Wednesday, August 19, 2009


Glenn Stevens is the most influential banker in the country. As head of the Reserve Bank, when Stevens speaks markets listen. But do politicians?

Recently, Stevens made some telling comments about the shortage of housing stock and the prospect of rising house prices. Those comments have since fuelled a flurry of ‘housing bubble’ stories in the media, but typically the underlying problem of supply was glossed over.

For the record, here’s what Stevens had to say on the 28th July to a Sydney business lunch in support of the Anika Foundation:

“A very real challenge in the near term is the following: how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices. Given the circumstances – the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs – this ought to be the time when we can add to the dwelling stock without a major run‑up in prices. If we fail to do that – if all we end up with is higher prices and not many more dwellings – then it will be very disappointing, indeed quite disturbing. Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over‑leverage and asset price deflation down the track.”

Stevens was by no means first to identify the problems of undersupply. Industry groups and some informed economists have been pointing to the supply problem for some years. Almost two years ago, the ANZ Bank flagged a shortfall of 200,000 homes by 2010, in a warning issued in November 2007 (you can read it here).

The Federal Government’s National Housing Supply Council confirmed the shortage in its ‘State of Supply’ report in 2008, arriving at a ‘crude’ estimate of 85,000 dwellings in the then market of 2008. (The Exec Summary is here).

So the fact that there is a shortage is undisputed and the number is probably somewhere between 100,000 and 200,000 and getting worse. That’s a lot of rooves. But what got Stevens worried was that this shortage, combined with renewed activity in the market as a result of the increased First Home Buyer grant and the prospect of a ready supply of housing finance, would push house prices up without addressing the shortfall.


The signs are already there. In Melbourne, a robust market is producing intense competition at auctions. New land releases are so eagerly anticipated that homebuyers are camping out to be first in line. As one agent described it “stock levels were so low buyers were being funneled into what is available and being forced to compete for it'' (full story here). Mortgage lenders have marginally tightened the amounts they will lend to first home buyers while typically leaving deposit ratios and LVRs untouched. (Story here). House prices generally have withstood the onslaught of the GFC, in some areas even rising marginally, leaving the IMF to suggest that Australian house prices remain 20% over valued – a sure sign that supply is insufficient for demand, and that even a global recession isn’t enough to cool people’s fundamental desire for shelter.

But public policy settings – the very things causing the chronic undersupply – remain unchanged. Queensland’s revised ‘South East Queensland Regional Plan’ will only exacerbate the shortage by setting hopelessly unrealistic targets for infill housing and limiting the areas capable of development for detached housing on the fringe. Councils are adding to the problem with unwieldy if not impossible approvals processes and usurious infrastructure levies.

The market reality now is that developers find themselves faced with a chronically undersupplied market – and are basically powerless to do anything about it. The first problem is obvious: a global credit squeeze and the retreat of lenders from the domestic market. Many developers can’t find the credit needed to proceed with projects while others have been hit with massive devaluations such that their existing debt ratios don’t exactly make the prospect of more debt something that would appeal to markets (or lenders).

A pricing floor?

But even if the credit squeeze was eased tomorrow, the raw price of land – a reflection of its scarcity – combined with the extortionate approach to upfront levies, has put a minimum cost on the price of new detached and attached housing. And that cost is currently above what many in the new homebuyer market can afford to pay.

I was quoted a figure this week of a minimum $500,000 per home unit for anything basic in Brisbane, given the land costs, infrastructure levies, planning compliance and build costs (which are higher for high rise developments than detached housing). A $500,000 home unit is roughly eight times average incomes, so the likelihood of finding a rush of buyers in that price range to ease the housing shortage isn’t good. (Assuming there are enough people wanting to live in units to begin with).

Detached house and land packages fare a little better although it would be difficult to bring any new supply onto the market for much under $400,000. Half of that, roughly, is the land cost alone. And that’s if you can find the land to begin with.


This creates the conundrum that has Stevens worried. New supply lead times are such that it would just about be easier to get a new coal mine happening than release a new housing estate. So supply is inelastic in response to the demand.

