Bubble

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The Melbourne buyers' advocate David Morrell says he is finding it "incredibly hard to buy because you cannot justify the prices."
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He said most reserves were being passed easily.
"Are we in a bubble? Of course we are. It just depends who is caught with the parcel," he said.
 "But in my opinion, it is incredibly hard to buy because you cannot justify the prices," he suggested in his regular Monday auction roundup in the Australian Financial Review.
He recently blogged "the really bubbling bubble" is at $1 million to $5 million.
He pointed the finger at a June $4.66 million Armadale sale (photo below) at 39 Lambeth Avenue — "a street where anything starting with a $4 would be hard to justify." 
<img src="https://i1.au.reastatic.net/456x342/fbf55072cbb6b761411114c1532d68b13e37f8d41325530b7bec5cf4a47ac81c/main.jpg" alt="39 Lambeth Avenue, Armadale" title="39 Lambeth Avenue, Armadale" data-index="0">
Only a month ago Morrell wasn't calling it a bubble.
"Our suspicion is that this isn’t a bubble, it’s a jumping castle.
"Frenetic leaps until it springs a leak and then a slow deflate."
But another Melbourne buyers' agent Mal James continues finding homes for clients, noting while typically at well above agent estimates, they have been <a href="https://marketnews.com.au/documents/May_Results.xlsx.pdf" target="_blank" style="line-height: 1.3em;">rarely above his own price appraisals</a>.
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Buyers' agent David Morrell says top end Melbourne bubble prices can't be justified 

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The arguments Terry Ryder presents need to be anchored in facts, he urged last week, and we couldn’t agree more. The subject of <a href="terry-ryder/43362-present-arguments-anchored-in-facts-terry-ryder" target="_blank" style="line-height: 1.3em;">Mr Ryder’s piece for Property Observer</a> was about recent GetUp email on negative gearing and unfortunately the facts of the matter were the first casualty. 
Getting into the policy nuances of an issue as complex as housing affordability is challenging in a blog. What we have to do is cut through the haze of complexity, often used by politicians and lobbyists to diffuse popular calls for reform, and get to the heart of the issue in clear language, anchored in the facts. With the luxury of a few more words, let’s go through Mr Ryder’s statements compared to GetUp’s, and see which way the facts fall.
1. Mr Ryder said we were wrong to claim “millions of first home buyers” were priced out of the market, because: “Australia has 8.6 million households, of which 6 million are homeowners and much of the rest (according to the research) are renters by choice.”
Mr Ryder was looking at household data, not individuals - but if you look at individuals, the last census in 2011 <a href="https://www.abs.gov.au/websitedbs/censushome.nsf/home/factsheetshtdc?opendocument&amp;navpos=450" target="_blank">found about 2.3 million people in Australia rent</a> (and that figure doesn’t include the people who want to buy, but are living at home with their parents rather than renting). 
Mr Ryder does not provide any reference to the “research” allegedly showing most of these are “renters by choice.” However, a November 2014 report by the <a href="https://www.ahuri.edu.au/publications/download/ahuri_51002_fr2" target="_blank">The Australian Housing and Urban Research Institute</a>, under a section titled “deferring, not rejecting purchase”, shows renting for longer to save for a later purchase is one of several approaches would-be homebuyers are using to deal with higher prices.
It’s difficult to know for sure how many renters would rather be home owners, so we probably should have qualified it by saying “potentially” millions in our email, but when you look at the numbers and the research there are plenty of clues to suggest millions of renters would rather own their own homes. 
2. He claims, “25% of all current residential sales are to first-time buyers.” 
That’s wrong. The <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5609.0Main%20Features3Apr%202015?opendocument&amp;tabname=Summary&amp;prodno=5609.0&amp;issue=Apr%202015&amp;num=&amp;view=" target="_blank">Australian Bureau of Statistics Housing Finance figures for April 2015</a> shows first home buyers made up just 15% of residential sales. The last time first home buyers made up 25% of the market was nearly five years ago, in October 2009. In fact, this precipitous drop in less than five years supports the proposition that would-be first home buyers are being pushed out of the market.
3. He questions the link between negative gearing and housing affordability, saying, “An 18-month federal parliamentary inquiry … couldn’t provide any definitive evidence that it did.”
Research from the Australian Bureau of Statistics shows housing finance for investment properties rose from 16% to over 40% over the past 25 years, with the proportion of people renting increasing over that period, too. In particular, rental loss reported through negative gearing exploded after the capital gains tax discount was introduced in 1999. All this points to more investors in the market bidding up the price.
4. Though it’s not a key point in our email, Mr Ryder takes issue with the implication that investors are buying a second or third property, referencing ATO data showing “three-quarters of investors own only one property.” 
But that ATO data refers to investment properties. Mr Ryder forgets most people who buy an investment property are also owner occupiers. So when they buy an investment property, it’s generally their second property.
5. Mr Ryder says “the [GetUp] claim about ‘a skyrocketing housing market’ is patently absurd, given that only one of the eight capital cities has a boom market.” 
If that’s true, we’re not sure what all the fuss is about in the media, every single day. But let’s look at the figures and listen to the experts.  
A fascinating article on 15 April by ABC Business journalist Michael Janda quotes:
<ul>
<li>RMIT housing expert Emeritus Professor Mike Berry: "Housing prices more or less doubling over the last 10, 12 years in the capital cities.”</li>
<li>ABS statistics: Australian capital city home prices rose 68% over the past 10 years, and 125% in the decade before.</li>
<li>
BIS figures: over the last 40 years Australia has seen stronger house price growth than anywhere except Norway.
</li>
<li>International property analysts at Demographia: Australia is one of the world's least affordable places to live, with their measure of median home prices to median incomes showing all five of Australia's biggest cities are "severely unaffordable," with Sydney and Melbourne in the world's top 10, along with Tweed Heads.</li>
</ul>
According to the International Monetary Fund, Australia has the third highest house prices, relative to the level of people's incomes, among 24 advanced economies.
Even if you limit the discussion to the Sydney and Melbourne property markets, that’s where more than nine million Australians live. Other capital cities, like Perth and Brisbane, have also seen<a href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6416.0Dec%202014?OpenDocument#Time" target="_blank"> dramatic price rises</a> at times within the past 12 years (more than doubling and a 75% increase, respectively) that have made it very difficult for first home buyers. 
6. Mr Ryder disputes this statement: “A massive $4.2B in negative gearing tax breaks per year go to the top 10% of income earners.”
The $4.2 billion in tax breaks for the top 10% of income earners is the combined impact of the negative gearing and Capital Gains Tax (CGT) discount - we should have said this in the email (and have since done so on the web page). That figure comes from the GetUp commissioned Australia Institute report, ‘It’s the revenue stupid,’ released in May this year, which was cited in the email.
The wider issue is how negative gearing interacts with the capital gains tax discount to drive up prices. It is the two policies working together that makes property investment so profitable and means that more and more of it is happening. For this very reason, scrapping the capital gains tax discount is also part of the GetUp/Australia Institute policy recommendations. It is simply too difficult to tell that entire story in one blog (and many in the media have had the same difficulty), though we have information about it online.
7. Mr Ryder then cites ATO data to argue that most Australians who own an investment property earn less than $100,000. 
On this point it is essential to understand that one of the core purposes of using negative gearing is to reduce the investor’s taxable income (i.e. below $100,000, or $80,000, the marginal tax thresholds).
As ABC Business Journalist Michael Janda explains, “the “ATO's measure of ‘total income’ includes net, not gross, rent - that is, rental earnings or losses after deductions such as interest payments have already been removed. The very reason that many housing investors fall below the $80,000 threshold is because they have used negative gearing to slash their tax bill.”
For this reason, both Mr Janda and Greg Mckenna (in an article for Business Insider), point out that the HILDA survey data, used by the Reserve Bank of Australia (RBA), is more accurate. According to the RBA (as cited in Mr McKenna’s piece), “investor households with incomes in the top 20 per cent of the income distribution owe the bulk of the investor housing debt and over a quarter of total housing debt outstanding … The bottom 20% [of the income distribution] account for just 2% of investor housing debt.”
For further reinforcement, Professor Judy Yates, one of the country’s most respected housing experts, who was seconded by the Australian government to work on their National Housing Strategy, said: “the biggest benefits [of negative gearing] go to high-income households, lowest benefits go to lower-income households."
8. Mr Ryder next takes issues with our claim there’s a “consensus among housing experts and economists that negative gearing is one policy area driving unaffordable housing.”
In arguing this, he says only a minority are concerned about negative gearing, and describes highly respected economist, Saul Eslake, as being part of the “lunatic fringe”. (Who knew the chief economist at Merrill Lynch could possibly be considered fringe?) Nevertheless, here are a few other notable ‘lunatics’ who have shown concern about negative gearing:
<ul>
<li>Former Governor of the Reserve Bank Bernie Fraser </li>
<li>Former Commonwealth Bank CEO David Murray </li>
<li>ANZ boss Mike Smith</li>
<li>Australian Council of Social Service </li>
<li>John Daley, CEO of the Grattan Institute </li>
<li>The Australia Institute </li>
</ul>
We’d run out of pixels if we completed the list.
9. Mr Ryder claims “the GetUp campaign is based on the notion that eliminating negative gearing will somehow make housing cheaper.” 
Except, that’s not what we said. The GetUp/Australia Institute policy recommendation was to limit future negative gearing to new properties, which currently represent only six per cent of the value of negatively geared purchases. By driving investment dollars into new properties, the idea is to stimulate the creation of additional housing supply, which can help reduce prices and rents, as well as create construction jobs. This is also an approach that’s been put forward by the McKell Institute and is reportedly being considered by the Labor party.
But, to take Mr Ryder’s point on more directly, the logic is pretty straight forward. Reducing the tax incentives for investors buying second hand property will reduce demand for that property and therefore put downward pressure on prices. 
10. Finally, Mr Ryder takes issue with our reference to the property bubble. He says, “What we have seen throughout history is that boom markets eventually stop growing and prices level out. But we have never seen a crash, not in the history of this nation.”
In fact, RBA data shows several <a href="https://www.rba.gov.au/publications/rdp/1999/pdf/rdp1999-06.pdf" target="_blank">precipitous price drops in the history of the Australian property market</a>, including in 1891 and the Great Depression. And if we go just a bit outside the direct experience of our nation, the entire Global Financial Crisis was triggered by a property bubble and crash in just one country - the United States. As a reminder, that included the near collapse of some of the largest financial institutions in the world (only prevented through massive government intervention) and recessions in most industrialised nations of a scope and duration not seen since the Great Depression (prevented in Australia only by a $52.4 billion stimulus package). So property bubbles and crashes do happen and they can have pretty dire consequences.
Tens of thousands of Australians have signed the petition calling for reform to negative gearing - we’re disappointed to hear Mr Ryder doesn’t support it, but GetUp’s member driven, which means if members don’t support a campaign they are free not to. We welcome constructive criticism, but as Mr Ryder said, it needs to be grounded in the facts. 
Picture this: 43% of Australia’s wealth is held in real property now, compared to 30% of America’s wealth in 2001, just prior to the Global Financial Crisis. Australia also has just four banks holding 75% of all Australian mortgages. So, if you want to talk about systemic economic risks, then the property bubble would have to be at the top of your list. With that in mind, it makes sense why Saul Eslake, the RBA Governor and the Treasury Secretary, among others, have been so concerned.
In the context of so much risk, the burden is on Mr Ryder to explain what magical mechanism would prevent the Australian housing bubble from a price crash.
Mark Connelly is GetUp's Campaign Director. GetUp can be reached <a href="https://www.getup.org.au" target="_blank">here</a>.
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Property market facts are stubborn things: GetUp's Mark Connelly

