The future of property supply in Australia

Finance & Fury Podcast

Welcome to Finance and Fury. In this episode we look at the future of the supply of property in Australia.

1. We will talk about the availability of land in Australia, look at the population density and supply of developments, as well as what the future supply has in store – assuming that the demand stays constant, then the areas with under supply will see price gains – those with supply abundance will see price stagnation
   1. Australia is a unique country – outside of places like Antarctica, or Greenland with massive land masses but with relativity greater areas of unliveable space – compared to many other nations, we have a high rate of urbanisation with high levels of unused land
   2. Looking at the land use in Australia – Area KM2 and portion of Australia as a %
      1. Land for Intensive uses (mainly urban) 16,822 0.22%
      2. Rural residential 9,491 0.12%
   3. Australia’s population is estimated to be 25.5m - of this population around 86% of people are living in urban areas –
      1. This is fairly similar to many other western nations – US is about 83%, UK 84%, France 81% - then you have nations like Singapore or HK – sitting at 100%
      2. What is different is the portion of the land that goes towards housing this urban population – US have 3% of the nations land that houses this urban population, and in the UK it is 5% - remember that Australia is 0.22% - or 13.6 and 22.7 times greater respectively

• So in Australia - Using some simple math – Just under 22m people are living in 0.22% of the nations land mass

1. There are some major reasons for this –
   1. First - Large portions of Australia are rather inhabitable - 18% of the Australian mainland is considered to be desert, but about 35% of the Australian continent receives so little rain that large population centres never sprang up there – Fresh water is always important, but also rainfall for vegetation for food and livestock – apart from Antarctica, Australia is the driest continent on earth – so much of our land has reduced liveability
      1. But when accounting for the inhabitable land – assuming it is 35% of the continent – then this still means that the land use for urban population is 0.34% - or 10 times lower than the US
   2. Secondly - The period of settlement of Australia – focused on the coast and major harbours or river inflows
      1. Over time – major cities sprung up – Sydney, Melbourne, Brisbane, Canberra, Adelaide, Perth – but not in the same manner as other nations that have had hundreds of additional years of development in a different technological era – where the population was given a greater chance to sprawl before technology made urbanisation easier – Urbanisation is only possible in developed countries due to technology
      2. Transportation and infrastructure, as well as water and food supplies used to be the major issues for having large sprawling cities
         1. Transportation and infrastructure – cars, trains, buses, roads – sewage and power – all important to house millions of people in a dense urban area
         2. Water and food – the ability for people to live in cities is a hard logistical task -
            1. this does come back to transportation and infrastructure – how do you produce enough food and provide enough fresh water to people in the millions – but then you need to transport this into city centres – just in time supply chains
         3. Because Australia was starting to grow in population when these problems had mostly been solved – there was no need for population sprawl like in many other nations where the burden needed to be spread out before technology and innovation took over – When comparing Australia to other nations with larger levels of land supply – this starts to become obvious –
            13. Big cities – London makes up 13.5% of the UK population, or New York making up 2.5% of the US population - but Sydney makes up 21% of the population of Australia
         4. This limited supply of land surrounding these major cities when accounting for demand is a large part of why the price of property in London, New York and Sydney is higher relative to many other cities in these respective nations
      3. Where does this leave us as a nation when it comes to property supply in the future –
         1. We have a massive potential to achieve property affordability in Australia when compared to a nation like Singapore – but not in a practical way based around the way that we live, or want to live
            1. If every person living in cities moved to rural areas, we would see more of a normalisation of property prices
            2. i.e. the price of rural properties would rise, whilst CBD prices would decline – on average property could become more affordable -
         2. But as previously mentioned – this is not how many people want to live – most people need to be close to their place of employment or alternatively, wish to have the lifestyle that a bigger city affords – therefore, people wish to live close to cities – hence to help with population growth and demand for property, additional supply needs to become available

When looking at the property supply development – what are the options to increase the supply of land?

3. more realistic expectations and what town planning is likely to focus on is considered grayfield, greenfield brownfield and infill development –
   1. Grayfield land is economically obsolescent, outdated, failing, or underused real estate assets or land.
      1. name coming from the "sea" of empty asphalt concrete that often accompanies these sites – we all know these types of areas – run down places with lots of older industrial sites/sheds that has seen prices go up
      2. Many of these areas used to be formerly-viable retail and commercial shopping sites but have suffered from lack of reinvestment and have been "outclassed" by larger, better-designed, better-anchored malls or shopping sites - major tenants have vacated the premises leaving behind empty shells – or they are currently rented but the owners offer large prices to buy up these premises
   2. Similar to greyfield – we have Infill development - within an urban community, it is the construction on any undeveloped land that is not to be considered on the urban margin
      1. We all have seen this type of development – a developer buys 2-4 old properties located in an inner-city suburb and puts up 100 units in their place
      2. This development could also be called "land recycling"

