The Housing Accord in NSW – off to a bad start

This month we look at the NSW State Government’s performance in this the first month of the Federal Government’s Housing Accord target to build 75,000 well located and designed Australian homes in NSW each year until June 2029 and the broader implications of that performance for Sydney residential and commercial property buyers.

But first, a snap shot of Sydney’s residential and commercial property market in July 2024:

• At a macro level, activity was even slower than discussed in our June 2024 Newsletter caused by nearly a fortnight of school holidays and thanks to bitterly cold and windy weather, more than the usual seasonal buyer hibernation

• Although CoreLogic found that because of affordability constraints, “Sydney dwellings have seen a…substantial easing in recent growth…with the 28-day change cooling to 0.3%, down from 0.7% at the same time last month’ that finding didn’t square with:
  •  Our knowledge of top and non top end buyers whose ‘affordability constraints’ didn’t stop them from weeks’ long overseas holidays to escape that weather
  •  Herron Todd White’s Property Clock which still showed Sydney as a rising residential property market
  • 75% + clearance rates reported by agents on the ground; especially in the Inner West and despite a listings increase in that as well as other Sydney regions
  • ANZ-Roy Morgan’s latest Consumer Confidence reading …”4.7 points above the same week a year ago, July 24-30, 2023 (78.4), and is now 1.3 points above the 2024 weekly average of 81.8”

• Released today and eagerly awaited, the inflation rate for June 2024 came in at 3.8% as predicted by the RBA. In addition to leaving some talking heads with egg on their faces, that result all but extinguished any chance the RBA the rate next week with a majority of economists now forecasting a rate fall in 2025 and the money market now factoring in a 65% chance of rate falls by the end of this year. The historically very sound former Assistant RBA Governor (Economics) and now Westpac’s Chief Economist, Luci Ellis, expects a cut in November this year before a pause thereafter. There is a growing cohort of economists who think the same.
• Fuelling the case in favour of cutting interest even before the end of this year were analyses by private economists such as Greg Jericho at the Guardian and Alex Joiner at IFM Investors demonstrating, in contrast to the upbeat ABS data, extreme weaknesses in the private sector employment market and a sharp drop in recruiting intentions. While we touched on this briefly last month, these latest analyses have reinforced the concern.

For example and as published on 30 July 2024, the Matusik Missive reported that the annual change in the number of jobs as at June 2024 was down by 99,000 or 20% and that a breakdown of the new jobs created an that period reveals:

• Workers continued their return to Sydney’s CBD with the vacancy rate over the first half of 2024 declining for the first time since 2019 from 12.2% to 11.6%. Confirming a weakening private sector employment market, the AFR reported on 30 July 2024 that:

“The Australian Chamber of Commerce and Industry expects the trend towards higher office attendance to continue as the jobs market softens…“It’s natural that as jobs become harder to find, employers will find it easier to dictate terms of employment,” said Jessica Tinsley, the [C]hamber’s director of workplace relations”.

NSW and the Federal Government’s Housing Accord – report card

 As discussed in The Urban Developer on 29 July 2024, according to Urbis Director Ashleigh Ryan, the only policy which has far proven to be attractive to developers is the in fill affordable housing policy under which developers are eligible for height and floor spaces bonuses of up to 30 per cent with the inclusion of a minimum of 15 per cent affordable housing.

Confirming the views we shared in our  May 2024 Newsletter, in relation to the Transport Oriented Development (TOD) program, that report continues: “Ryan said she had not seen significant interest in the policy from developers, saying that the TOD program was one lever in incentivising more housing, not a silver bullet. 

“It will work in some precincts where the ultimate sale price of these units will justify the cost of amalgamating the site and cost of construction, but it’s difficult to justify in a lot of the precincts,” Ryan said. 

Colliers national director Guillaume Volz said the TOD policy “opens up a lot of land for development but the economics don’t add up in all areas”.

“For instance, if a developer purchases a house as part of a development site in Dulwich Hill where there are mostly semi-houses on 254sq m of land, the gross floor area provided under the TOD program doesn’t enable an uplift in value in that market,” Volz said. 

“However, while the development uplift may be too slim in some areas, there are others where it is feasible.

“If you take Roseville for instance, you have land-rich properties and higher value metrics, that when combined with uplift to floor space that has been provided via the TOD, provides sufficient incentive for owners to pursue the development upside and entertain collective sales with their neighbours.”

ABS building approval figures released on 30 July 2024 showed total home approvals in the financial year ended 30 June 2024 in seasonally adjusted terms were the worst in a decade with NSW experiencing the highest annual decline of all States at 17.8%.

