Australia’s residential game changer?

Housing affordability isn’t at crisis point, says Rod Fehring, chief executive officer of Frasers Property Australia. But it does demand a radical rethink of the way we build and develop.

Housing affordability is a catch-all phrase, Fehring (pictured) says, which affects a large section of home hunters – everyone from people experiencing disadvantage to key workers, and from first home buyers to “retirees that are asset rich, cash poor and want to remain in their neighbourhoods”.

But these groups are united when it comes to finding affordable accommodation. Just one recent report from community housing advocacy group PowerHousing Australia found just 3.5 per cent of houses in Sydney sold in the year to February were purchased for less than $400,000, compared with nearly 26 per cent of sales five years ago.

But Mark Bouris, chairman of Yellow Brick Road, and the founder of Wizard Home Loans, said last week that this isn’t a crisis. Instead it’s an affordability “shift” that is occurring as the amenity, attractiveness and profile of previously inexpensive suburbs changes.

Fehring says Bouris is “absolutely right”.

House price growth has everything to do with location, amenity and employment opportunity, and less to do with low interest rates, which accelerate the way value is ascribed to these factors, Fehring says.

“When we look at the pattern of house price growth, we find that sales are easier to achieve in locations with high amenity, particularly those with close proximity to public transport, good schools and jobs. It’s the access to amenity and jobs that is driving the price appreciation fuelled by the availability of finance.

“Amenity drives demand, and as it does, densities need to go up in high amenity areas to respond to that demand. This is why apartment commencements are now equal to, if not greater, than detached housing at the moment.

“Interest rates just unlock the opportunity for people to consider trading up or trading down. But interest rates are not the ultimate determiner of what is bought where.”

The problem is that household incomes haven’t escalated at the same rate as house prices, which has left “an opening gap between those who could be in the market and those who can’t,” Fehring says.

Allied to this is the inability of our development management systems to enable supply to increase in response to fuelled demand, he says.

A recent survey by CHOICE found a third of Australian householders currently rent, and more than 40 per cent have been in the rental market for more than decade.

“We are witnessing quite a large section of the market unable to participate in traditional ownership and looking differently at private rental, provided they can get security of tenure via longer term lease arrangements. And this opens up opportunities for the industry to respond.”

Fehring points to progressive changes, that are “not comprehensive or coordinated”, but which are supporting longer-term leases. Victorian renters will soon be able to put down roots after the introduction of 10-year leases, and Fehring expects New South Wales and Queensland won’t be far behind.

Meanwhile, measures outlined in May’s federal budget will see managed investment trusts able to develop or acquire affordable housing to hold for rent. This move was welcomed by the Property Council, which has established a build-to-rent roundtable to identify policy barriers and test the market’s appetite for this new asset class.

The build-to-rent or ‘multi-family’ sector – whereby institutional groups build apartments to lease on a long-term basis – is thriving in other parts of the world. In the United States, for instance, it is the largest asset class and has performed consistently over the long term.

But this is “not about picking up your excess stock from an unsuccessful tower development and moving it into rental stock”, Fehring warns.

“It’s a very different product – one that strips out the unnecessary, like gymnasiums, pools and cinema rooms – to enable the cost base to be reduced.”

A build-to-rent property may take a different approach to laundry, car parking access, and the building’s title, “to keep operating costs low to ensure occupant lease payments are affordable.  This product needs proximity to broader neighbourhood amenity.”

But build-to-rent is an “important new product offering” and the industry is undertaking “considerable work” to make the numbers stack up.

With the combination of rental yield, operating cash flows and positive rent reversions as leases roll over, investment grade returns are “tantalisingly close”, especially when compared to where yields are now in other investment grade property assets such as retail, office and even industrial, Mr Fehring says.

“With interest rates starting to rise, a window is open now – and may stay open for a couple of years, perhaps a little longer,” he says.

“But it won’t be open for ever. As soon as interest rates go up beyond a certain point, the equation won’t work.”

Rod Fehring will be joining other industry leaders, including Mirvac’s Susan Lloyd-Hurwitz, Lendlease’s Kylie Rampa and Stockland’s Mark Steinert, at The Property Congress to explore Australia’s residential game changers. This year, we’ll be heading to Cairns from 18-20 October. Book your ticket today.