There is a price floor created by new regulatory weapons in the hands of public policy makers, which means that new supply is also very costly. Probably more costly than many people in the market can afford to pay. That being the case, developers will need to rely on second and third home buyers to make many projects stack up, or for the return of investors, provided rates of return remain attractive relative to alternatives (cash or equities).

So the chances of this nationwide undersupply being brought into balance by the rapid addition of new housing stock are looking pretty remote right now.

That being the case, you would imagine that the pressure of an undersupplied market will invariably find its way into the stock of existing homes. Evidence of that would be in the form of rising established house prices despite a climate of falling employment, or intensive competition for existing stock. Which is what we’re seeing now.

What happens next?

The shortage of housing is chronic but the willingness of public policy makers to do much about the problem is practically non existent. Given we can usually rely on policy makers to do the wrong thing (or nothing) when action is needed (other than perhaps hold an inquiry), the chances of radically changed policy settings freeing up land supply are remote, at best.

Economics 101 tells us that a shortage of supply relative to demand should equate to rising prices. And that’s quite possible in established markets, where competition for stock amongst those with secure incomes and the capacity to pay will translate into increasing prices.

But surely prices generally can’t increase by much – they are constrained by people’s incomes. If house prices rose much further, we would be facing housing costs on average at nine or even ten times average incomes, which on a global scale would make Australian housing the most expensive in the world (if it isn’t already). Incomes are unlikely to rise quickly for average workers and bank lending policies are unlikely to return the heady free for all of recent years. So that in effect puts a ceiling on price growth.

By the same token, prices are unlikely to fall, given the floor under the market created by public policy settings controlling the release of land (hence restricting supply) and the unrealistic approach to infrastructure levies.

The gap between that floor in prices and the ceiling is the space in which developers must operate to provide new supply. And it’s not a wide gap.

All of which means we are probably faced with a waiting game. Incomes need to rise faster than the increasing supply side costs created by policy settings, or those policy settings need to be relaxed so that relativity with incomes is restored.

In the meantime, Stevens has probably nailed what happens next. In his own words: “it will be very disappointing, indeed quite disturbing”.

Thursday, August 6, 2009


Interviewer: So Minister, we’ve heard a lot about your new planning schemes, can you tell us what’s actually involved?

Planning Minister: Thank you, and might I say I am very proud to tell you about how much planning we’ve actually been doing. The plans are very comprehensive, and have been painstakingly developed over many years, so they’re extremely comprehensive and we’re very very proud of what we’ve done.

Thank you Minister, but what’s actually involved?

That’s an excellent question. As I’ve said, these plans are comprehensive and the result of extensive public, industry and stakeholder consultation. The plans cover a wide area of planning – I can assure the people of this State that no stone’s been left untouched by any of this planning. So what’s involved is a very comprehensive plan for planning the future of our region.

Yes Minister, but what does the plan actually contain?

I’m sorry, but you possibly don’t understand what’s involved ...

Clearly not.

Well let me say the plan has actually been refreshed and recharged and we’ve done away with the dated, inappropriate plans of the past and replaced them with a whole new set of plans for the future that ...

... contain what exactly?

I’m not sure your listeners would appreciate your line of questioning. Look, it’s a very comprehensive plan – in fact, there’s more than just one plan in case you didn’t get that message. We have plans for every contingency, for every possible scenario, based on the extensive review of our planning and consultation with leading industry and public groups. In fact, it’s fair to say we’ve never had so many plans available for so many contingencies and interests that have been, in themselves, very comprehensively planned out. The Premier has told me she’s 100 per cent behind these plans and what they mean for our region.

Does she know what’s in them?

Don’t be flippant with me, of course she does, she’s a very well-informed Premier, who’s been fully briefed on all of our planning activities and the plans themselves and the consultation process and understands that these are the best plans we’ve seen for a long, long time in this great State...

Can I change the subject for a moment?

Provided you don’t miss the point about our planning. I welcome any enquiry into our planning!

