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How To Avoid The Bubonic Plague Of Australian Real Estate

How To Avoid The Bubonic Plague Of Australian Real Estate
August 9, 2019 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

The Australian construction industry is critically ill and if you’re the owner of an apartment within a medium to high density building that was constructed within the last twenty years, you’ve contracted Australian real estate’s equivalent of the bubonic plague. There’s no vaccine for this horrible disease and the best treatment is most likely to sell sooner rather than later.

Same-same mass-produced Lego buildings, appalling governance within the Australian construction industry, embarrassingly poor-quality workmanship, and approximately 40 per cent of the purchase price of a new property representing assorted taxes is a toxic combination.
Research conducted by Propertyology confirms that, over the last five years, the differential between growth in median house price and median apartment price in Australia’s biggest cities was circa 20 per cent; in some cases more than 30 per cent.

Propertyology expects this price growth differential will continue to widen for an indefinite period of time.

What this means going forward is that if the median house price within a specific location increases by (say) 20 per cent over a 5-year period, the value of an apartment is likely to decline.

In fact, for the owner of a medium to high density apartment to achieve even a modest amount of growth in their asset value, their local market would need to produce a property boom. And such a possibility currently seems many years off for most Australian capital cities.

Related article: Property market outlook, boom conditions

In addition to the concerning financial performance, these dwellings are laced with repair bills worth millions of dollars due to extreme structural integrity concerns.

The absence of good hygiene within the construction sector (ie. prudent quality control) over the last two decades has resulted in a deplorable quality of workmanship, primarily within Australia’s mass-produced dwellings in our biggest cities. It’s a bubonic plague!

The governance within Australia’s construction industry is as poor as what the Banking Royal Commission exposed for the financial services sector. An entire generation of housing supply has been corrupted by greed, vested interests, and little regard for quality control, safety and consumer best interests.

The sector has totally lost the trust of the buying public.

State and local governments are as much to blame for this bubonic plague as any stakeholder within the construction industry.

With more and more buildings confirmed to have this incurable disease, it’s impossible for prospective future buyers to have any confidence that warrants sinking their hard-earned funds in to something that offers zero financial stability and extreme concerns over structural integrity. It’s a national disgrace!

As a proud representative of Australian real estate’s professional buyers, I don’t know how any Australian could have an ounce of trust in the quality of any mass-produced dwelling built in this country over the last 20 to 25 years.

The evolution of the mass-produced Australian high-rise apartment is an era which commenced in the 1990s and has evolved such that several cities now build less detached houses each year than apartments. Appalling governance enabled the infection to occur in this first instance. A generation of ignoring the infection enabled it to spread to epidemic proportions.

What we’ve now got is the single biggest threat to Australian real estate in our 200 plus year history. As many as 1 in 10 households, primarily in our biggest cities, are seriously exposed.

On the balance of probability, the safest response by those affected is to quarantine themselves – sell their apartment!

The Evolution of Australia’s High Density

Australia’s 25 million population is housed within 10 million dwellings. As illustrated in the chart below, Australia is currently in the middle of the second period this century wherein the total national volume of new housing supply exceeds base-level demand (population growth).

More important than how many new dwellings have been built is the type of dwelling. Over the 16 years of ABS data to December 2018, Australia added 1,005,786 ‘attached dwellings’ just within our eight capital cities.

10 per cent of Australia’s total dwelling stock is now medium to high density apartments with the bulk of that built in Sydney and Melbourne since the turn of this century.

Apartments will continue to play an important role within Australia’s housing supply, particularly so in our biggest and most expensive cities.

Higher density residential development reduces pressure on the national infrastructure budget, reduces commute times, and provides the community with a more affordable option to live centrally.

In the 1970s, there was a surge in construction of low density 4 to 10-pack apartment blocks. 29 per cent of new dwellings approved during the 1970s were for attached dwellings. Those rock-solid, yellow and red brick apartment complexes continue to live the test of time!

The volume of apartment construction really started to accelerate during the mid-1990s. And the scale of new buildings continues to cast bigger shadows over everything else.

Eleven of Australia’s cities have seen 3 or more apartments approved for every 10 new dwellings over the last 16 years.

