A LOOK AT HOW ACTIONS FIVE YEARS AGO PRECIPITATED SUBDUED MEDIUM AND HIGH DENSITY DEVELOPMENT IN WESTERN AUSTRALIA
On the face of it, Friday August 10, 2007 isn’t the most memorable date on the calendar. More Australians would probably remember it as the day last placed Richmond beat Collingwood rather than as one of the earliest signs of what’s now coined the GFC.
It was the early hours of the morning in Australia, but for financial markets on the other side of the planet it was becoming clearer by the minute that there were trillions of dollars of suspect financial instruments suddenly worth a lot less. Banks froze operations and overnight they stopped lending to each other. Over the next few days, central banks in Australia and overseas coordinated efforts to boost liquidity by pumping more $200b into jittery financial markets.
A lot happened over the next 12 months, including some of the largest bank failures in history, however, up until September 2008 the financial crisis was largely seen to be under control. There was a sense that governments would step in to bail out any of the ‘too big to fail’ banks if they got in trouble.
On September 15, 2008 – a couple of days after another Collingwood loss – investment bank Lehman Brothers filed for bankruptcy. The US government had only a week earlier nationalised Fannie Mae and Freddie Mac, which at that point owned or guaranteed half of the US’s $12 trillion mortgage market. At the same time the UK government had stepped in to stop the bank run on Northern Rock. The collapse of Lehman Brothers precipitated a run on financial markets, causing liquidity to almost dry up.
Meanwhile, in the ‘lucky country’, Australia was not shielded from the events in the northern hemisphere. In October, 2008, the Australian government also stepped in and guaranteed the deposits and wholesale funds of Australian deposit-taking institutions. The Reserve Bank of Australia aggressively lowered rates, cutting the official cash rate by 100 basis points at October 8, 2008 meeting. The cash rate would fall from 7.25 to 3 per cent in just eight months by early 2009.
Signs of worsening economic activity paved the way for the Rudd government’s $42 billion economic stimulus package; a combination of public infrastructure funds, housing construction incentives and cash handouts.
Housing construction stimulus, namely the First Home Owner Grant Boost, in combination with historically low mortgage rates, successfully increased housing construction activity. By late 2009, there were more than 1,000 first home buyers per month purchasing new dwellings, up from 350 in mid-2008. New vacant land sales more than doubled in six months and remained at relatively high levels throughout 2009.
While detached housing construction increased 34.5 per cent from the low of 2008/09, the number of medium and high density dwelling starts increased only 13.7 per cent.
Figure 1 – Medium and high density dwelling construction, Western Australia
Since early 2008, the number of medium and high density dwellings approved for construction but not yet commenced has more than doubled in Western Australia. Meanwhile, over the same period, the number of medium and high density dwelling starts continues to decline. With the leading indicator of proposed residential projects, building approvals, also trending lower for the past two years, confidence in developing and selling medium and high density development is still low.
At the risk of losing you in nostalgic ruminations, any meaningful understanding of the state’s medium and high density construction industry requires an understanding of how more cautious lending practices have contributed to access to finance becoming one of the most significant barriers to medium and high density projects in the state.
A survey early this year by consultancy Davis Langdon found that hurdles to accessing finance have worsened in 2012, with the majority of respondents (58 per cent) citing the level of pre-sales as the most significant barrier. This figure has more than doubled since December 2011, where only 25 per cent of respondents identified pre-sales as a major hurdle.
Concerns that pre-sale requirements are one of the biggest barriers to medium and high density development are also supported by a recent report by the Australian Housing and Urban Research Institute (AHURI), “Delivering diverse and affordable housing on infill sites”. The report purports that the banks’ pre-sales requirement to cover 80 per cent of debt funding, net of GST and sales costs, “represents a significant hurdle in a stagnant or falling market and a barrier to the development of medium and high density development”.
With subdued apartment activity still a concern and pre-sale requirements unlikely to significantly liberalise, access to finance looks likely to remain an issue for some time.