Australia sees biggest fall in projects in five years

PERTH (miningweekly.com) – The value of definite projects in Australia, those under construction or committed, fell by nearly A$25-billion over the December quarter – the most significant quarterly fall in five years.

In its latest Investment Monitor, Deloitte reported on Thursday that the value of projects in its database stood at A$866.3-billion in the December quarter, with mining projects accounting for A$434-billion of the total.

The advisory firm reported a 9.2% year-on-year decrease in the value of mining projects, as major iron-ore projects were wrapped up in the Pilbara.

Currently, there are A$217.1-billion mining projects under construction, A$12.3-billion committed, A$120.2-billion under consideration and A$84.4-billion deemed possible.

In iron-ore, BHP Billiton had completed its A$5.2-billion rapid growth project and Rio Tinto had finished its A$1.2-billion expansion of its Pilbara mines. Moreover, with no new major iron-ore projects set to start up, the trend towards production and exports was well advanced in the sector.

As for coal, Deloitte noted that investment in the sector was still under way, but that it was nearing a turning point, with the GlencoreXstrata Ravensworth project, and BHP’s A$4.2-billion Caval Ridge project nearing completion. Definite coal projects stood at A$18-billion and planned projects came in at A$55.9-billion in the December quarter.

Weak prices and a soft outlook for global demand have hindered further investment in coal projects, Deloitte reported.

Oil and gas projects that will see it through were worth A$201.4-billion in the quarter under review and Deloitte reported that investment continued to be dominated by a collection of large liquefied natural gas (LNG) projects, such as Chevron’s Gorgon project, which recently suffered a A$2-billion costs blowout, which has taken the total cost to over A$54-billion. Planned projects were worth A$304.8-billion, Overall, the value of oil and gas projects fell by 14% year-on-year in the December quarter. Deloitte also noted that no new LNG project had recently been cleared for construction.

During the quarter ended December, A$12.9-billion worth of projects, which were not limited to resource projects, were completed, including BHP’s Jimblebar iron-ore mine and Rio’s A$1.2-billion Brockman 4 iron-ore expansion.

A number of new projects were also added to the Investment Monitor database, including Bandanna Energy’s A$24.2-billion South Galilee coal project and a A$3-billion expansion of the Abbot Point coal terminal.

Meanwhile, the growth outlook for 2014 remained below trend, with the impending peak in resource-related investment spending.

Deloitte predicted that the peak and subsequent decline in resource investment would place pressure on other areas of the economy to pick up the slack. However, it added that the value of definite nonresource projects went sideways after the onset of the global financial crisis, with recovery still expected.

http://www.miningweekly.com/article/australia-sees-biggest-fall-in-projects-in-five-years-2014-01-30

The one number you need to know: 72

You’ve heard it all before – the mythical property that doubles every seven to 10 years, or even more quickly. You’re wondering whether or not the numbers can be true, particularly with the strong results recorded for 2013.

The Real Estate Institute of Victoria has been on the record that the value of houses in Victoria have doubled every 10 years when looking generally at the market.

Ken Raiss, from accounting firm Chan & Naylor, is also of the understanding that a good investment doubles in value and that this is the benchmark to look for.

“A good capital growth property will pay for itself within 10 years. For those who like numbers, a property growing at a compound rate of 7% per year over a cycle will double in value in about 10 years. A poorer-performing capital growth of 5% will double in just less than 14.5 years while a superior 10% growth property will double in just over seven years,” he says.

However, not every property will double. Welcome to the ‘Rule of 72’. This quick mathematical rule of thumb is one to keep in mind as a benchmark if your expectation is, really, for your property to double in this time.

Think of it like this – if you divide 72 by the expected percentage of annual growth, what you will be left with is the number of years the area has taken to double. For instance, if an area is growing at 10% per annum, steadily, then it will double in 7.2 years.