Sydney (65.7 per cent), Canberra (62.9 per cent) and Darwin (51.2 per cent) have constructed more apartments than houses over the last 16 years.

The cities with the next highest ratio of new apartments to new houses were Wollongong and Gold Coast (both 48 per cent) followed by Melbourne and Brisbane (44 per cent each), while the NSW Central Coast had 41 per cent.

Newcastle was next with 35 per cent over the last 16 years however, we note that between 64 per cent and 82 per cent of new dwellings approved in each of the last four calendar years were apartments.

32 per cent of new dwelling stock in Australia’s second largest inland city, Toowoomba, over the last 16 years were apartments and Adelaide had 30 per cent.

Moreover, a very high percentage of properties built during this 16-year period will not stand the test of time. The quality is crap!

How Quantity Superseded Quality

Timber, rock, concrete, steel… these materials aren’t perishables. That’s why there are tens of thousands of buildings around the world which are centuries old and still stand strong and beautiful today.

Australia also has lots of buildings older than 100 years that will still be standing in centuries time. But, unfortunately, the quality of a lot of materials and products used in many Australian buildings since the mid-1990s is such that they’ll be lucky to last 40-50 years.

We are now living in the ‘disposable society’ wherein the buildings of today will become the landfill of tomorrow!

Substandard materials and workmanship within a high percentage of buildings from the mid-1990s onwards has led to major structural defects, foundation cracking, serious waterproofing issues, combustible cladding and general fire safety concerns, fragile balconies, and fittings with very low lifespans.

Recourse available to individual owners of apartments is scarce. According to renowned strata expert, Michael Teys, the terms and conditions within the building insurance policies taken out by body corporate exclude building defects.

Mr Teys says that developers are liable for repairs when a claim is made within a 6-year window of building completion. Unfortunately, a large portion of these major defects – that in many cases cost millions of dollars – often don’t surface until after that 6-year period so apartment owners have absolutely no where to turn.

Teys also said that the narrow 6-year window is totally dependent upon the development company not being used as a single-project entity and wound down shortly after settlement of the project.

With an alarming repair bill that no one is claiming ownership of, state governments are understandably panicking.

In Victoria, the state government has established a new department to administer a $600 million scheme for essential rectification works on hundreds of buildings, primarily in Melbourne, found to have high-risk combustible cladding.

Related article: Will Australia’s apartment love affair end like The Bachelor?

It was recently reported that Strata Community Association NSW estimates that there are well over 10,000 apartments in New South Wales, Queensland and Victoria that may be affected by inflammable cladding.

That’s 10,000 apartments just with major cladding defects. SCA NSW President, Chris Duggan said “We still have hundreds of kilometres of poor-quality electrical cabling that poses a fire risk in NSW, and we can’t track it down. Government is still allowing poor quality Chinese-made glass panels to come into this country that can explode under stress.”

This national disaster hasn’t just occurred overnight. A 2012 study by University of New South Wale’s City Futures Centre found that 85 per cent of buildings built since 2000 had at least one significant defect in their complex.

Within our biggest cities, the volume of apartments with the bubonic plague could be as high as 50 per cent of total dwelling stock and it’s anyone’s guess who’ll foot a bill that is estimated to be in the $10 billions nationally.

The contrast between the beautiful old European buildings that were constructed 500 years ago and the disposable ones constructed within Australia during the last 20 years couldn’t be greater. The former stands strong and adds a unique beauty to cities. The latter are bland, mass-produced, and already crumbling before our very eyes.

Whether century old buildings or the rock-solid yellow brick 6-pack from the 1970’s, we know that mankind is more than capable of constructing buildings which last forever. The problem is that, about 20 years ago, quality assurance was replaced with managing profit margin.

In more ways than one, a healthy Australia depends upon a healthy construction industry. There was a time when good health within the sector was a priority. The sector’s equivalent of doctors and nurses were arm’s length local and state government departments who oversaw consumer protection and quality assurance through a prudent building certification process.

Vested interests and politics have taken over. Between 1994 and 1998, state and local governments across the country changed regulation such that building certifications were completed by private companies. They opened the door for property developers to engage their own people to approve their work.

It was this poor hygiene that led to the start of the infection.