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The debate over Sydney’s property price bubble (Yes there is! No there isn’t!) sits smack bang in the middle of one of the most fascinating economic questions of our time: how risky is sudden asset price inflation?
And if the risk is judged to be high what, if anything, are policymakers to do about it?
In the 24/7 world of US and European bond markets, traders’ Bloomberg screens have bleated dire warnings since bond yields went negative last year for the first time in modern economic history. In China, speculators watch equity markets in Shanghai and Shenzhen that have risen more than 150% in the past 12 months. And in Australia, Australian_property_bubble is its own Wikipedia page.
As my former boss Saul Eslake pointed out last week in the Sydney Morning Herald, to use the term bubble in relation to asset prices is “emotionally laden”. It has no definition in the academic literature, other than a generalised notion of a sudden and upward acceleration in asset price movements that poses the risk of a violent crash.
Alan Greenspan’s famous term “irrational exuberance,” was another expression of emotion. Bubbles – the endgame of a bull market – are not as well defined as a bear market, which generally refers to a 20% or more fall in equity prices, or an economic recession, which is two consecutive quarters of negative GDP growth.
What is a bubble and other tricky definitions
One of the big challenges in defining a bubble is in establishing its start. Sydney property prices are a case in point. In 2014, the ABS residential property price index for Sydney indicated a 14.7% rise for the year. That’s strong growth, and was at least double the rate of growth seen in other capital cities. But extend the starting point back five years, and Sydney’s property prices have increased by 39%, roughly on par with Canberra (36%) and Melbourne (35%). Go back 10 years, and Sydney’s property price growth of 57% is significantly less than the national weighted average of (85%) and less than half that of Darwin (168%) and Perth (133%), or even Melbourne (113%).
So are Sydney property prices in bubble territory, or are they just catching up after a period of flat-to-negative growth in the early 2000s? What of other factors such as the underlying dynamics of supply and demand, housing density, urban planning and land value?
When policymakers are staring in the face a potential bubble, their real concern is the underlying drivers of that sudden, rapid surge. Is the bubble a symptom of systemic risk?
Growth in credit and foreign investors
In Sydney’s case, two potential systemic risks merit scrutiny. The first is the very rapid growth in credit being used for property investment; that is, the expansion of leverage. The second is increasing foreign investment that is reportedly flowing into the Sydney property market, purportedly from China.
These are, however, two very different risk stories. Of the two, leverage is far more pernicious. Excessive household leverage in particular walks down a well-worn path toward financial instability - as the global financial crisis amply reminded us - where it can take years for families to repair their balance sheets after a hit. “Buyer beware” is a theoretically correct construct, but not a particularly practical one should a government have to face down armies of homeowners sinking under negative equity.
Rising capital inflows hold much less risk, particularly in an Australian context. A sufficient magnitude of outflows would dampen market prices, potentially cause the Australian dollar to weaken somewhat and ultimately require some current account adjustment. One could argue that this outcome may be an upside risk for growth, not a downside one.
Reserve Bank of Australia governor Glenn Stevens’ comments last week in Brisbane make it clear that his focus is square on the risk of leverage. He notes pointedly that Australian households already have a high debt burden taken on in the years leading up to the 2008 financial crisis; the point of the speech was a plea was for government to shoulder the burden by getting on with a boost in useful (non-mining) infrastructure investment while cheap finance is so plentiful.
Macroprudential actions
Should Stevens’ concerns on household indebtedness move from words to action, the policy response would be to temper leverage. The most targeted and effective approach is to make borrowing more expensive through more stringent customer debt-to-income tests.
The RBA and Australian Prudential Regulation Authority (APRA) could also reduce the allowable maximum loan-to-valuation ratios (LVRs) thereby requiring higher deposits – following the example of the Reserve Bank of New Zealand – or, in a nod to recommendations in the Financial Services Inquiry, increase the Big Four banks’ risk weights on capital held against mortgage loans.
These types of measures are often called “macroprudential”– that is, regulations applied to maintain financial system stability by directly addressing perceived underlying risks. Macroprudential regulation is a term that has come back into vogue in the post-GFC world. In reality, the concepts are not new.
As Luci Ellis and Paul Woolley pointed out in an RBA paper back in 2012, a macroprudential policy stance is more a state of mind around monitoring and acting on systemic risks rather than a specific set of policy measures or tools.
Lower stamp duties, increase capital gains tax?
A second course of action would be for the federal or state government to shift market dynamics through tax incentives. Lowering stamp duties would reduce transactions costs, potentially freeing up more supply in the existing housing stock. So could shifting the pension asset test to increase the incentive to downsize from the family home once it is no longer needed. Introducing greater capital gains tax on properties sold within a short period or reducing the benefits of negative gearing would go a long way toward discouraging investor-driven acquisitions, while imposing new levies on purchases by non-residents could dampen capital inflows.
The problem with changing property-related tax policies for residents is twofold; not everyone will be happy, and the need for gradual introduction to allow for adjustment means impacts may be slow. An additional issue with trying to limit property purchases by non-residents through tax is that its target is a great unknown.
Hong Kong’s failure to deflate
As will be discussed in depth in a paper released by the Australian Centre for Financial Studies and Finsia this week, there continues to be a remarkable lack of comprehensive and reliable data on both the source and ultimate destination of foreign investment into Australia, and particularly into the residential and commercial property market. With such thin evidence as to both the total size and the source of these anecdotal flows, policymakers are shooting in the dark.
Beyond this, it cannot be guaranteed that raising borrowing costs and shifting tax incentives would deflate a perceived property bubble. Hong Kong and Singapore have both tried it, and arguably failed. In 2010, Hong Kong moved to simultaneously require a significant increase in deposits for investment properties while also adopting additional stamp duties on investment properties, with higher penalties for non-resident investors. Singapore followed suit in 2013.
The impact on Hong Kong has been negligible. Despite concerns of market disruption in 2010, property prices continued to climb and hit an all-time high last year. Singapore did see its property prices flatten in 2013, then fall by 4% in 2014.
However, there has also been a significant decline in the volume of both existing and new home sales according to the Urban Redevelopment Authority, suggesting that these measures may not have had the desired impact of increasing housing affordability or supply. And although prices have not increased, they remain high relative to Singapore household income.
Crazy indeed.
Amy Auster is Deputy Director at the Australian Centre for Financial Studies. She can be contacted <a href="https://www.australiancentre.com.au/AboutUs/Staff/AmyAuster" target="_blank">here</a>.
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Blowing bubbles: the tricky task of tackling Sydney's property market 

