Is the property boom just a trendy bandwagon or is it a gravy train?

Two years ago the media here in Brisbane hardly carried a story on property forward of Shipping News. Now The Courier Mail has almost daily colour liftouts. In the suburbs Brisbane City Council is considering tightening noise abatement regulations as the sound of power tools smashes through the weekend peace.

What has happened to the X-Generation café society, the Rayban-wearing, black on black, latté-drinking layabouts of the 90’s? They’re all up at Mitre 10 buying power tools and talking paint colours or scanning the auction columns for the ultimate bargain.

What are the causes of this quantum shift in our approach and interest in property? Why is it now the “in thing”, the ultimate fashion accessory, the BBQ stopper, the only thing to talk about over dinner, down at the pub or over a short black in Park Road or James Street?

Quite simply it has been brought about by a rare combination of factors which have collided and compounded at a certain point in our history to create the hottest property market I have personally experienced in 30 years in the industry.

First, we should define what we mean by a property boom. My personal definition of a boom is when demand exceeds supply and prices are rising at a significantly higher rate than the balance of the economy.

Clearly the figures support the contention that we are in the midst of a property boom. So let’s ask, as Professor Julius Sumner Miller used to,”why is it so?”

In my view there are a number of significant elements which have simultaneously compounded to create this situation. Interestingly, although there are significant economic fundamentals, in my opinion the emergence of a number of non-economic factors could well be even more important.

While I will confine most of my comments and analysis to the south-east Queensland (SEQ) residential market, I should add that my comments are mainly general and that there are always exceptions in a market as diverse as the property market.

First, the economic factors.

Stagnant growth

During the '90s both Sydney and Melbourne experienced significant growth in demand and pricing. In fact, based on my definition, Sydney has been in boom conditions for the better part of the past 10 years.

On the other hand, following the boom of 1988-1991 and, given the fragmented nature of the development sector and the relative lack of sophistication in the building industry, the South East Queensland property industry simply failed to recognise that the boom was over and underwent a long period of overbuilding of residential property, creating an oversupply of dwellings and a subsequent extended period of flat values.

While this was punctuated by an upward blip in the mid-90s caused by the introduction of the First Home Owners Grant this merely served to pull forward existing demand, creating a “black hole” in 1998/9.

In summary, the SEQ market showed very little real growth during the period from 1992 to 2000. Quite simply, SEQ was underpriced by Australian standards.

Historically low interest rates

Sustained low official interest rates which have remained steady at 4.75 per cent now for 18 months have delivered variable housing loan rates of around 6.5 per cent. Consider that at the height of the 1988/89 boom lending rates for business were hovering around 20 per cent and home loan rates around 15 per cent and you get some perspective of the current level.

This, coupled with a highly competitive lending market, have clearly made home ownership and investment extremely attractive, the former based on affordability and the latter on a taxation regime which encourages private investment with the tenants covering the majority of the interest. In a market where capital growth is positive and favourably taxed the attractions are obvious.

Poor Alternative Returns

Clearly a knock-on effect of low borrowing rates is low deposit rates for alternative investments. During the '90s we have seen returns on bank deposits and commercial bills, particularly important to fixed-income earners, barely above the official CPI inflation levels, currently providing a real return of just over two per cent.

For the investor, the traditional forms of saving, eroded by increasing bank fees and fully taxed, simply do not compare with the lure of a fully funded, tax effective, bricks and mortar property purchase. Interest of two per cent after tax on a $20,000 deposit looked pretty ordinary in early 2000 when you could buy a $200,000 house or apartment as an alternative investment and show a gross five per cent to six per cent return with the tenant paying the vast majority of the interest.

The introduction of “equity loans”, the freeing up of existing home equity to purchase property without a cash deposit, has put property investment within the reach of the “mums and dads”.

At the same time as the banks were struggling to attract depositors, the equities market, the traditional alternative to the property market, was imploding. Losses sustained by the Telstra 2 investors, inconsistent returns and the horrors of HIH and AMP have severely dented the average investor’s faith in the market.

Superannuation returns moved into the red for the first time and average investors were aghast at the media reporting of corporate incompetence and calculated treachery. Putting your money into the traditional safe haven of bricks and mortar appeared to make a lot of sense.

Restructuring the Development Industry

While the vast majority of residential property transactions involve the sale of existing property, clearly the supply of new stock has a significant impact on the rate of price growth. In this regard the emergence in South East Queensland of the large, publicly-listed corporate developers such as Lend Lease, Australand, Stockland, Walker Corp, FKP, Lensworth, Devine, etc as the dominant players has led to a rationalisation of the land development industry, a far greater level of control on the rate of stock release and the emergence of the Master Planned Community as a dominant development form.