It then spread to epidemic proportions when government certifiers wiped their hands of responsibility and insurers don’t trust the quality of workmanship across a generation of mass-produced dwellings, banks have little trust in the quality of the asset securing loans, and buyers of Australian real estate most definitely should not trust it. Consumer trust has been abused. Local and state governments stood by and allowed that trust to deteriorate!

One must also wonder how long it will be before similar concerns are exposed in mass-produced house and land packages. I wouldn’t be surprised if defects in spec homes are just as common as defects in multi-unit dwellings. After all, it’s the same personnel operating within the same culture of poor hygiene.

The Consumer’s Best Interests Must Come First

Currently, while state and local governments sit back and line their pockets with taxes and charges from these mass-produced disposable dwellings, the disease continues to infect more and more households.
Sadly, the best interests of those whom the product is actually built for is at the bottom of everyone’s checklist. The Australian system for building more dwellings for our growing population is seriously sick and there’s no doctor on duty.

As a means of illustrating where Australian politician’s heads are at with this crisis, it’s only three months ago that Bill Shorten took a major policy into the last federal election which essential would have added steroids to this nasty infection. Labor’s negative gearing proposal was to incentivise more everyday Aussies to purchase brand new properties.

In my opinion, a vaccination for this horrible disease would include a return of the genuine independent building certification process along with a Star-rating system for every building in the country (existing and future new builds). The consumer’s best interests must be restored to Priority Number One!

For at least two decades, another major flaw in the Australian real estate system is that government grant initiatives actually fosters a horrible decision-making process for property buyers across all segments (owner-occupiers, first home buyers and investors).

Buyers aren’t focusing on fundamentals such as where they would prefer to live, the quality and longevity of dwellings through good workmanship and quality materials, and the impact of large-scale extra supply on their future asset value. Instead, property buyers are being lured to the poor-quality shiny stuff through incentives such as stamp duty discounts or tax rebates.

While none of them will ever have the guts to admit it, the reality is that the primary objective of state and federal government real estate policies has never been to help people buy property. If it were, there’d be no limitation on which specific property one could buy; the government would simply make an agreed amount of money available for whatever property best suited the buyer.

The truth is that government grants are intended to support the construction industry through providing buyers with an incentive to buy new builds (aka ‘bubonic plague’).

Instead of consumer protection, we’ve had an entire generation of successive governments indirectly encouraging consumers to make inferior decisions on the biggest asset they’ll ever acquire. The system is littered with disease!

Proof Reflected In Poor Performance

For several years now, Propertyology has issued warnings about housing over-supply concerns, particularly in respect to the apartment market in our big cities.

Related story: Melbourne’s over-supply concern [March 2016]
Related story: Sydney over-supply risk [June 2016]
Related story: Next step for Sydney and Melbourne property owners [November 2017]

The latest official data confirms a significant differential in the change in median value (house price growth versus apartment price growth) over the last 5 years.

The headline rate used in media reports to communicate change in median dwelling prices disguises how poorly apartments have really performed.

Over the five years ending April 2019, Greater-Sydney’s median house increased by 35 per cent. 8 out of Sydney’s 34 municipalities produced more than 45 per cent house price growth (Campbelltown, Ku-ring-gai, Mosman, North Sydney, Northern Beaches, Randwick, Willoughby and Woollahra). Well done to the very small portion of Australians who have $2 million plus for a basic house!

Related article: Sydney’s 30-year history

The performance of Sydney’s apartment market was significantly inferior to detached houses. Eleven of Greater-Sydney’s municipalities produced a change in median apartment value of less than 25 per cent. Ryde (14 per cent), Lane Cove (16 per cent), Georges River (18 per cent), Rockdale (21 per cent), Parramatta and Hornsby (both 22 per cent), Strathfield (23 per cent) and Inner-West (24 per cent) were significant under-performers.

Greater-Melbourne’s median house price increased by 37 per cent over the last 5 years. Frankston (57 per cent), Brimbank (54 per cent), Dandenong (52 per cent), and Whittlesea (50 per cent) were the best-performed locations for detached houses.

Fourteen of Melbourne’s 27 municipalities (more than half) had a differential in the change in median value (house versus apartments) over the last 5 years of 15 per cent or more, including four having a differential of 30 per cent or more. Wowee!