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The Satterley Property Group has seen no indication of softening demand or an impending price correction in its Victorian operations.
Jack Hoffmann, general manager of Satterley Property Group Victoria, noted the land market and the established market "were two very different beasts.” 
“We’re hearing all this talk of ‘is there or isn’t there a bubble?’ and that the established housing market, particularly the inner city apartment market, is in serious trouble.
"But this simply isn’t the case for the land market.”
 Satterley lay claim to around eight per cent of the Victorian land market with its portfolio having included Coburg Hill, Plenty River, Riverstone and Tarneit.
“The median land price grew by four per cent last year, which hardly indicates that we have entered a bubble.”
“While any price correction would inevitably have an effect on the entire market we expect that the land market, barring any unforeseeable event, would be largely sheltered from any significant impact,” Jack Hoffmann said.
He identified a consistent level of supply as a key factor keeping the land market from approaching bubble-like conditions.
“The reason that the land market has grown at a more sustainable rate than the established market is supply.
"The state government has done a good job of approving enough land for development, which is now readily developable, to satisfy demand.
“As a result you currently have around 170 active land developments in Victoria, compared to around 90 in 2010,” Mr Hoffmann added.
In 2013 Satterley Property Group announced plans to secure 10 per cent of the Melbourne residential new house and land market, with its successful bid for Victorian Government-owned land at Point Cook.
The company said in 2013 it believed the house and land package market in Melbourne was then close to the bottom of the cycle.
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No bubble with Melbourne house and land: Satterley