Here’s a quick cheat sheet for you that will help you work out the return prospects based on the current or projected rate of annual growth:

growthchart

This leaves us with the knowledge that an area needs to grow by 7.2% per annum to double in 10 years.

However, property doesn’t work on a steadily, regularly increasing incline and so estimates can be limited in their usefulness; as can be looking to the past at the 10 year averages so often cited (also seen as the ‘average annual growth’, which is usually worked out using the past 10 year’s worth of statistics).

Where some properties will significantly increase in value for two years and then slump for eight, others may indeed double in 10 years, only to spend another 10 year period without much growth. This is where many trip up, by assuming that regardless of what they buy, where they buy and when they buy, it will double when the 10 year clock ticks over.

Late last year, Monique Sasson shared her opinions on what it takes to choose a property that doubles.

“[It’s] really important for investors to understand that property values and growth factors will fluctuate, but what we’re trying to do in terms of really good quality asset selection is beat the performance of the wider marketplace,” she said.

“When it comes to houses we like to choose investments that are anything from the 1880s probably to about the 1940s or 1950s. And the key note here is that the asset has to have what we call scarcity value. In other words, there has to be much more demand for that particular type of asset in that particular location than there ever will be supply to satisfy that demand. The same criterion applies to apartments. With apartments you want anything from 1930s through to about the 1970s. Those are the assets that really confer and satisfy that criterion of scarcity value.”

She also pointed to her scepticism that off-the-plan properties could reach this point, as well as the requirement for some sort of architectural scarcity in the dwelling chosen.

It’s worthwhile remembering that this is a fairly blunt tool, used for your first estimates. You will want to factor in rental return and yield, vacancies, the cost of the property to hold and a number of other calculations.

By Jennifer Duke
Thursday, 30 January 2014

 

 

Mining town vacancy rates mean that it’s wise to wait and watch

The publication this week by SQM Research of vacancy rate trends in mining-related cities and towns is a timely reminder to investors to check out supply-demand issues before buying.

The figures show that, in many important regional locations around Australia, oversupply is the issue, rather than the much touted “chronic housing shortage crisis” – just as it is for inner city unit markets in several capital cities.

Many investors consider demand factors, such as population growth, but forget to check out the level of supply in the market.

It’s difficult to imagine a place with more compelling demand factors than Gladstone, with massive levels of infrastructure development under way. Yet the Central Queensland city has a vacancy rate of 11%, according to Louis Christopher’s figures. Developers seeking to profit from the LNG boom went overboard and the Gladstone market has been sinking for the past 12-18 months.

Nearby Mackay has also suffered from an upsurge in new developer product and now has a vacancy rate around 7%.

Some markets have had a double whammy, with an increase in supply coinciding with a drop in demand. There is particularly true of Queensland coal mining towns, such as Dysart, Moranbah, Blackwater, Clermont and Capella.

Moranbah once ranked as the growth star of Australian real estate. In early 2012, its long-term capital growth rate (average annual growth in its median house price over the previous 10 years) was above 33% and its median weekly rent was $1,200. Before the end of 2012 its median house price would reach $750,000 – but, by then, rents were already falling and prices were soon to follow.

The demise of the Moranbah market was as spectacular as its rise. In the past 12 months its median price has dropped 42% to $435,000 and the median rent is now $520 per week. Median yields, which were 12% not so long ago, are now around 5%.

All manner of woes hit Moranbah. BHP and its partners refused to pay the astronomical rents being asked by investor landlords. Existing projects were downsized and new projects were deferred or progressed with 100% fly-in, fly-out workforces. And new dwelling supply hit the market.

Similar events have happened in other mining-related markets across Australia. In Roxby Downs in South Australia, where many investors bought in anticipation of a $30 billion expansion of the Olympic Dam mine, the vacancy rate has risen to 10% in the wake of BHP’s decision to defer the project.

Investors need to be aware of these issues because marketing companies continue to pump out promotional material for new developer product at high prices in mining-related markets that are in sharp decline.