Only 6 out of Melbourne’s 27 municipalities produced an increase in median apartment values of more than 25 per cent. What boom?

The biggest under-performing apartment markets in Greater-Melbourne over the five years ending April 2019 were Melbourne City (minus 1 per cent), Stonnington and Yarra (both 4 per cent), Maribyrnong and Manningham (6 per cent), Moorabool (7 per cent), Moonee Valley and Port Phillip (both 9 per cent), Moreland (14 per cent), Boroondara (17 per cent), and Glen Eira (18 per cent).

Television shows like The Block, along with a bunch of grossly misguided general rhetoric suggesting that inner-city cosmopolitan apartments are blue-chip investments, has provided property buyers with an enormous false sense of security.

For many property buyers, the logic tends to be that they love the inner-city lifestyle and culture of trendy suburbs and can’t afford to purchase a detached house so they opt for an apartment – and there’s no shortage of so-called modern ones that have been built over the last couple of decades. But the financial performance of apartments in many of these desirable locations, in spite of a property boom, has been ordinary to say the least.

Melbourne apartment values have grossly under-performed in the suburbs of Richmond and Fitzroy (Yarra LGA), St Kilda, Elwood, Albert Park (Port Phillip LGA), South Yarra, Prahran and Toorak (Stonnington LGA).

Similar apartment under-performance has occurred across many of Sydney’s highly desirable suburbs like Chatswood, Macquarie Park (Ryde LGA), Rose Bay, Paddington, Vaucluse (Woollahra LGA), Lane Cove LGA, Mosman LGA, Epping, Baulkham Hills, Marylands, Rose Hill (Parramatta LGA), Coogee, Chifley, Mourabra, and Clovelly (Randwick LGA).

History has taught us that a city generally only goes through a boom once every 12 to 15 years. When one considers that apartments in Sydney and Melbourne produced growth of between zero and 20 per cent over the last five years (including a boom), the odds are stacked heavily in favour of negative growth over the next five years.

In Brisbane, a city which hasn’t seen a property boom since way back in 2007, the median house price increased by 20 per cent over the last 5 years but apartment values in Brisbane City Council declined by 4.4 per cent. That’s a 24 per cent price growth differential.

The trend is consistent across the four other municipalities which make up Greater-Brisbane. Logan, Ipswich, Moreton Bay and Redland all produced a differential between median value growth for houses compared to apartments of circa 20 per cent.

In Adelaide, the median house price increased by 15 per cent over the last 5 years. The strongest municipalities were Prospect (30 per cent), Holdfast Bay (26 per cent), Loxton Waikerie and Unley (both 25 per cent), Burnside (24 per cent), Walkerville and West Torrens (both 21 per cent), and Mitcham (20 per cent).

In and around Adelaide’s CBD, there’s been a significant surge in medium density apartment construction over the last 5 to 10 years, to the extent that 76 per cent of all residential dwellings within Adelaide City Council are now apartments. Holdfast Bay (where 40 per cent of all dwelling stock is now apartments) and Norwood-Payneham (35 per cent) have also produced increased density.

Of Greater-Adelaide’s 18 municipalities, the biggest under-performing apartment markets were in Salisbury (4 per cent decline over the last 5 years), Port Adelaide and Mitcham (both 6 per cent growth), Burnside (7 per cent) and Onkaparinga (9 per cent).

Greater-Perth’s median house price declined by 6 per cent over the 5 years ending April 2019. While large parts of Perth consist of detached housing stock, pockets of significantly increased density include Perth City (14,300 dwellings are now apartments, or 96 per cent), Subiaco (52 per cent), South Perth (45 per cent) and Vincent (45 per cent).

The apartment market in Australia’s fourth largest city has also been susceptible to some horrendous results with the highest rates of decline over the 5 years being in Swan (28 per cent price decline), Canning and Cockburn (both 25 per cent decline), Perth City, Belmont and Bayswater (each with a 23 per cent price decline). There’s more apartment pain to come!

From 2002 to 2016, Darwin consistently built more new apartments than detached houses each year. So, while Darwin’s persistently weakly economy created a 10 per cent decline in median house prices over the last 5 years, the high concentration of apartment construction has (so far) created a 25 per cent decline in median apartment values.