Minister, your Department employs many hundreds of public servants in the planning field. Are the public getting value for money?

Of course! (laughs). Haven’t you seen all the plans they’ve produced?

But what are the plans for? I mean, why all this planning? What’s it for, where’s it leading?

Because (irritably) you HAVE to have plan for things, you can’t just let growth happen all willy-nilly without a decent planning framework. And let me also say, which is something you need to appreciate: planning takes planning. You can’t just produce the sort of plans we’ve produced without lots of carefully thought out planning for the plans. It’s a subtle point sometimes lost on a cynical media, but producing good planning is an investment in our future and that in itself needs to carefully planned out, which I’m sure your listeners would fully want.

Minister, we’re running short on time. Can I wrap this up by asking what has actually been DONE with these plans and all this planning?

Done? I’m sorry?

Yes Minister, what’s actually been done?

Oh, I see, well that’s easy to explain, you’ll need to redirect your question – you see, I’m the “Planning” Minister, the “doing” is not part of my portfolio. But when anyone is ready to do anything, absolutely anything, I promise you we have the plans! I’m very proud of that.

Minister, I’m afraid we’ve run out of time – that’s all we have time for today.

You should have planned that better then, shouldn’t you?

Thank you Minister.

Monday, August 3, 2009

Planning Never Never Land?

The one thing you should expect from any half decent plan of any sort is that it should have at least some vaguely remote chance of actually delivering on its ambitions. Otherwise, it isn’t a plan because the end result is unrealistic and falls into the realm of fantasy.

The release last week of the revised South East Queensland Regional Plan brings into focus many issues, but one central assumption – that infill housing targets can accommodate future population growth in existing urban areas – suggests this plan might have about as much chance of realistically being achieved as Peter Pan being told to ‘think happy thoughts’ so he can fly.

The revised SEQ Regional Plan attempts to ‘manage’ the growth of south east Queensland by containing future population growth largely into existing urban areas, and limits expansion on the fringe by imposing an urban growth boundary. The philosophy owes much to concerns about ‘sprawl’ (a pejorative term which on a global scale is hardly applicable here) and has its roots in land use policies developed in parts of the United States and Europe.

Setting aside any critique of ‘smart growth’ policies and their impact on housing choice and costs, the attempt to contain future growth in SEQ into existing urban areas is perhaps the most contentious aspect of the SEQ Regional Plan. Put simply, it is hard to see how the numbers stack up.

The targets.

The plan proposes that half of all new residents are to be accommodated in existing urban areas via infill housing (medium to high density). Within the City of Brisbane, the target is even higher at 88% of new growth. That figure isn’t really surprising given there’s really no large parcels of land left suitable for detached housing. But when you start to look at the raw numbers of infill dwellings required to meet the plan’s targets, the credibility gap widens.

For south east Queensland, the plan acknowledges the need for 754,000 new dwellings to accommodate predicted growth. Of that, 374,000 dwellings are mandated as infill (townhouses or high rise units). Within Brisbane City there will be 156,000 new dwellings of which 138,000 will be townhouses and unit type dwellings, according to the plan.

That’s a lot of units. Some back of envelope sums are helpful here. Imagine a twenty level highrise unit block, with four units per floor. That’s 80 units. The 138,000 dwellings infill target, if it was all delivered as 20 storey highrise buildings, would equate to 1,725 such twenty storey unit towers across Brisbane, between now and 2031. That works out to roughly 78 unit towers, each year, for the next 20 years or so.

For south east Queensland, the 374,000 dwellings infill target equates to 4,675 twenty storey apartment towers or 212 per year, every year, for the next 20 years.

Now the SEQ Regional Plan makes precious little comment about how the planners expect this scale of infill to actually be delivered. It’s a bit like envisaging a Dubai-scale apartment boom right here in Brisbane.

Does this sound like a plan, or are we being asked to think happy thoughts?

So where will they go?

The revised SEQ Regional plan does at least suggest that there are some preferred areas for infill development activity, particularly around transit nodes – which makes sense. Transit oriented development exploits existing public transport infrastructure (however overtaxed it may already be) and mixed use development to create work-live-shop-play environments. It can be tremendously successful, and Brisbane has a couple of notable examples already, with more on the drawing board.