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GUEST OBSERVER
Following the end of the mining boom, Australia’s growth has been rebalancing towards housing and the services sectors. The first part of the rebalancing act involved a significant rise in housing prices and housing construction. 
Housing prices have risen by 30 percent since mid-2012, led by Sydney and Melbourne. Most of the rampup in building has been apartments in the major cities. 
The housing market is now cooling, as a result of tighter prudential settings and the boost to housing supply.
<a href="/images/2016/04/22/Screen%20Shot%202016-04-22%20at%208.43.29%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/04/22/Screen%20Shot%202016-04-22%20at%208.43.29%20AM.png" alt=""> 
Although the housing upswing has been a necessary part of the rebalancing act, it also drove a rise in household debt. The household debt-to-income ratio has risen from 167 percent in 2011 to 186 percent in 2015. Australian household debt levels are among the highest in the world. However, high household debt is not, in itself, a problem, as long as the debt is held by households that can service it. In Australia, the distribution is fairly favourable, with high income earners holding most of the debt.
Institutional features also matter. In Australia’s case, all mortgages are full recourse, significantly reducing the incentive to default. Australia does not have sub-prime mortgages. Australian households also use their mortgage to save, given the tax benefits available for doing so. This has meant that the average mortgage is currently more than 2.5 years pre-paid, leaving households with a significant equity buffer to draw down, if needed. The prudential regulator has also been tightening lending standards over the past 18 months, particularly for investors, reducing the risks involved with the new lending. Loan-to-valuation ratios on new loans have fallen.
We expect housing price growth to remain subdued in coming quarters. We see some risk that apartment prices could fall, given signs of over-supply of apartments, particularly in Melbourne and Brisbane. However, we view these apartment markets as somewhat segmented from the detached housing market. Significant foreign investment in new apartments also limits domestic financial system exposure.
Overall, we see mortgage debt as generally well distributed to households that can  afford to continue to service it and see the financial stability risks as moderate.
Australia’s housing market is cooling 
National housing prices have been broadly steady over the past six months, following strong growth over recent years (Chart 1). 
The slowdown has been most vivid in Sydney and Melbourne, where housing prices have been flat since October, following annual average growth of 10 percent and 6 percent over the previous four years (Chart 2). Housing price growth has been much more modest in the rest of the country at around 3 percent a year over the same period.
Apartment prices have generally risen by less than detached housing prices in recent years, and are slowing down by more than detached housing prices in some of the major markets.
The slowdown reflects a range of factors, including tighter prudential settings, particularly for investors, and rising housing supply. We expect these factors to continue to constrain housing price growth in coming quarters and forecast that national housing price growth will run at low single-digit rates this year and into 2017, following growth of around 10% in 2015 (see Downunder Digest: Australia’s housing market cools, 11 December 2015).
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<img src="/images/2016/04/22/Screen%20Shot%202016-04-22%20at%208.45.21%20AM.png" alt="">
Household debt has risen, but it’s the distribution that matters
The housing price boom has led to rising household debt. The household debt-to-income ratio has increased from 167% in 2011 to 186% in 2015, mostly led by a pick-up in lending to investors (Chart 3 and 4). This makes Australian household debt levels amongst the highest in the developed world (Chart 5). Of course, given the rise in housing prices, the household debt-to-asset ratio has been more subdued: it has actually fallen from 24% in 2011 to 22% in 2015.
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<img src="/images/2016/04/22/Screen%20Shot%202016-04-22%20at%208.46.38%20AM.png" alt="">
High household debt levels can make an economy more vulnerable in the face of a shock.
However, it is unusual for the high debt levels, in themselves, to be the driver of a downturn. The US sub-prime crisis was a rare example of this situation. Importantly though, even in the US, it was not the level of aggregate debt that mattered most, but the distribution of debt. In Australia’s case, most of the debt is held by higher income households. Numbers for 2010 showed that, at that time, around 72% of the household debt was held by the top 40% of income earners (Chart 6). Less than 4% of the debt attributed to the lowest 20% of earners.
Australia’s financial system also has institutional features that help to reduce the risk that household debt could become concerning. For a start, all mortgages are full recourse.
Australia’s tax system also favours paying down mortgages ahead of schedule as interest payments and expenses on owner-occupied properties are not tax-deductible. 
The latest numbers suggest that the average mortgage in Australia is currently over 2.5 years pre-paid, leaving households with a significant buffer in the face of the risk of rising unemployment.
Lending standards were tightened as investor borrowing rose
Despite these factors, the strong rise in lending to housing investors through 2013-15 raised concerns that the new lending could increase the risk to the overall mortgage book. Concerns increased partly because the ramp-up in debt was quite geographically concentrated in New South Wales and, to a lesser degree, Victoria, and because the strong investor interest was helping to fuel double-digit housing price growth in these markets (Chart 7).
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<img src="/images/2016/04/22/Screen%20Shot%202016-04-22%20at%208.48.14%20AM.png" alt="">
As a result of these concerns, the authorities tightened prudential settings. This included: requiring the banks to test new borrowers for a higher mortgage rate than offered; requiring the banks to slow the growth in their lending to investors to below 10% y-o-y; and, requiring the banks to hold more capital (which saw effective mortgage rates rise). Tighter prudential settings have seen a clear pullback in lending to investors (see Chart 7). There has also been a fall in the proportion of lending at loan-to-valuation ratios of over 90% and a decline in ‘interest only’ loans (Chart 8). This should help to reduce the risks associated with recent new lending.
Apartment over-supply presents a risk
To the extent that there are risks, the key focus is on the apartment markets in the major cities. Apartment building has picked up substantially in the major cities (Chart 9). Importantly, our view remains that the national detached housing market is not over-supplied, which means the overall housing market is not yet showing signs of being over-supplied (see Downunder Digest: Australia’s housing supply ramp-up, 9 September 2015). As Chart 9 shows, there has only been a modest rise in construction of detached dwellings in recent years.
<a href="/images/2016/04/22/Screen%20Shot%202016-04-22%20at%208.49.28%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/04/22/Screen%20Shot%202016-04-22%20at%208.49.28%20AM.png" alt="">
The risk of a potential over-supply of apartments is largest in Melbourne and Brisbane, where apartment building has been at record highs as a share of the existing stock (Chart 10). There is also some risk of over-supply in Perth, where apartment building has been strong.
To some degree, the detached and apartment markets are segmented, given the lack of perfect substitutability. For example, buyers of detached dwellings in the suburbs tend to be quite different from buyers of inner-city apartments. So a possible decline in apartment prices, due to over-supply, would not necessarily translate into a matching fall in detached housing prices.
This is particularly the case, given that there has only been a limited pick-up in detached home building in recent years. The tightening of prudential settings and falls in loan-to-valuation ratios also help protect the financial system from any decline in apartment prices as new borrowers would need to see larger price declines before they fell into negative equity.
Strong foreign investor involvement in the major city apartment markets, particularly from China, may also limit the exposure of the domestic financial system to the impact of any falls in apartment prices in these markets. Government approval numbers show that there has been a strong rise in foreign purchases of new dwellings in Australia over the past year (Chart 11).
<a href="/images/2016/04/22/Screen%20Shot%202016-04-22%20at%208.50.41%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/04/22/Screen%20Shot%202016-04-22%20at%208.50.41%20AM.png" alt="">
Many of these purchases are off-the-plan apartments, partly because foreigners are restricted to purchasing newly constructed dwellings.
In its recent semi-annual financial stability review, the Reserve Bank of Australia (RBA) noted that ‘the Australian banking system has little direct exposure to Chinese investors’. Foreign buyers may also have different motivations for purchasing, with some looking to invest in property as a store of value, rather than for speculation. This could limit the willingness of foreign investors to divest, even in the event of some capital losses.
Falling apartment prices could also put pressure on developers’ balance sheets, with many of the apartments having been sold ‘off the plan’. Again, the RBA recently noted that its liaison suggested that ‘settlement failures have, to date, remained uncommon and are generally expected to increase significantly only if housing prices fall substantially’.
Related risk in commercial property
Global demand for commercial property assets has also somewhat displaced Australia’s commercial property market. Commercial property prices have risen well ahead of rents in recent years, as global investors ‘search for yield’ pushes Australian yields down to global levels, which are around historical lows. The ramp-up in commercial property prices (and fall in yields) has come despite office vacancy rates that remain elevated, with particularly sharp increases in Brisbane and Perth.
This could have a bearing on the domestic apartment market as there may be some substitutability between office and apartment buildings. A retreat in commercial property prices could put some downward pressure on apartment prices. However, much like the apartment market, foreign investor involvement in the commercial property sector has been significant, which could limit the risks to the domestic financial system.
Mortgage loan arrears are still falling
Finally, it is worth noting that mortgage loan arrears have continued to fall since their peak in 2011 and are at very low levels (Chart 12). What is most interesting is that arrears continued to decline despite the rise in the unemployment rate over recent years. This is likely to reflect the support from falling interest rates over that period. The recent decline in the unemployment rate should help to support loan servicing and potentially limit concerns about household debt levels.
<a href="/images/2016/04/22/Screen%20Shot%202016-04-22%20at%208.51.42%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/04/22/Screen%20Shot%202016-04-22%20at%208.51.42%20AM.png" alt="">
Paul Bloxham is chief economist (ANZ) for HSBC . Daniel Smith is economist. They can be contacted <a href="https://www.about.hsbc.com.au/hsbc-in-australia/management-team" target="_blank">here</a>.
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Australia’s rising household debt and should we worry? HSBC's Paul Bloxham