On that inherited deficiency alone, this State Government clearly has no chance of achieving its Housing Accord five year target even before taking onto account the fact, as discussed above, that the construction sector accounted only for 10% of all jobs created in the past year.

Subverting that target

As we have previously commented, last month’s decisions to freeze the land tax free threshold at the 2024 level of $1.075 million and to increase the foreign purchaser duty surcharge from 8% to 9% and the foreign owner land tax surcharge from 4% to 5% are all decisions likely to exacerbate rather than solve the housing shortage.

This month the State Government added one and possibly two more confounding initiatives to that list by selling the massive and former Westconnex dive site on the corner of Parramatta Road and Mallett Street, Annandale (162-186 Parramatta Road, Annandale) to a private developer with no requirement that its re-development contain affordable housing in a location where such housing is desperately needed especially by front line workers 500 metres away at RPA Hospital.

Other property types also point to this Government’s plan announced this month, to ban no fault tenant evictions as another cause for investors to flee NSW. For many reasons, we do not agree. Nor did it happen in WA when the same ban was introduced a while ago.

Indecision and lack of co-ordination

Although the Metro West tunnelling and other works to build The Bays Station between Glebe Island and White Bay Station are well underway, two media reports on 25 and 26 July 2024 revealed that the State Government has not decided what use is to be made of that massive tract of land.

On 25 July Premier Minns was pushing high density housing at Glebe Island.

The next day a report emerged that the Port Authority of NSW was concurrently proposing maritime focused commercial buildings, a potentially expanded cruise terminal but no housing apart from about 250 close to The Bays Station.

That Authority is owned by the State.

Does the left hand of this Government know what its right hand is doing?

This pattern is also consistent with the proposed mini city at Rosehill Racecourse. Infrastructure proposed with no certainty that the ‘city’ will be approved – more a case of putting the cart before the horse (no pun intended).

Not picking lower hanging fruit

The State Government has still not amended Part 10 of the Strata Schemes Development Act 2015 (NSW) (the Act) to preserve the number or at least minimise the net loss of re-developed strata lots and instead, leaving that to councils like the City of Sydney to decide; all of whom are now mired in election mode.

As we said nearly a year ago, “[s]ugar coated as ‘strata renewal’, the superficially attractive intention of the Act in the residential sector was to make it easier to re-purpose ageing buildings and increase urban densities whilst reducing urban sprawl in response to population growth. 

Despite that lofty intention and in a glaring omission, the Act contains no requirement for the developed properties to be replaced by properties with increased density.”

Showing promise

In an excellent ABC series this month, journalist Michael Janda revealed that there are more than 43,000 privately owned properties in the State sitting vacant, some in prized suburbs close to public transport.

In Camperdown, Darlington, Chippendale and Ultimo the figure was as high as one in four whilst others were identified in Newtown and Surry Hills as well as 355 empty properties in Millers Point, 235 in North Sydney/Lavender Bay and about 140 in each of Lane Cove, Five Dock, Manly and Bondi.

The 22 July 2024 episode continued: “Weak state and federal property tax settings are partly to blame for the “excessive incidence of vacant homes”, according to Hal Pawson, associate director at UNSW’s City Futures Research Centre.

Professor Pawson said one option, which was favoured by economists, was to gradually phase out stamp duty for a broad-based land tax.

Failing that, he suggested “vacant property taxes could be a means of discouraging speculative holding of empty dwellings and/or ownership of rarely used second homes.”

But he cautioned there was not enough available data to show what was an “unjustifiably vacant” property, and anything beyond a “very narrow definition” could accidentally rope in others, such as homeowners away on a long holiday.”

The good but much belated news is that a State Government inquiry is underway which will consider vacant property taxes and report later this year.

(Victoria introduced such a tax for parts of that State in 2018 and is about to make it State wide).

In our view, addressing the vacant properties issue should have been prioritised well before now given its potential to alleviate the housing crisis much quicker than the long lead time, shovel and infrastructure ready development opportunities contemplated by TOD.

And that need is urgent: some of the suburbs listed above have the lowest fertility rates in NSW as baby makers are pushed by affordability constraints to the outer suburbs:

Source: ABS/KPMG

To put those fertility rates in perspective and while acknowledging that some of those rates would also be attributable to orientations and lifestyle preferences in those suburbs, a rate of 2.1 is regarded as the “replacement level” needed to maintain a stable population excluding migration.

Gentrification is all well and good but suburban demographic and wealth diversity is essential not only to provide local vibrancy but also labour for front line services and businesses as well as a local cohort of upgrading buyers of properties soon to be sold by ageing baby boomers.

Conclusion

While the Housing Accord in NSW is undoubtedly off to a bad start, it’s one which still provides well advised Sydney property buyers with an array of risks and a few buying opportunities.