One I received this week was touting two-bedroom units in Port Hedland for $715,000, claiming they would rent for $1,400 per week, provide a 10.2% return and earn up to $22,000 per year in profit – thereby providing the “perfect investment opportunity” for first-time investors.

The promo failed to mention that Port Hedland’s vacancy rate is now above 6%, that prices have dropped by up to 10% in the past 12 months and typical yields are now around 7% (and falling).

Similar propaganda comes in every week for highly-priced new product in Karratha and Newman (where the median price dropped from $850,000 to $450,000 in six months).

This is life in mining-impacted property markets. Many of the locations I’ve mentioned will recover, once the resources sector has finished the current phase of cost-cutting.

One tactic commonly being used is to shut down a mining project, sack all staff – and then, perhaps six months later, re-hire at lower pay rates and re-start the mining project. One town impacted by that is Collinsville in Queensland where, according to SQM Research data, the vacancy rate is currently 36%.

Moranbah, Newman and others will recover as there are big projects in advanced stages of planning. But in the short-term they are dangerous places to buy. Even investors who are happy to have some risk in their portfolio would be wise to wait and watch until the current phase is done and dusted.

By Terry Ryder
Thursday, 30 January 2014

Terry Ryder is the founder of hotspotting.com.au.

House prices to rise again, says Fitch

Australian house prices have grown faster than in any other major economy and are forecast to match growth in 2014 even in countries recovering from the global financial crisis. But low interest rates, high incomes and only modest employment declines mean Australian houses are still relatively affordable, says credit ratings agency Fitch.

Australian house prices have more than tripled since 1997, accelerating past other countries as the crisis hit in 2009. Prices fell about 7.4 per cent between late 2010 and May 2012, but have grown 11.8 per cent since then. Growth in the past 18 months has been more rapid in parts of the United Kingdom but much slower growth in other regions there mean it has not matched Australia’s recent growth.

Australian houses are the second least affordable after the UK on both house price -to-income ratios and compared with per capita gross domestic product. But Fitch expects both economies to support further house price growth, rising 4 per cent in Australia in 2014 and 5 per cent in the UK.

“Australian cities appear expensive relative to those in other countries,” says Fitch’s Global Mortgage and Housing Outlook. “The ratio has, however, been in the same range for over a decade.”

But it expects affordability to get worse as prices outpace income growth.

A separate consumer sentiment survey out on Wednesday is less positive about the outlook, with the influence of house price rises on confidence wearing thin. The Westpac Melbourne Institute Survey of Consumer Sentiment found expectations income would rise in 2014 fell 2.5 per cent this month. “The household sector is currently experiencing the weakest labour income growth in a decade,” JP Morgan economist Ben Jarman said.

The Fitch report shows much of the resilience in Australian house prices has not been driven by high rates of lending in recent years, with home loan growth relatively flat until the past six months. Instead, the main influences have been a relatively buoyant economy, and housing supply not keeping up with population growth.

Several other countries are also experiencing house price hikes, particularly resource -rich countries such as Brazil. Record low interest rates as economic conditions improve is driving others such as the UK. But worries about overheating property markets appear more acute than in Australia.

The lift in house prices in the southeast of England, which is paralleling growth in Australia, is also driven by a lack of supply as well as super -low interest rates. But the report says affordability is deteriorating fast there as incomes have quickly been left behind. Canada, which like Australia has benefited from the resource boom, has had a sustained rise in house prices over a decade, but this is tailing off due to over -leveraging.

While home lending dropped sharply in many countries. In Canada there has been no let -up. The debt to disposable income ratio in Canada is about 180 per cent. In Australia it is about 134 per cent.

Financial Review – 23 Jan 2014

 

10 off-the-plan contract mistakes that can kill your deal

The success of a development all comes down to securing sales for your end product. PSD looks at the top 10 contract mistakes that could cost you a sale or leave you in legal hot water.

