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Matusik Missive – A new paradigm?

20^th October 2010

The numbers of housing loans and new housing starts continue to slide. Every excuse under the sun is offered up as to why. The real reason, being an actual lack of demand, is rarely mentioned. But in short, buyers across the board are not that interested in buying residential property at present. This is especially the case for new stock.

Why?

Let’s cover the new supply first. This follows on nicely from the most frequent reply to our three-part urban myths missive series last month, which posed the question as to why a proper study into “what the market really wants” isn’t done. Well, we have done several; for the PCA for their Australia on the Move publication and for several clients including the Brisbane City Council.

In short, the current new supply is wrong. It is either too small, of limited quality and/or overpriced. What’s on offer too often does not offer value for money. Hence buyers increasingly opt for something established, which they might renovate or refurbish in the future, rather than buy a new dwelling.

In an ideal world, many would buy something alternate to the detached house, but only at prices much cheaper than new apartments, townhouses and the like are currently asking. In general, the market expects “other” housing to be about 20% cheaper than a detached house in the same area. Whilst they expect some shrinkage in the size of alternate accommodation, the current offerings are considered by most to be way too small.

Another complaint is that the quality of the new product – and in particular for apartments – is far too low for the prices expected. The thirst for a quality product is an opportunity and one which should grow in demand as baby boomers enter retirement.

The cheap and cheerful (often of late more “nasty” than “cheerful”) trend has gone too far. It is somewhat ironic that the housing industry is vamping up the supply of really tight product just as the emerging demographics suggest the opposite. Household sizes are increasing across Australia – fuelled by a baby boom, relatively high overseas migration and adult children remaining (out of choice) at home with their parents.

When it comes to existing product, many vendors, in short, want too much for the property. There is a flood of second hand stock on the market; the customary spring market pick-up is missing this year (although its impact is usually overstated) and with the threat of a further interest rate rise pending, vendors need to get realistic quickly or take their property off the market. Failure to do so could result in substantially lower offers (than a realistic price today) in the near future.

This issue was brought home quite clearly when a 293 square metre penthouse on the Brisbane River in Kangaroo Point (with uninterrupted views of the Brisbane CBD) was passed in at auction a few weeks back. The reserve was set between $1.2 and $1.4 million which equates to a paltry $4,600 per square metre.

Ironically, it is a buyer’s market and could be for some time to come – read “years” not “months” – yet potential purchasers are not buying. Usually and somewhat ironically, rising interest rates get interested parties off the fence. Maybe that will occur once the RBA actually moves the cash rate, but maybe not.

I cannot help but feel that we have entered a different paradigm – one in which a dwelling is a home, rather than a vehicle for speculation. If that happens, the term “real” estate will regain its true meaning.

To revisit our Aussie Urban Myths commentary visit newgeography.com