Will labor kill the golden goose?

By Andrew Leoncelli, Managing Director of CBRE Residential Projects

When I woke up last Thursday it was like any normal working day in any other week. The market hadn't started incredibly well in 2016 but sales were coming, and confidence starting to return.  Little did I know that this was no normal Thursday - not by a long shot.

The state Labor Party's decision to increase already aggressive charges on international buyers of new Victorian residential property a further 4% was something no one was expecting.  The decision to make all international purchasers of Victorian property pay an application fee of $5,000 or $10,000 (depending on the price of the property they bought) plus an additional 3% stamp duty on top of the stamp duty that all Victorians or other Australians already pay came into effect on the 1st July 2015 - less than twelve months earlier.

The decision to drive the stamp duty rate now to 7% for all international purchases sends two incredibly strong messages to the market place.  The first, is that the Government is running economic policy that is purely ad-hoc, knee-jerk reactive and short term focused, based on immediate budget needs. The second is that the Labor Party doesn’t understand the broader economic benefit of the apartment boom that is currently underway in Melbourne. More on this later.

The quick history lesson on apartment living in Melbourne is that in comparison to all international cities (and especially our famous northern cousin Sydney), Melbourne has had an extremely low percentage of housing made up of apartment buildings three storeys or more. Melbourne has about 5% of all its housing stock in this form of product. Sydney has 11% and nearly every major European, American and Asian city sits comfortably between 20-35%.

The oversupply conversation has been incredibly short sighted for a very long time. Put even more simply Melbourne is growing at twice its long term historical average of 45,000 per annum with between 90,000 and up to 110,000 net annual population growth over the last ten years. This rate of growth is forecast by all leading economists and demographers to continue for the foreseeable future. By 2030 we will be home to more than seven million people – a long way up from the current level of 4.75 million. By 2050 we will be over eight million and the largest capital city in Australia - yes even larger than Sydney. Why?

The main reason is the fact it is an incredible place to live (voted five years in a row the most liveable city on earth - judged on a broad based index of criteria that basically summed Melbourne up as being easier and cheaper to live in than 142 major cities across the globe), and business and political visionaries have planed this city very effectively. We all complain from time to time about bureaucracy for a range of reasons, however it would be a harsh judge to say that both sides of politics for the last twenty years haven’t shared a very similar approach to planning, understanding that we need to grow, and that densification is a very important part of the growth story. For this we should be very thankful.

Not all however have had the same vision as Jeff Kennett had for this state back in the early 90's with his huge push for infrastructure projects to kick start a sluggish state economy. Since his time in power, Victoria has enjoyed positive migration from all other states as we reversed the trend of losing brain power and work experience to the warmer, northern states. Victoria's quality of life and its diverse arts, ethnic, and cultural community has kept people from deciding where to live based purely on shorter winters and longer summers.

Some facts about apartment completions and supply;

• Between 1990 and the year 2000 there were 16,500 new built apartments outside the core CBD grid. At that time there was virtually no CBD residential development with very few developers having the confidence to tackle this market place.
   
• From 2000 to 2010 the number of completions increased 350% to in excess of 65,000 new apartment completions. Yes, a huge percentage increase, albeit coming from the one of the world’s lowest bases of completed apartments.
   
• From 2010 post GFC the world has changed for the apartment business, as Melbourne and the market for apartments has matured significantly. We are now a very well established market place for developers to work in, and not just local developers. Significantly, developers from Southeast Asia and China have now had their sites firmly set on taking advantage of the commercial approach to growing what is a great international city.

As existing free standing property prices grow (some years by up to 30%), forcing entire generations out of this market place, we’ve seen apartments become a very accepted way of living, not just for the global adventuring Gen X and Y's but importantly also for the Baby Boomers. Once St Kilda Road was home to this genteel market place of suburban downsizers selling the large family home and shifting closer to the city, but oh no, certainly not into the city.  We appreciate the connectivity of how close St Kilda road makes everything that is good about Melbourne - moments to the CBD, Southbank and the arts precinct, the Royal Domain and Botanical Gardens, Albert Park Lake and Toorak Road, South Yarra but also St Kilda and of course the very well established freeway infrastructure connecting the airport, west coast and Mornington Peninsula.