Developers rely on off-the-plan (OTP) contracts to help secure sales as well as pre-construction financing. When formulating an OTP contract it’s important a developer is confident of the wording and the content as lenders look closely at these contracts to ensure they’re water-tight and buyers can’t exit from them without a valid reason.

When novice developers encourage buyers to sign contracts that aren’t legally sufficient it can cause huge headaches for all involved and may require the developer to reword a contract and have the buyers re-sign it.

Ben Olsen of Olsen Property Lawyers says there are many factors a developer should consider when drafting OTP contracts.

Here are 10 of the most common contractual issues he has encountered:

1. Deposit

A developer should be careful to ensure a deposit never exceeds more than 10 per cent of the purchase price. If this were to occur, then an installment contract situation could come into play, which is likely to have adverse consequences on the seller. In an installment contract, generally time is not of the essence in terms of payment of the settlement monies by the buyer and the buyer may take possession of the property before they have fully paid for it. Other adverse consequences include, but are not limited to, restricting the developer’s right to rescind the contract and exposure to a buyer on selling the property before full payment has been made to the developer. As an aside, the contract should provide for the deposit to be invested in an interest bearing account, but only once the buyer has provided their tax file number.

2. Unfair contract terms law

The contract should be drafted to ensure it doesn’t breach any unfair contract terms law. However, in the unlikely event a buyer commences action and the court deems a clause in the contract “unfair”, then such a situation can be dealt with by ensuring a severance provision is contained in the contract. This will essentially say that any provision which isn’t legal is severed from the contract and the remainder of the contract will continue unaffected. For example, if the contract only allowed the buyer to terminate on very limited circumstances but allowed the developer to terminate in a number of circumstances, one being, say, “any time without reason” and that specific clause was found to be unfair, it could be severed from the contract and the contract would continue without risk of being deemed void.

3. Disclosure statement

This document can contain a minefield of issues which a developer or seller must get their head around to avoid potential non-compliance. It usually contains such things as the plan, proposed community management statement and building management statement, budget and estimated body corporate levies, caretaking and letting agreement, body corporate management agreement and other services agreements. The seller’s solicitor will be able to assist in compiling this document, although due to the diverse information required, it’s likely other third parties will be involved in its creation. For example, the surveyor and body corporate specialists should be consulted. Olsen says he’s aware of one financier who took issue with a disclosure statement that rather than containing a copy of the proposed plan, simply referred to the proposed plan in the contract. As the law requires that the disclosure statement be given to a buyer before the contract, the financier required this to be remedied by the developer.

4. Foreign Investment Review Board (FIRB)

The seller should ensure that the contract easily identifies whether the buyer is a foreign person and the necessary clause inserted in the contract to make it subject to approval from the Foreign Investment Review Board.

5. Adjustments

Outgoings such as council rates, body corporate levies, land tax, etc. are commonly being swayed in favour of the seller these days. This is being done by deleting the standard clauses relating to adjustment occurring from the date of settlement to ensuring that all outgoings are adjustments on and from the date of registration of the plan. This effectively means the seller doesn’t have to concern themselves with the payment of council rates, water, etc. for the individual lots as the buyer takes all liability. Therefore it’s in the developer’s best interests to word the contract in such a way as to take advantage of this saving.

6. Settlement

A common settlement date in most off-the-plan contracts is 14 days from the date the seller notifies the buyer that the scheme has been established and an indefeasible title issued. The reason why 14 days is most often used is because most states legally don’t allow settlement to occur any sooner than 14 days and naturally a developer wants to settle the property as soon as possible after registration of the plan. Don’t be tempted to try and settle any earlier than this as your financier will require you to change the contract.

7. Termination rights

In addition to any other rights of termination, the seller or developer should consider inserted provisions in the contract to allow them to terminate in the event that it doesn’t receive all necessary approvals (such as development approval) and also if they can’t “secure funding for the development on satisfactory terms or otherwise decide it isn’t commercially viable to proceed with construction of the scheme building or the development”.