• Infill has been promoted as an economical use of existing infrastructure and a remedy for urban sprawl

1. A greenfield is an area of agricultural or forest land, or some other undeveloped site earmarked for commercial development, industrial projects or other construction projects.
   1. Around 20% of Australia’s land is Nature conservation and other protected areas (includes Indigenous uses) – this area is not going to be available for greenfield – but with the right regulations – many other areas of supply could be opened up
   2. When driving outside of cities – you can often see lots of available land – if it has trees on it or is open fields – assuming that it isn’t already owned by a private individual – this would be considered greenfield

• Many housing estates come into existence through greenfield development – but these can take a number of years longer than to infill - master-planned community such as major housing estates can take between 12 and 14 years to complete – this is from the initial developer purchase of the land, to regulatory planning, all the way to the first person moving in

1. So, the options will be between green, greyfield and infill development for city areas
   1. Greenfield developments – housing completions – most often in new estates outside of the CBD – in outer lying suburbs – often 30+ minutes’ drive to the city centre
   2. Greyfield and Infill developments – multi-unit completions – these will be the supply of property within the CBD radius

Areas around Australia – Stats from Urban Development Institute of Australia

1. Sydney – Long run average is around 31k p.a. of new residential market supply
   1. Since 2016 – supply has been above the long run average –
   2. But this average is broken down between greenfield housing completions and multi-unit completions – at the last update:
      1. greenfield housing completions – 8k
      2. multi-unit completions – 27k
   3. The supply of units to houses is very different – many more apartments being completed
2. Melbourne – Long run average is around 38k p.a. of new residential market supply
   1. Since 2016 – supply has been above the long run average –
      1. greenfield housing completions – 18k
      2. multi-unit completions – 24k
   2. Units to houses are closer – more units than houses
3. Brisbane and SEQ – Long run average is around 19k p.a. of new residential market supply
   1. Since 2015 – supply has been above the long run average –
      1. greenfield housing completions – 11k
      2. multi-unit completions – 11k
   2. Almost a 50/50 ratio between houses and apartments
4. Adelaide and Perth are similar – both see a fairly even distribution between houses and apartments
5. Like Sydney – the ACT stands out for apartment completions – but the total completions are vastly lower – the long-term average is around 3.8k – of those 800 are greenfield and 3k are apartments

Looking at these trends and how to apply these to what this means for Property prices –

1. when demand outstrips supply – prices will rise for property – but when supply outstrips demand – prices will fall
2. This supply can be broken down into houses (both existing and greenfield) as well as apartments (infill)
   1. The future of housing property – limited supply close to the CBD - and uncertain demand
   2. So in other words - Greenfield and infill will bear the brunt of property availability for major cities moving forward when it comes to homes and apartments
      1. However - The closer to the city you get, the higher the probability that it is either greyfield or infill
      2. As For apartments – greyfield and infill development will be where the supply of these properties come from

• For the increase in supply of property in homes, this will come from outer lying suburbs

What to look for and what to avoid – purely looking from a supply perspective –

1. Available greenfield and greyfield areas need to be paid attention to
   1. For homes – if you are buying a home in an area with a lot of available land surrounding it – then there is a higher chance that you may not see any capital growth for a while until the land is fully developed
   2. For Apartments – if you buy an apartment in an area with either a lot of old run down homes, or commercial sites that are looking a little old – there is a chance that many new apartments can spring up around you
      1. This equation is more detrimental than for residential properties – as a few residential properties or one commercial property can turn into a hundred+ apartments
   3. If you are looking for capital growth – it is best to avoid areas/sites that can be developed with increasing the supply of property – i.e. increasing the residential capacity through multiplying the number of houses from the same land supply
      1. This is mainly relevant to apartments – if you have a block of land in an area (with a house on it or not) that it is hard to increase the supply of land – i.e. everything is already built out on – then this can see capital growth
   4. Suburbs with limited available land and new houses, i.e. not derelict properties – that are closer to the city and do not have the capacity to be built out – these can rise in value – or at least maintain much of their value –
   5. The sector that is unlikely to grow in capital value – assuming demand stays constant – are apartments – the supply can outstrip demand easily compart to greenfield –
   6. For greenfield projects – as time goes on, you need to start looking further and further out from the CBD as the land supply gets soaked up
   7. However – for greyfield or infill projects – you will find this land often within 5-10km of the CBD – the maths for this exchange doesn’t bode well for supply versus demand – think about turning 2-4 properties into 100 – this only works if you own one of the properties being turned into the 100 – as you can command a higher price – but if you own an apartment in the area and now this is turned into one of thousands – then the supply can outstrip demand – which means that there are few people who can demand your property
   8. This is just one side to the equation – need to look at demand – which will be covered in next episode

http://udia.com.au/wp-content/uploads/2020/03/State-of-the-Land-2020-Summary-of-Headline-Statistics.pdf

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