In Canberra, a whopping 70 per cent of all new dwellings approved over the 9 years ending 2018 were apartments. While the nation’s capital saw a strong 26 per cent increase in median house prices over the last 5 years, apartments only produced 5 per cent growth. Once again, there’s a price growth differential of circa 20 per cent!

Tasmania’s resistance to high-rise development means that 80 per cent of residential dwelling stock in Greater-Hobart are still detached houses and the differential in price growth between houses and apartments is the smallest of all capital cities (only 6 per cent).

Right across Australia, thousands of individual apartments will have performed well below the median value change for their own location. The common denominator among the poorest performing assets is newer buildings, primarily because roughly 40 per cent of the purchase price for that first owner are taxes associated with new builds.

Among thousands of examples of individual properties with alarming price falls is a 3-bedroom apartment in the Meriton-built Altitude complex at 330 Church Street in Parramatta that recently changed hands for $990,000 (that’s $295,000, or 30 per cent, less than what the first buyer paid in May 2015). The mind boggles when trying to guess how much bigger that loss would have been without Sydney’s ‘boom’.

Or perhaps one only needs to look at non-boom towns like Brisbane where a basic 2-bedroom apartment at 2004-16 Hamilton Place in Bowen Hills was originally purchased for $489,500 in March 2011 and, 8-years later, has no takers when listed for sale at $299,000 (a loss of – at least – 39 per cent).

Undoubtedly, across all of Australia’s bigger cities, there will be thousands of owners of a high-density apartment reading this and thinking they’re immune from the bubonic plague because there’s no evidence of major structural defects within their complex. The sad news for all of these good people is that their future resale value potential will be indefinitely held back by the substandard performance of the modern-day apartment majority and the understandable uncertainty among the buying public. The infection risk is far too high for future buyers!

Now what?

Generally speaking, older-style attached dwellings within small complexes and in close proximity to a major city’s CBD are generally sound assets. Whilst every property purchase should be subjected to a prudent health check, the older apartment blocks were built in an era of good hygiene.

Mass-produced apartments that were built in Australia’s big cities during a 25-year period ending 2020 will be referred to as Australian real estate’s bubonic plague. These buildings will forever be tainted.

To trigger a reset, regulators must prescribe a dose of highly concentrated disinfectant for Australia’s construction industry. It must be a national priority to restore the basics of good hygiene through strong governance 101. This means making sure that regulatory policies and processes pass the consumer-best-interests test. There will never be trust until this is implemented!

The federal government also needs to step in and commission a new (independent) department with the responsibility of designing a comprehensive building Star-rating system. Regardless of when it was built, every Australian apartment complex should be issued with its own rating and these made available to the public via an online register. This is critical to restoring confidence among future real estate buyers.

As for any Australian contemplating buying a property now or in future years, be absolutely crystal clear that your structural integrity risk and financial performance risk are exponentially higher should you chose to purchase any medium to high density apartment that was built during the bubonic plague era (the last 20 to 25 years). It makes zero sense to enter such an infested cesspit!

While the price growth differential (houses versus apartments) revealed in this report is already compelling evidence, this is just the tip of the iceberg. I believe that the differential is only going to get considerably bigger as more buildings with major defects get exposed over time. Buyer confidence (quite rightly) will further deteriorate.

Those in the trickiest of situations are the circa one million existing medium to high density apartment owners that is either already known to be infected by the bubonic plague or has contracted this disease but the symptoms haven’t surfaced yet. They are the ones who trusted a system and have been terribly let down.

If you’re an existing apartment owner and sitting there thinking that you have to wait for your apartment to increase by (say) 20 per cent just to break even, it’s important to understand that your local market probably needs to produce 40 per cent price growth for you to realise that 20 per cent. If the apartment is in the likes of Sydney, Melbourne, or Darwin you could be waiting a decade or more to see that.

If the property really isn’t eating into annual cash flow, the decision to hold might become a tad easier. But if you’re already having to tip in $5,000 to $30,000 of your hard-earned each and every year, one must seriously question why.

No one likes to crystalise a loss however, the brutal reality of investing is that sometimes the smartest decision is to remove the band aide and lance the wound.

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