8. Financier approval

Generally, it’s commonplace for the financier of the developer or seller to require a copy of the draft contract and disclosure statement to ensure their interests are protected. For this reason, it’s best to get on the front foot and provide these documents to the financier prior to utilising the contract for any actual sales, as if the bank does require amendments it may be very difficult (if not impossible) to terminate and re-enter contracts for lots already sold.

9. Cooling off periods

When it comes to compliance, OTP contracts are no different to any other residential sale contract. In Queensland the Property Agents and Motor Dealers Act 2000 (PAMDA) requires that the seller ensure a “clear statement” in the form of the Form 30C Warning Statement be provided to the buyer prior to the buyer signing the contract. While no longer essential, ideally the Form 30C should be placed at the front of the contract. Its purpose is to inform the buyer of their rights with respect to the five-day statutory cooling-off period. The seller should also provide a copy of the Form 27C Selling Agents Disclosure to the buyer. Without the seller or developer making the buyer aware of the cooling off periods and informing them of their rights, an OTP contract may be void.

10. Body Corporate and Community Management Act 1997 (Qld) (BCCM)

Compliance with the provisions of this Act is required under Queensland law, including but not limited to, the insertion of a BCCM Form 14. A new version of the BCCM Form 14 was released on August 1, 2013 and must now be used.

Not all state legislation is the same and therefore any developer considering using OTP contracts should obtain legal advice in their specific state.

 

http://www.psdmagazine.com.au/2013/09/10-off-the-plan-contract-mistakes-that-can-kill-your-deal/

Rio Tinto’s Iron-Ore Shipments Rise

SYDNEY–Rio Tinto PLC (RIO) said iron-ore shipments rose by 5% last year to a new record as it expanded mining operations in Australia’s iron-rich Pilbara region betting on continuing strong demand from Chinese steelmakers.

The Anglo-Australian mining company said it produced 266 million metric tons of the raw steelmaking ingredient in 2013 and shipped 259 million tons to customers in countries like China, the world’s largest buyer of iron ore used to make steel for everything from skyscrapers to luxury sedans.

Higher production of the bulk commodity illustrates Rio’s confidence China’s economy will continue to expand at a strong rate, and that its manufacturing and construction industries will stay robust.

Rio, the world’s second largest iron-ore producer, behind Vale SA (VALE), said in November it was looking to spend around US$2 billion to boost its annual iron-ore output in Australia by more than a fifth over the next four years.

Analysts say rising iron-ore output should push iron-ore prices lower over the next few years. Still, Rio has said it can continue making money at lower prices, with its mines in the Pilbara being among the lowest-cost operations in the world.

The new $2 billion plan follows a recent multiyear expansion program to lift the mining company’s Pilbara production to 290 million tons a year from 230 million, a level it aims to maintain consistently from the end of June.

Rio separately reported a 15% increase in annual copper output to 631,500 tons, and a 10% increase in bauxite production to 43,200 tons.

Alumina production was up 1% on-year at 7.0 million tons, although the company said it would start ramping down its Gove alumina refinery in Australia’s Northern Territory from February before shuttering the site in July.

Rio said in November that it would halt production of alumina at the unprofitable refinery, which has struggled with low prices and Australia’s high exchange rate.

By Rhiannon Hoyle

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

http://online.wsj.com/article/BT-CO-20140115-710248.html

API 16 Most Overlooked Costs in Property Development

This is a mini booklet release from Australian Property Investor titled 16 Most Overlooked Costs in Property Development.

This report may potentially save you thousands of dollars, precious time and unecessary stress!

API 16 Overlooked Costs Cover

Download the booklet – API 16 Most Overlooked Costs in Property Development [PDF 5.37MB]

 

Australian property prices explained: Independent analyst

What everybody is telling us

The most common opinion about property prices in Australia is that our real estate is significantly overpriced or, that we are even experiencing a “property bubble”.