The thing that has changed is the quality of the cafe lifestyle on offer in the eastern and southern suburbs now. Mature downsizers no longer have to live close to South Yarra to enjoy quality restaurants, cafes, bars and even nightclubs. The booming eastern suburbs for example, have seen an enormous shift in the attitude to living in apartments. Now more than ever before our projects consist of much larger product, with the three bedroom market place doubling for CBRE in the last 24 months, as demand continues to grow for larger, better quality apartments, with the very best interior design features we can possibly deliver. These mature buyers have capitalised on the rocketing house price growth in their local areas, and are looking to stay within the area they know and love with quality lifestyle offerings, making the decision much easier for them to move into an apartment. Pocketing $1 -2 million and staying amongst friends and family, while enjoying quality apartment living sounds like a no brainer. Developers have had to respond. 40m2 one beds and 52m2 two beds without car parking don’t work in Hawthorn. In come the 130-150m2 three bed apartments with two and a half bathrooms, two freestanding cars with extra storage.

Apartments are here to stay.

They not only make expensive residential housing markets affordable to generations of people who can't afford them, but they help centralise population growth into areas that have existing and well established infrastructure.  Not just for public transport, but also retail and lifestyle amenities. A smart move when infrastructure projects are so politically sensitive.

Having the State Government cite Rosie Batty's genuinely wonderful cause against domestic violence as the reason we slug the only industry creating construction and consulting jobs for local Melbournians was shameful. Even Rosie would say she doesn't want ordinary Melbournians to lose their job for her cause. I'm certain she would much prefer the majority of Victorians kept food on their table and reduced financial stress from our already stressful households. The very real risk of the residential construction industry shedding jobs is on us, after what can only be described as short sighted, isolated (no industry consultation at all) and extremely late in the cycle exogenous shock.

My client from Australia 108 rang me from Singapore - they had just read a news article on the new rules. I told him he must have misread the article and that there was no chance the State Government would suddenly make Melbourne the most expensive place to buy property for an international investor or potential new migrant to this wonderful city of ours. How wrong I was as I scrambled to get hold of the new legislation.

The lack of industry consultation undertaken by the Andrews Government has been its hallmark from the beginning of its reign. The Planning Minister changed how business had been done in Melbourne for 40 years when he introduced a very Sydney concept of restricting the development potential of property in the city to a floor space ratio matched against the size of the land. Why not take into account any other characteristics of the property and allow local government or even VCAT to make judgement calls about the benefits of some projects over others? No, let's just use land area as the sole determinant.

I wonder if he had ever lived in Sydney or has seen how property prices have tracked in the city and all surrounding suburbs over the last 15 years? Surely he would have spent time in the city, or spoken to his friends, or read in the newspapers about how Sydney is the most expensive city in Australia by a long way yet it isn't growing as fast as Melbourne?

Supply in Sydney through short sighted planning rules and regimes have crippled affordability. The median house price 20 kilometres in all directions from the heart of Sydney averages over $1 million. In Melbourne that figure is halved at 10 kilometres. You can still buy a house in Melbourne not too far from the city if you look hard enough. The average rate per square meter of apartments in the city Sydney is close to $20,000m2 with Melbourne again almost half at $11,000m2 - again Melbourne wins hands down on affordability, because we have built the supply, and we have been pro-development. The industry had confidence and transparency and support from both sides of parliament. Every facet of the industry worked hard to make Melbourne an international recognised place to do business well.

What Westpac and the Andrews government have done in the last fortnight has massively damaged the confidence that our market has thus far enjoyed. The trust has completely gone in the powers that be. Westpac announced it no longer banked international investors buying residential apartments in Australia. Why? Surely Westpac understands that there has never been any history of defaults on settlements from the international buyers? It's always been local buyers that have done the majority of the walking. Surely they also understand how wealthy these investors are, and how cash rich they are to be able to afford to buy not just their family home and homes for their children in their domestic countries but also have enough left over to buy in another country? I was in a major pitch in Malaysia last week with a developer doing a major development in Melbourne - an extremely successful finance man with 40 years of making material wealth in Malaysia - and he couldn't understand how Westpac could come out and say that no longer would they welcome the international investors, when they so clearly had grown their business over many generations on the back of major international investment in our economy. The signals this sends coupled with the exogenous shock of the Andrews tax grab are very damaging and have only very negative future impacts on the Victorian economy.

We will now witness development approvals fall in the city, international investors walk away from Melbourne (to think they are coming to Melbourne 7% tax or not is foolish - they have the entire globe to select from when buying property… watch where their dollars will go), less cranes in the sky over the next five years, less jobs in construction, less interior designers, less architects, planners, civil engineers, less certain career paths for university students, less work experience for builders, a smaller economy with more job vacancy and higher residential property prices.

We will know exactly where to rest the blame for this horrible yet easily avoidable situation, and it will certainly not be at the feet of the former Planning Minister, Matthew Guy.