The builder to an extent has become a sub-contractor to the corporate developer as the only way he can access land. This “Just in Time” approach to stock control, coupled with a significant increase in the infrastructure costs applied by all levels of government and the creation of significantly more sophisticated communities, has clear implications for upward pressure on costs and prices in those communities plus a knock-on effect to the surrounding existing housing and land stock.

The Introduction of GST

Following the scramble to complete construction prior to the introduction of GST in June 2000, the building industry fell into a “black hole” due to demand having been pulled forward artificially.

The existing property market was handed a free kick by being made exempt from GST while the new housing market struggled to absorb an increase of 9-10 per cent overnight. While this increase has now been absorbed the existing housing stock has now risen to parity with new stock, once again lifting the average cost base across the board.

Now the socio-economic factors.

The Baby Boomers

The end of the twentieth century marked the 55th birthday of the first of the Baby Boomers, that disproportionately large group born in the 1945-55 post-war period.

The Boomers are an interesting lot. We are confident, successful, financially well-off, determined to enjoy our late working life and retirement, equally determined not to slide into the “suburban pipe and slippers” drudgery that our parents did and - most importantly - not particularly interested in accumulating wealth simply to pass on to our children.

In the search for the eternal “Fountain of Youth”, the Boomers have followed the X-Generation into the urban fringe, populated the prestige high-rise apartments, taken possession of anything remotely associated with the waterfront, swapped their Landcruisers and Range Rovers for Audi cabriolets and are settling in to enjoy “the good life”.

The Seachange Phenomenon

As an extension of the Baby Boomer demographic, the SEQ market has also been a major beneficiary of the “Seachange Phenomenon” - that seductive lifestyle sidestep popularised by the ABC television series of the same name.

Following the heady boom and bust of the '80s and the stressful corporate restructuring and rationalisation of the '90s, the idea of moving out of the big city corporate rat-race and retreating to the relative calm of a seaside township struck a very positive chord with many jaded Australians in their '40s and '50s. This extension of the US New Urbanism movement has been most evident on the Victorian Southern peninsulas, the Central and North Coasts of NSW and particularly the Gold and Sunshine Coasts in SEQ, two of the fastest-growing regions in the country.

The emergence of Brisbane as a viable challenger to Sydney and particularly Melbourne in terms of lifestyle and facilities, have all added to the population shift to SEQ from both interstate and overseas. The establishment in Brisbane of a number of corporate head offices has also added to employment opportunities, currently delivering around 80,000 new jobs per annum, the highest level since 1994.

The Power of Fear

Psychologists say that fear is THE most powerful emotion - particularly the fear of the unknown. The fear of the outside world engendered by September 11, by the Bali bombings, by the wars in Afghanistan and Iraq and by the outbreak of SARS have brought home to Australians the stark and dangerous realities of the clash of religions and cultures and the horror of the unknown attacker.

They feel increasingly threatened, vulnerable and mortal and are determined to enjoy life now in familiar, safe surroundings. Australians of all ages, particularly the big spending Baby Boomers, have taken a good look at their lives and priorities, shelved their plans for the tour of Europe, given up their annual pilgrimage to Bali and decided to focus on their home, their family and to “see Australia first”.

This has all led to an increased focus on the home - where it is and what it provides. Is it appropriate for this new lifestyle?

The results are a significant increase in the velocity of house change, a surge in renovation expenditure, a huge upswing in the sale of leisure boats and an endless stream of massive caravans and four wheel drive vehicles as the “Grey Nomads” hit the roads of Australia en masse.

The Cynical Society

A further extension of the power of fear that is also impacting on both our society and the property market is what I refer to as the Cynical Society.

Consider if you will the progressive demolition of the pillars, the icons of society which our parents saw as sacrosanct …

If you follow the popular media today you would be forgiven for thinking that:

• the local priest is a paedophile
• the teacher a lazy whinger
• the unionist a crook and a thug
• the businessman a corrupt tax cheat
• the politician a lying, failed lawyer and the banker a blood-sucker.

Who’s left? All our heroes are sports stars and rock stars!!

In investment and property terms this translates into “every man or woman for themselves”. You can’t trust anyone so why trust them with your money? Better to look after yourself, put your money into your own home, your fortress against the forces of evil, or into that traditional bricks and mortar investment. “I’m not gonna give my money to some thieving Funds Manager who’s just gonna nick it!”

Demography and emotion – are they still drivers?

Unequivocally yes….and they will remain so. The Boomers have another five years at the top and I believe that Seachange, the Power of Fear and the Cynical Society will remain as potent factors over the next few years as they are today. While individual issues which will come and go in the years to come Australians’ priorities and focus have changed irrevocably…we can never go back.