Evidence cited in support of the argument that prices are too high is that, in the past, median property prices were three times the average household disposable income but now that multiple is as high as six times the average.

An alternative measure, used less frequently in debates, is the ratio of house prices to rental costs – this ratio is now almost double of what it used to be a couple of decades ago.

Both these statistics show that property prices have increased twice as much as household disposable incomes and rents in the last twenty odd years. Therefore, it is easy to jump to a conclusion that, from a historical perspective, residential real estate in Australia must be significantly overpriced. But is this a correct conclusion?

There is a problem

As outlined in my last article about a property bubble in Australia, the above measures are rather inadequate for the purpose of describing short and medium term fluctuations in property prices, and whether these prices are “excessive” or not.

The key problem with the above ratios is that they have higher values now than in 2000’s, which in turn were higher than in 1980’s, which were higher than in 1970’s, which again were higher than in 1950’s… You get the picture. It is frankly impossible to draw any rational conclusions using these measures.

An alternative approach for better insight

To better depict what is actually happening in the market, we need to consider relationships between several factors that directly influence property prices – not simplistic measures like ratios of prices-to-rents or prices to household disposable incomes.

I have selected three different measures that, when presented together, describe more accurately what is happening with property prices. These are:

  • incomes – which reflect affordability; I opted for adult full time average weekly earnings which are more relevant to a property buyer cohort and are a less artificial measure than household disposable incomes;
  • rents (from CPI index) – which are indicative of a relative cost of accommodation for renters (since renting is a substitute for owning a property there is a direct relationship between the costs of both accommodation options); and
  • cost of buying – which is indicative of the relative cost of accommodation for owner occupiers (I am using a proxy measure which is simply equivalent to interest payments on a 100% loan on a median priced house);

I acknowledge that the “cost of buying” measure has its critics but there is a simple explanation why this is the correct statistic to use for direct comparisons with rental costs and affordability and not property prices. In particular, these days hardly anyone purchases a property outright so, the price of a property is only a secondary consideration in the purchase decision.

Yes, you read it correctly. Far more relevant for the purchase decision is the annual cost associated with buying a property – comprising of mortgage payments, council and water rates, maintenance costs, etc. Even more importantly, consideration also needs to be given to how this cost compares with rental costs, since renting is a close substitute for buying.

That is, the maximum affordable price of the desired property is worked out based on the buyer’s existing financial resources (i.e. cash and/or equity in currently owned property) as well as the buyer’s borrowing capacity (which is directly linked to buyer’s income and prevailing interest rates).

All in all, in order to proceed with the purchase, personal or family financial capacity has to at least match the annual cost of buying.

Paying off the loan principal is omitted in the analysis since it equates to savings and is therefore deemed irrelevant (i.e. every dollar that is paid off becomes owner’s equity that can be drawn upon in the future). Again, I acknowledge criticism of this point of view but I leave detailed explanations of its merits until next opportunity.

With this background, let’s now compare information on personal incomes, rents, costs of buying and property prices over the last 27 years.

The simple truth

LOGIS

 

Source: Based on ABS data

The chart reveals quite an interesting picture. In particular, despite a six-fold increase in property prices, the cost of buying a median priced house in Australia has risen less than two and a half times in the corresponding period (the actual Sep-13 index value is 234.1).

The increase in the cost of buying is substantially less than increases in personal incomes (adult total full time weekly earnings May-13 index value is 341.5) as well as in the cost of renting (rent component of the Consumer Price Index Sep-13 value is 298.6).

In other words, relative to the incomes of Australians working full time, the cost of buying is significantly lower now than it was 27 years ago. And rents are also a lesser burden now than they were in 1986. Therefore, if housing was affordable then, it is even more affordable now.

Undoubtedly, this conclusion will raise a few eyebrows since it contradicts many “informed opinions” that circulate in the media. So, let’s examine the chart a bit closer to see how well it reflects the reality.