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Here’s the most remarkable statistic to emerge from the residential real estate industry this year: 32% of people think there’s a bubble.
The remarkable thing is that so few believe in the bubble BS. Media has been running bubble stories daily. Recently a new B word has taken up headline space: bloodbath, now a popular word to describe predictions from the lunatic fringe who subscribe to bubble theories.
But, according to an Investor Insight Survey, 55% of respondents said there was no property bubble and 13% were unsure.
Media, being the strange twisted animal that it is, chose to highlight the 32% who do apparently believe there’s a bubble, with the inference that this number is significantly high. My reaction was quite the opposite: that it’s amazingly low, given that media constantly tells us that one exists.
Among the many unworthy things that Nazi propaganda guy Joseph Goebbels gave to the world was the notion that “if you tell a lie big enough, and keep repeating it, people will eventually come to accept it as the truth”.
That principle, if that’s the right word, is alive and thriving in Australian media today. Most of what consumers believe to be true about real estate – the affordability crisis, the chronic housing shortage crisis, the bubble, the Great Australian Dream is dead, etc – are lies that have been repeated so often that many people accept them as truth.
This week the Australian Bureau of Statistics published its Residential Property Price Indexes, which are the latest figures to demonstrate the lie in the boom/bubble/bloodbath nonsense much beloved by tabloid media.
Sydney’s price index is up 13% and the next best is Melbourne’s 4.7% annual rise. Brisbane has managed 3.9%, Canberra 3%, Adelaide 2.5% and Hobart 1.9%. The price indexes for both Perth and Darwin have fallen slightly. The weighted average rise for the eight cities is 6.9%, but seven of the eight cities are well below that average.
I’ve scrutinised these figures, and similar data from other sources, from lots of different angles and directions. I’ve turned them upside down. I’ve looked at them in a mirror. I’ve examined them through a magnifying glass. And I cannot find a national property boom there. And without a boom, there is no bubble. And without a bubble, there is no prospect of a bloodbath.
Few media outlets reported the ABS figures, as they don’t fit with the pre-conceived story line of runaway markets, blistering price surges and world-shatter<a name="_GoBack" href=""></a>ing bubbles. Goebbels also gave us the idea, much utilised by journalists today, that you never let the facts get in the way of a good story.
The latest “bloodbath” forecast has come from a couple of attention-seeking conspiracy-theory twits who have put in a submission to yet another parliamentary inquiry in an attempt to drum up a bit of publicity for their consulting business.
They’ve predicted a bloodbath. Naturally media had a field day with it. If someone is silly enough to predict a market crash, journalists will be delighted to recycle it as news, regardless of how outlandish it is or how often the forecasters have been wrong in the past.
I’ve added this to the very large list of people who have predicted bloodbaths, bubbles bursting and markets collapsing in Australian real estate over the past 15 years.
I have a heightened awareness of such predictions because I recently conducted a research exercise for a client on the predictions newspapers and other media outlets have made about real estate prices since the start of the century.
Over 15 years there has been a constant barrage of articles making doomsday predictions about the housing market. Subsequent outcomes have proved them all wrong. Not one has been correct.
I recently published a Top 20 list of worst predictions about property prices. For example, in January 2012 visiting US spruiker Jordan Wirsz, seeking to drum up some free publicity, predicted a bloodbath in which house values would fall 60% in 2013. He forecast land values would fall 90%. 
Not surprisingly, this did not happen. There is no precedent, not in Australia nor in any other nation on planet Earth, for such a calamitous decline in values. The actual outcome? Capital city prices, on average, rose 9% in 2013 and 8% in 2014, with most of that growth occurring in Sydney.
But Wirsz’s ludicrous prediction, which should not have been published by any credible media organisation, was just one of numerous doomsday forecasts made over the past 15 years, and all of them have been proven false. They have come from US spruikers, Australian economists and the lunatic fringe brigade of anti-real estate campaigners.
But if Wirsz lobs in Australia again next month and predicts our property values will fall 100% - in other words, every property will be worth zero - newspapers around the nation will publish it, television will rush to do interviews and politicians will call for a parliamentary inquiry.
TERRY RYDER is the founder of <a href="https://www.hotspotting.com.au/" target="_blank">hotspotting.com.au</a>. You can <a href="https://mailto:ryder@hotspotting.com.au" target="_blank">email him</a> or follow him on <a href="https://twitter.com/hotspotting" target="_blank">Twitter.</a> 
Terry was recently joined by Property Observer editor at large Jonathan Chancellor for a webinar on why research is the key to successful property investing in 2015. You can download slides and audio from the webinar <a href="component/content/article?id=42796" target="_blank" style="line-height: 1.3em;">here</a>.
 
