around $90,000. So it’s a stark contrast in locational value, which is reflected in the socioeconomic status of the area as well.
Karl: Catherine Cashmore, thank you very much for joining us on the Renegade Economist.
Catherine: Thanks Karl.
Karl: And there we have, www.CatherineCashmore.com.au reporting in on the 7th Speculative Vacancy Report. Check all the details at www.Prosper.org.au. I’ve just uploaded her actual presentation audio which you can click along to the PowerPoint there. So, check out all our work at www.Prosper.org.au and for the show notes www.EarthSharing.org.au. See you next week on the beloved 3CR airwaves.