A few words about the chart

The reason for selecting 1986 as a starting point is simply because this is when official ABS house price index data begins. This was neither an extremely low nor extremely high price point, hence is a quite reasonable year to use for benchmarking.

It is also very close to 1985, a year that Steve Keen, economist and a prominent media commentator, nominated as the year when “houses were affordable” and that he uses as a reference point in his analysis. So, no bias here whatsoever.

Let me also stress the fact that there is no conflict between this chart and the two ratios mentioned at the beginning of the article. That is, the chart clearly shows that property prices had grown at twice the rate of incomes and rents over the 27 year period.

However, in addition, this chart also illustrates the relationship between incomes, rents and the cost of buying which provides the explanation as to why property prices have risen so dramatically.

That is, current property prices are the result of incomes, rents and the cost of buying keeping in a relative balance over an extended period of time.

The real story behind the numbers

The story that this chart tells is surprisingly accurate. In particular, a combination of explosive rises in property prices and interest rates in late 1980’s resulted in buying costs reaching a level that could be considered a “bubble” (this was a period of high volume of sales and high prices).

Although the “recession we had to have” shook buyer confidence, prices did not fall. It was simply because a drop in interest rates brought down the costs of buying quite fast and this provided strong support for the then price level.

The cost of buying kept falling for almost a decade, to the extent that by early 1998 it was only half of what it had been in 1990. On the other hand, incomes and rents grew steadily, compounding the perception that properties were getting extremely cheap.

It meant prices had a lot of room to move. And they moved indeed – as much as three times in some locations in a relatively short period of time.

This jump in prices was merely a catch-up as Australians rediscovered their true financial capacity. It wasn’t until 2008 that a combination of continuous price growth and hikes in interest rates pushed the cost of buying again into an unaffordable territory.

The unfolding Global Financial Crisis quickly deflated this bubble – a reduction in buyer confidence led to a small drop in prices and the RBA swiftly engineered a big cut in mortgage rates to bring rates down to historically low levels and, in effect, dramatically reducing the cost of buying.

By March 2009 the cost of buying reached a bargain level again. These developments, combined with an additional stimulus for first home buyers, generated quite a lot of demand for residential properties, pushing prices higher in a very short period of time. The RBA reacted again, lifting rates in a hurry and the cost of buying caught up with the strongly growing incomes and rents at the time.

That brings us to present times. Renewed financial troubles reduced buyer enthusiasm for property. A moderate fall in prices from the peak reached in mid-2010, and interest rates retreating back to historically low levels, brought about a reduction in the costs of buying yet again.

However, the falls in those costs were not as sharp as in 2009, or as prolonged as in the 1990’s. Nevertheless, from a historical perspective, the reduction in the cost of buying was enough for real estate to be considered if not an outright bargain, at least well within the financial capacity of working Australians. And then prices started rising again…

Historical perspective with real data

The ultimate check of accuracy for the information presented on the above chart is a comparison of actual prices from the past and present – and the match is pretty good, as this sample of statistics for Sydney demonstrates:

 

June 1987*

Sep 2013

Change

Median House Price

 

$104,000

(Sydney annualised)

$627,000 (Jun’13)

(Greater Sydney)

6.0 times higher

Median rent:

– 3B house

$8,580

($165 p.w.)

(Metropolitan, dwelling)

$28,600

($550 p.w.)

(Greater Sydney)

3.3 times higher

Median rent:

– 2B apartment

$7,280 p.a.

($140 p.w.)

(Metropolitan, dwelling)

$24,960 p.a.

($480 p.w.)

(Greater Sydney)

3.3 times higher

Full Time Adult Total Earnings

(Seasonally Adjusted)

$24,528 p.a.

($471.70 p.w.)

(NSW Aug’87)

$75,634p.a.

($1,454.50 p.w.)