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terryryder-YECXbqmri2

Without a boom, there is no bubble: Terry Ryder

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It didn’t take long for some property commentators to start declaring that the Sydney market was crashing when last week clearance rates came in at 65.1%.
The fools have been released from the asylum when you closely scrutinise this data where Sydney consists of approximately 700 suburbs, so are they all crashing? I looked up Mosman’s clearance rate for last week and it came in at a respectable 87.5% which is hardly crashing as some would have you believe. Don’t get me wrong it is clear that the Sydney real estate market is correcting rather than crashing – this is not a bad thing either.
The problem for some is that intellectually they can’t differentiate between the strong investment market over the owner occupier market, with the investment market cooling at a much more rapid pace due to lending restrictions and consumer sentiment adjustments – which are long overdue.
Many consumers who are chasing investment properties should be quite concerned about what’s around the corner and I’m not referring to banks increasing their respective lending rates. The Reserve Bank of Australia (RBA) can stand aside for the moment because on Melbourne Cup day should it decide to lower the cash rate the major banks won’t be following suit with Westpac, CBA, NAB and ANZ hiking their rates just in the last week. As soon as one moves inevitably the others will all follow although it would be highly unlikely that Westpac will be the next to increase rates.
All eyes should now be on the Australian Taxation Office (ATO) who have now taken over the responsibility of being Australia’s property watchdog. In 39 days the amnesty period for illegal property acquisitions expires and then we will start to see how many have deliberately broken the laws by purchasing Australian real estate – my tip is this will be huge where we can expect 2016 to be the year of the Divestment Order.
This may surprise you that there is a much larger property investigation that will have a significant impact on Australia’s property industry. That being Student Visa Holders who are allowed to purchase a property whilst completing their tertiary studies on the proviso that when they have completed their degrees the subject property must then be sold. The only problem is that Australia’s Foreign Investment Review Board (FIRB) who are entrusted to monitor such acquisitions have never actually followed through so we now have no idea how many thousands of properties this includes.
To make matters worse on 18 December 2008, the Rudd Government changed the policy where Student Visa Holder residents in Australia are no longer subject to a $300,000 limit on the value of an established dwelling as their residence. This then saw some students acquiring multi – million dollar residences. Also temporary residents were not required to notify FIRB of any intended acquisitions for established dwellings that were to be their principal place of residence.
Again we are talking about thousands and thousands of transactions where many will now end up with Divestment Orders.
The RBA this week declared in its biannual Financial Stability Review that “Recent investigations by regulators have revealed that standards were somewhat weaker than had originally been thought.” In that case any significant increase in property volumes onto the market would see prices coming down as these are established properties, so unlike off–the–plan properties where 100% can be sold offshore to non-Australian residents.
We are now seeing the housing price growth at its slowest pace since 2012 – which explains why the ATO have a duty of care when they start issuing Divestment Orders. We can also expect to see many households fixing interest rates on their respective mortgages.
A positive sign for those renting, when last Friday the Australian Bureau of Statistics finally got around to updating Australia’s housing occupancy data (the last release was in 2013), the proportion of those renting has edged up to 31.4% with 63.4% of Australians renting being under 35. To further identify just how big the investment market for real estate in Australia is, 1.5 million households now own investment properties on top of their principal place of residence.
Whilst the finger is clearly pointed at negative gearing (I will address that next week) when it was introduced in the late 1990’s, approximately 40% of houses were owned outright with only 28% renting.
The issues are clear in that we have problems with policy making, and that requires urgent attention although this has not been helped with actual mortgage interest rates falling from 7.1% to 4.7% over the past five years.
Property is all about supply vs demand – supply is what we need to be paying closer attention to, so watch the ATO with great interest. Who would have ever thought the ATO would play a central position with Australia’s property markets.
<h5>MOSMAN – 2088</h5>
• Number of houses on the market this time last year – 104 • Number of houses on the market last week – 61
• Number of houses on the market this week – 64
• Number of apartments on the market this time last year – 65
• Number of apartments on the market last week – 59
• Number of apartments on the market this week – 60
<h5>CREMORNE – 2090</h5>
• Number of houses on the market this time last year – 19
• Number of houses on the market last week – 9
• Number of houses on the market this week – 10
• Number of apartments on the market this time last year – 32
• Number of apartments on the market last week – 23
• Number of apartments on the market this week – 22
<h5>NEUTRAL BAY – 2089</h5>
• Number of houses on the market this time last year – 7
• Number of houses on the market last week – 13
•Number of houses on the market this week – 10
• Number of apartments on the market this time last year– 51
• Number of apartments on the market last week – 32
*Number of apartments on the market this week – 33
 
ROBERT SIMEON is a director of <a href="https://www.rwm.com.au/" target="_blank" title="RWM" rel="nofollow">Richardson Wrench Mosman and Neutral Bay</a> and has been selling residential real estate in Sydney since 1985.  He has also been writing real estate blog <a href="https://www.rwm.com.au/news/" target="_blank" title="Virtual Realty News" rel="nofollow">Virtual Realty News</a> since 2000. 
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robertsimeon-hRNTwJyXkQ