But bring the issue of scale back into focus – the hypothetical 1,725 apartment towers are for accommodation only. They do not include additional requirements for more office space, more retail space, more schools, hospitals, medical centres etc – it’s a long list.

Chermside, Indooroopilly, Carindale and Upper Mt Gravatt are some of the activity centres expected under the plan to accommodate this frenzy of building activity over the next twenty years. But within these centres, the plan again is silent on precisely where the activity is to take place. It seems fair to ask the question: have the proponents of this plan at any stage pulled out a map and decided which entire suburban blocks are to be demolished to make way for the 1,725 apartment towers needed for infill development, or is there some new approach to infill which somehow creates new development sites in built out neighbourhoods?

The credibility gap is actually much wider than this. Infill housing is usually delivered as a mix of medium (townhouse style) to high density. Medium density projects by nature occupy a larger footprint than a high rise tower. So the reality of the numbers is that the foorprint needed to achieve the infill targets will be much greater than our hypothetical 1,725 towers in Brisbane (or the 4,675 towers throughout south east Queensland).

Where exactly are these sites? I’ve had a good look at Chermside, Indooroopilly, Carindale and Upper Mount Gravatt, and even the wonders of Google Earth don’t reveal vast hectares of vacant land adjoining transit nodes just waiting to be developed as housing.

Has anyone asked the people?

The physical impossibility of the target numbers being delivered is one fatal flaw of the SEQ Regional Plan, and will remain so until the plan’s proponents explain – in precise detail – where and how these numbers will be delivered. Only with that sort of street by street analysis of available land can the credibility gap be closed.

But then there’s another, significant gap in all this. The SEQ Regional Plan proposes perhaps the most fundamental change in the way of life and urban environment for Brisbane and the south east ever proposed in the history of this state’s development. Did anyone actually ask the people if this is what they want? It is a democracy after all and we have debated and voted on lesser issues than this.

The reality is the community are highly likely to object strenuously to dozens of 20 storey towers appearing in their neighbourhood. Jim Soorley was once savaged by the Liberals for proposing a ‘sardine city’ but his ambitions for infill were miniscule compared to what the SEQ Regional Plan now proposes. The scale of community objection to the infill targets of the SEQ Regional Plan, once the community realises, could be sufficient to unseat local Councillors or State MPs, and the prospect of that is another fatal flaw for the plan. Politically, it is hard to see how it could ever be delivered.

Then there are other market realities to deal with. Families overwhelmingly prefer detached housing and backyards for the kids, so even if deprived of housing choice, will there be a big enough market to buy all the units and townhouses proposed? There’s an issue of cost also – high to medium density is expensive to deliver, inflated by infrastructure levies and build costs. So will there enough people who could afford to buy all the units and townhouses proposed? There’s an issue of planning polarity, in that while the SEQ Regional Plan is a state instrument adamant on infill, many local council planning schemes don’t support it. Once again, how that tension will be resolved adds yet another wedge to the credibility gap.

Never land?

Is it possible that such a comprehensive planning scheme which purports to deliver on so many noble objectives (preservation of open space, quality of life etc) actually failed to do the most basic maths on the key assumptions that underpin it? And if that maths was done, why is the plan silent on the answers?

The questions are already being asked and the answers are not forthcoming. At the end of the day, unless and until the Plan’s authors and proponents can answer the physical realities of ‘where’ and ‘how’ in fine detail, site by site, street by street and neighbourhood by neighbourhood, the SEQ Regional Plan is suffering a yawning credibility gap from day one.

In the meantime, a region with a demonstrable housing shortage could find the shortages worsen, affordability deteriorate and growth – the economy’s engine room – falter.

And that doesn’t sound like much of a plan.

[If you haven’t searched through the SEQ Regional Plan for all the details yet, this is a good place to start: Chapter 8 on ‘Compact Settlement’ sets it out. You can find it here - ]