(NSW May’13)

3.1 times higher

Buy cost proxy (100% mortgage on median priced house)

$16,120

$37,306

2.3 times higher

Standard Variable Mortgage Rate

15.5%

5.95%

62% lower

Mortgage cost as % of full time adult wages

66%

49%

26% lower

Ratio of full time adult wages to median house price

4.2

8.3

2 times higher

Rent as % of full time adult wages (house)

35%

38%

Relatively unchanged

Ratio of median price to median rent (house)

1

1.8

Almost 2 times higher

Source data: RBA, ABS, Housing NSW, Stapledon UNSW.

* Note: 1987 data used in absence of full set of statistics for 1986

Final comment

The chart presented in this article is a simple construct but is sufficient to explain what has happened with Australian property prices over the last three decades.

I am open to a constructive criticism but frankly speaking, in my extensive research on the topic, I did not come across anything else that would provide such accurate narrative to real life events.

The ratios favoured by economists and some property market commentators do not offer much of an insight in comparison. Since the validity of these ratios has been undermined, at least in my view, I believe it is time to find more suitable alternatives to better explain what is happening in the property market in Australia.

To conclude, the message is clear – based on the income capacity of working Australians, residential property in this country is not overpriced and prices are far from bubble territory. We can afford current prices – and we can afford them more than in 1986. The only hurdle is that it requires accepting a level of debt that many may not feel comfortable with.

 


Arek Drozda is an independent analyst who has worked in the public and private sectors for over 20 years in business development, data analysis and in building geographic information systems.

http://www.propertyobserver.com.au/finance/australian-property-prices-explained-independent-analyst/2014011367181

QLD mining ghost towns predicted as workers on the move

A mining communities advocate has lashed out at the Queensland government, claiming a lack of support will see regional mining centres turn into “ghost towns” as workers leave to secure FIFO jobs.

Former state politician and Central Queensland Coal Communities advocate Jim Pearce claims mine workers are leaving regional towns at an alarming rate so they can be considered for work at the 100 per cent FIFO workforce at BMA’s Caval Ridge mine, Daily Mercury reported.

Pearce said the state and federal governments should “hang their heads in shame” for allowing BMA to opt for a wholly FIFO workforce at the mine and says people are leaving their homes and moving to different postcodes in the hope of securing work.

“This is the history of the industry in reverse,” he said.

“People used to move from the coast to the coal towns to have a job and a nice home and a great town to live in and now those vibrant populations will become ghost towns. Who would want to live in a community where they have a high risk of not being able to retain a job just because of the policies of the industry?”

BHP’s decision to use a 100 per cent FIFO workforce instead of hiring from inside the local Central Queensland community, enraged locals, the unions as well as the wider mining community at large early last year.

It was hoped that BHP would source the 1000 employees needed for the project from the surrounding areas of Moranbah, Dysart, Mackay and Rockhampton but instead workers will be flown in from Brisbane and Cairns.

President of the Moranbah Traders Association, Peter Finlay, has previously said local residents should have the opportunity to apply for jobs in their own community.

“It’s seven kilometres from the post office and if you want to work there you can’t have an address in Moranbah – how stupid is that?” he said.

Pearce agrees, describing BMA’s decision as “bad policy”.

“There’s a huge burden on infrastructure, roads and communities along the east coast and all this is adding to it,” he said.

“I think it’s about time the people of Queensland and people with some authority started to ask the questions why mining companies prefer to have FIFO ahead of a sustainable existing community. The reason is because they get tax concessions for constructing mining camps.”

Pearce called on the state and federal governments to take a serious look at the situation.

“Taxpayers, mining companies and the government have put a lot of money into building these mining communities; that’s why we need to use them.”

An enquiry into the effects of FIFO workforces on regional towns was released last year, making 21 recommendations including better resourcing communities under pressure from large FIFO workforces, removing tax benefits for companies using transient workforces, a study into the impact on communities and the development of a housing strategy.

http://www.miningaustralia.com.au/news/qld-mining-ghost-towns-predicted-as-workers-on-the