Concerns about upcoming Divestment Orders: Robert Simeon

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I think we all need to have a cold shower, a few aspirin and a wee lie down.
Then, having calmed down a bit, conduct a rational assessment of our property markets, without the emotion, the self-serving hyperbole and the publicity-seeking rhetoric.
We seem to have arrived at a point where any price rise anywhere in Australia is deemed a crisis. We're also at a point where the argument (it doesn't deserve to be called a debate) about real estate is driven by the people who make the most noise, rather than those with the most knowledge.
And, saddest of all, Australia in 2014 is a place where few people who work in or use the media give a damn about fairness, accuracy or balance. The only thing that matters is the headline or the political points scored or the amount of publicity achieved.
There was a time when journalists performed a worthwhile role. They were the filters through which information and comment had to pass. Claims were challenged, information was checked and alternative views were sought.
No one got to write about a subject unless they had credentials.
Today employees of media organisations are often mere conduits for propaganda. The public is asked to accept that if it's in a press release, it's valid. If someone describing themself as an economist makes a statement, it's likely to be fact. If an offshore "analyst" makes an observation, it's news.
The outcome is a melting pot of extreme views. The missing ingredients are objectivity, scrutiny and balance.
Many journalists no longer feel the need to support their statements with evidence.
A writer from a major media company (not a property specialist but apparently a "personal finance writer") this week stated as fact that Australia has "inflated house prices" and "surging property prices across the country". And that was just the first sentence.
No evidence was presented to back those big statements; we were expected to accept them as truth, despite the writer's lack of expertise and the reality that all the research data contradicts the notion we have "surging property prices across the country". According to the numbers I see every day, it's simply a lie.
On the same day, a writer from a different media company, with even flimsier credentials, sought to justify a pre-conceived attitude that investors exploiting the tax system drive up property prices. He presented graphs which he claimed showed that "whenever investor activity increases, house prices go up".
He saw what he wanted to see but, in reality, the graphs showed nothing of the sort. They showed, in fact, that investors do not lead price rises – they follow them. In every step along the graph line, a change in investor activity came after a change in prices.
My three decades researching real estate has taught me that investors never instigate property booms - they follow them. The biggest force in real estate, always, is the sector comprising home buyers other than first-home buyers, who dominate most markets numerically and have the financial capacity and motivation to pay high prices.
Meanwhile, another columnist with a bee in his bonnet about Asian investors tried to argue that "an influx of murky money from China" had been distorting and inflating our property markets "for years".
There was little in the way of research evidence, just a convoluted set of statements that led to no apparent conclusion.
So there we had, on the same day, three writers, all of them working for major media organisations but none of them with any real estate expertise, all claiming "Australian property prices" were unreasonably high, but each blaming a different bogeyman – one claiming it was foreign investors, another pointing the finger at local investors boosted by negative gearing, and the third blaming slack lending standards.
The one thing they had in common is that they all got it wrong. And probably don't give a damn because the headline is the thing.
So, setting aside all the ego-driven noise, here's a reality check.
Sydney remains the only city to have produced boom growth to date. The figure so many misguided commentators keep quoting – and describing as "the surge in Australian property prices" – is nothing more than the average increase across the capital cities, greatly inflated by Sydney's growth.
The key thing is this: Sydney's upturn follows 10 years of under-performance. Even with the rises of the past year or so, Sydney's average growth over the past decade is still below par. As a number of the more rational observers have commented, Sydney has been playing catch-up. But, despite the recent increases, it still hasn't caught up.
Here are some examples of what I mean. The median house price for <a href="https://www.urban.com.au/property-observer" target="_blank">Vaucluse</a> has increased 17% in the past 12 months, according to Australian Property Monitors, but the average annual rise in the past five years is just 1.4%. The 10-year growth average is 3% per year.
The median unit price for <a href="https://www.urban.com.au/property-observer" target="_blank">Point Piper</a> is up 17% in 12 months, but the 10-year average is 1.5% per year. In real terms, they've lost value over the past decade.
In <a href="https://www.urban.com.au/property-observer" target="_blank">Darling Point</a>, the median unit price today is lower than it was 10 years ago, despite the recent growth. They've lost money, even without allowing for inflation.
Heading out west to a more mainstream and affordable market, the suburb of <a href="https://www.urban.com.au/property-observer" target="_blank">Blacktown</a> (Sydney's most popular suburb in terms of sales volumes) has recorded 18% median price growth in the past year, but it's 10-year average is just 3% per year.
You'll find similar numbers right across the Sydney metropolitan area. Even when you examine above-average performers, the numbers are still modest. Balgowlah's five-year growth average is 5% per year; its 10-year performance is 4.1% per year.
All the froth and bubble in the media is being caused almost exclusively by Sydney's growth, but in reality Sydney's long-term performance remains decidedly poor.
Take the recent Sydney growth out of the equation and the average growth in the past year across the other seven capital cities is 4-5%. And that follows several years of price decline.
But, amid the prevailing atmosphere that any price rise is a national disgrace, even that number would be described by some as a bubble.
Terry Ryder is the founder of <a href="https://hotspotting.com.au/" target="_blank">hotspotting.com.au</a>. You can reach Terry via <a href="https://mailto:ryder@hotspotting.com.au" target="_blank">email</a> or <a href="https://twitter.com/hotspotting" target="_blank">twitter</a>.
 
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Headline obsessed writers need a reality check

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That pesky property bubble is mainly contained to the investors chasing yields and taking advantage of a chronic under-supply which is driving up rents – well it was however, we are now starting to see rents flat lining given supply has significantly increased.
New lending initiatives are quickly changing the investor landscape where I suspect it will be a very long time before we see lenders offering 90 per cent loans as we are now seeing lending ratios sitting more around the 70% mark. <a href="/expert-insights/43497-overseas-buyers-will-support-sydney-house-prices-during-apra-crackdown-nab" target="_blank">Overseas buyers will support Sydney house prices during APRA crackdown: NAB</a>; it is fair to say that the federal government won’t be tweaking the foreign buyer ratios (presently at 100 per cent) anytime soon.
There is a reason for this; Australia’s population is set to hit 40 million people by 2056. In order to meet this demand we will see the greatest infrastructure spending in Australia’s history given it’s been calculated that by 2056 Australia will need a further 1,100,000 apartments. Across Australia that means an additional 27,000 apartments each year for the next 41 years, it is expected Sydney and Melbourne will do the majority of the heavy lifting. This also plainly identifies why the Baird government wants to amalgamate the councils to ensure that these new developments keep getting approved.
The message is quite clear that if you want to reside in close proximity to the CBD you will have to live with an avalanche of high density developments.
This week the residential data from the 34th Property Directions Survey was released which is an industry based group comprising property experts – Valuers, Fund Managers, Property Analysts and Property Financiers.
<ul>
<li>58% of respondents stated that Sydney residential property was in or entering a bubble, while 53%t of the respondents believe that the Melbourne property market is in the same position. Seventy per cent of the survey respondents do not believe that the Brisbane residential market was in a bubble.</li>
<li>The majority of the respondents also believe residential property prices will continue to rise for 6 to 12 months. Fifty – three per cent of respondents believe that Sydney residential property prices will continue to rise for either 6 or 12 months with 26% stating 18 months. Respondents are more certain in their predictions for Melbourne residential property with 76%seeing prices continuing to rise for 6 to 12 months.</li>
<li>In 2016, Sydney residential property is seen as reaching the top of the property cycle and moving past the top in 2017. In 2016 respondents see Melbourne residential property having passed the top of the cycle but remaining close to the top through to 2017. Brisbane residential property is seen to be just nearing the top of the cycle.</li>
<li>All respondents to the Property Directions Survey see low interest rates as either a significant or very significant driver of demand for residential property in Sydney, while 95% also point to foreign investment being significant or very significant.</li>
<li>Respondents list a number of other factors they also believe play a role in increasing demand in Sydney, such as population growth, low supply over the past decade and the trend towards smaller households.</li>
<li>The major drivers are considered to be similar for the Melbourne residential property market however 94% see foreign investment as a significant or very significant driver and 87% sight low interest rates as significant to very significant.</li>
<li>A large majority of respondents see low interest rates as the main driver of demand and prices for Brisbane and Perth residential property; however this view is not as strong as it is for Sydney and Melbourne. The majority of survey respondents do not view foreign investment as a significant or very significant factor in driving demand in Brisbane or Perth, but believe negative gearing plays a bigger role.</li>
<li>Most respondents believe both interest rates and inflation will remain similar for next year, while moving higher in the next three years.</li>
<li>It’s a different story with foreign investment, with a small majority of respondents believing levels will remain similar for the next six months. Respondents are less certain over the next 12 months, but most see foreign investment at similar or higher levels. Respondents are even more uncertain about the outlook for 2018,</li>
<li>Some respondents listed current or emerging factors which they believe may have an impact on the Australian property market. Factors listed include a slowing Chinese economy, any increase in the unemployment rate and potential changes to foreign investment or immigration rules.</li>
</ul>
So the eastern seaboard is where we will see the majority of the new developments with NSW leading the way. This again will be investor led although it would be reasonable to suggest that with such a huge apartment platform the house prices will continue to rise with less single residential housing being built.
With that in mind it’s scary to think where prices will go for houses within a 15 kilometre radius of the Sydney CBD. Through the roof springs to mind.
As for that pesky property bubble – it won’t be doing any damage when the vast majority of suburbs across Sydney are posting record low stock levels. When markets are booming (or bubbling along) you see record stock levels which is the complete opposite to what we are seeing across Sydney at the present.
<h4>MOSMAN – 2088</h4>
• Number of houses on the market this time last year – 85
• Number of houses on the market last week – 55
• Number of houses on the market this week – 46
• Number of apartments on the market this time last year – 63
• Number of apartments on the market last week – 41
• Number of apartments on the market this week – 43
<h4>CREMORNE – 2090</h4>
• Number of houses on the market this time last year – 8
• Number of houses on the market last week – 7
• Number of houses on the market this week – 2
• Number of apartments on the market this time last year – 9
• Number of apartments on the market last week – 11
• Number of apartments on the market this week – 8
<h4>NEUTRAL BAY – 2089</h4>
• Number of houses on the market this time last year – 9
• Number of houses on the market last week – 3
• Number of houses on the market this week – 2
• Number of apartments on the market this time last year– 42
• Number of apartments on the market last week – 29
• Number of apartments on the market this week – 30
 
ROBERT SIMEON is a director of <a href="https://www.rwm.com.au/" target="_blank" title="RWM" rel="nofollow">Richardson Wrench Mosman and Neutral Bay</a> and has been selling residential real estate in Sydney since 1985.  He has also been writing real estate blog <a href="https://www.rwm.com.au/news/" target="_blank" title="Virtual Realty News" rel="nofollow">Virtual Realty News</a> since 2000. 
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Living with an avalanche of high density development: Robert Simeon

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Many doomsday predictions have been dumped on regional cities in the wake of adverse events. Few of those forecasts have come to pass.
When negative events sour the economy of a regional city, the community mobilizes. Civic, business and political leaders take action. The apparently doomed city fights back, recovers and often reinvents itself.
The latest to have a premature death proclaimed, Townsville and Whyalla, follow a long line of notable examples of cities about which their death was greatly exaggerated. They include Newcastle, Wollongong and Geelong.
Newcastle was widely considered to have suffered a mortal wound when BHP shut down in the late 1990s. It fought back and is today one of Australia’s largest and strongest regional cities. Its economic strength and diversity has been sufficient to withstand the negative impacts of the recent downturn in the coal sector.
When Bluescope Steel seriously downsized in 2011, it was declared the end for Wollongong. I recall one newspaper headline which predicted a 50% decline in property values. In contrast to that rather extreme forecast, Wollongong’s property market has shown strong growth in recent years. 
What many failed to realise is that Wollongong was no longer a smoke-stake town dependent on steel furnaces for its prosperity. It had been reinventing itself for years, with education, IT and tourism the key sectors.
Similar things are true of Geelong, once a factory town but now a modern city where the biggest employers are the health and education sectors. The decision to locate the national headquarters of the NDIS in Geelong has created a new industry sector, with related businesses keen to locate nearby.
So the impending closure of a car plant, while an adverse event many would prefer did not happen, can be absorbed by this growing economy without too many side-affects. Geelong continues to be the strongest Victorian property market outside of Melbourne.
Now we have Townsville apparently on its deathbed because another of Clive Palmer’s extravaganzas has gone belly up.
When this story exploded in January I wrote: “The latest Australian regional city to inspire a premature obituary is Townsville in the wake of the decision by political and business buffoon Clive Palmer to shed 237 jobs at his Queensland Nickel refinery.
“As has become common in the wake of such events, the media coverage has been a tad over the top since the announcement. I’ve seen reports predicting devastation of the local economy. One suggested Townsville would become ‘a ghost town’.”
The story has moved on since then, with the refinery business collapsing. That’s a hit to the Townsville economy, particularly as it was struggling a bit beforehand. But it’s far from terminal.
Townsville is a very resilient place. It has one of the most diverse economies in regional Australia, with strong elements of government administration, education, tourism, the military, the resources sector and manufacturing.
And lots of positive news has emerged more recently. Some seriously major enterprises have stepped forward to help take up some of the economic and employment slack created by Clive’s latest brain explosion.
The economic and defence deal between Australia and Singapore means $2.25 billion in new defence infrastructure will be built in Queensland, including in Townsville, which already has a big military presence through its RAAF Base and recently-expanded Army base.
In the past week came the announcement of “Australia’s biggest solar farm” covering 200ha just outside Townsville, with Origin Energy signed up to buy the electricity generated from 2017 to 2030.
A $400 million maintenance contract for Queensland Rail will be shared between UGL in Townsville and Downer EDI in Maryborough, reportedly at the behest of the State Government.
The State Government says it has fast-tracked almost $200 million worth of infrastructure spending in the Townsville area to boost the economy in the wake of the nickel refinery collapse, while $75 million in Federal Government funding will help establish the new Cooperative Research Centre for Developing Northern Australia in Townsville.
If you add together all those positives, and subtract the nickel refinery negative, I see it as a net gain for the city of Townsville.
Whyalla in South Australia will take a hit if attempts to rescue the Arrium steel business are unsuccessful. Arrium, formerly OneSteel, is a big chunk of Whyalla’s economy and is in voluntary administration.
But is this the end for SA’s biggest regional city? I would suggest not. Like Townsville, Whyalla has been attracting plenty of positive announcements in the past few weeks.
Oz Minerals is advancing its $975 million Carrapateena copper mine expansion and it wants to build its $150 million Concentrate Treatment Plant at Whyalla. The mine expansion will create 800 jobs and it’s hoped many of the workforce members will be sourced from Whyalla.
BHP Billiton continues to work on its alternative plan for development of the Olympic Dam resource and said in April it hoped to include Whyalla in the new project plans (put together after the previous $30 billion scheme was shelved because it was too expensive).
And there is hope for Arrium in the announcement that 15,000 tonnes of its steel will be used for a $620 million road project, the Darlington Upgrade Project, in Adelaide.
The Federal Government has handed Arrium at $80 million contract to replace around 1200km of rail lines for federal agency ARTC.
Arrium is also a chance to attract steel orders from the recently-confirmed Federal Government project to build 12 submarines in Adelaide.
I’ve been getting lots of emails from people who own real estate in Whyalla. I would suggest those who panic and sell in the wake of recent negative headlines will regret it later.
Terry Ryder is the founder of <a href="https://www.hotspotting.com.au/" target="_blank">hotspotting.com.au</a>. You can <a href="https://mailto:ryder@hotspotting.com.au" target="_blank">email him</a> or follow him on <a href="https://twitter.com/hotspotting" target="_blank">Twitter.</a>
 
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