Safe as houses: why the bubble is no trouble

In a place called Success, a suburb 23km south of the Perth GPO, a marvel of modern engineering was on show last year when 14 workers and a giant crane assembled a block of 77 apartments in the space of just 10 days.

The six-storey block is made up of 96 modules that were manufactured by Melbourne’s Hickory Group in its sprawling Brooklyn factory, then shipped to Perth. Hickory is one of several cutting-edge companies that are taking the Lego approach to rapidly address Australia’s housing shortage. Last December, a 303-room student residence went up in Darwin in 16 days.

However, such innovative and market-led responses to surging house prices don’t fit the narrative of the calamitous collapse ahead that has dominated discussion of Australia’s housing boom in some sections of the media.

Instead of fearing the housing boom, Australians should really think of it as the best thing to happen to our economy since the mining boom. While many Western countries are gripped by deflation, surging house prices in Australia are proving to be a powerful driver of investment and growth.

This, in fact, is what happened with the mining boom, when record commodity prices triggered a tsunami of investment in new resources projects, and it’s exactly what is happening right now in the housing market.

Just as Australia made it through the mining boom without the fuelling of an inflationary bubble, a similar virtuous economic cycle is emerging for the national economy — provided our bank regulation remains robust.

Despite talk of a property crash, Australian house prices have suffered only minor corrections on two occasions in the past 50 years; never a crash.

Like the mining boom, the housing boom is shaping up to be a a big job generator; in fact, housing construction is much more labour intensive than mining. In the year to December, building construction grew by 9 per cent in real terms, helping partially to offset a 13 per cent decline in engineering construction that reflects the end of the mining boom. The residential sector was behind all of this growth.

Although this trend is encouraging, economic growth remains weak and unemployment has been rising steadily. This is why the Reserve Bank of Australia has been cutting its official cash rate to record lows, and may cut further.

RBA governor Glenn Stevens said this week that domestic demand growth remained “quite weak” as a result of falling business investment, while inflation remained at a benign 1.7 per cent, below the 2-3 per cent target. Even when volatile items are removed inflation is only 2.1 per cent.

The forward indicators show the market is responding to these lower rates by marshalling more investment into the housing sector. This is good for home buyers and it is very good for boosting growth in the broader economy.

The latest Australian Bureau of Statistics figures show that approvals of new dwellings grew at an annual rate of 14 per cent in the year to February, but apartments and other non-house dwellings (the ABS calls them dwellings excluding houses) increased by a staggering 36 per cent.

Australia is on track to see a record level of 200,000-plus approvals this financial year. Dwelling approvals are a forward indicator of construction work that will take place during the next 12 to 24 months.

But approvals of detached houses, after rising sharply in 2013, have been flat during the past year. This reflects the shortage of new land on the fringes of major cities, Sydney and Melbourne in particular. As the population of these cities approaches five million and 4.5 million respectively, it’s no longer possible to add to housing supply in the way we have done since the end of World War II.

Now, there are almost as many non-house dwellings being approved for construction as there are detached homes, 9441 houses as against 9102 other dwellings in February. The lack of supply response for detached homes indicates that prices for these properties are unlikely to experience a sharp correction.

Evidently, the composition of Australian housing in being transformed at a rapid rate in response to these price signals. This means that many first-home buyers are opting for an apartment rather than a detached home because the latter is becoming unaffordable in the major cities. This trend need not be seen as the end of the Australian dream; it’s simply the market responding in a dynamic way to make housing more affordable and sustainable. It’s not as though young families will be trapped in apartments forever. These investments are a stepping stone to a detached home, which may become more affordable down the track as baby boomers retire and downsize into smaller homes (or indeed apartments).

But the recent surge in Sydney and Melbourne house prices has worried some analysts, who claim we are in the midst of a debt-fuelled housing price bubble that could end in a US-style collapse. The Australian Financial Review columnist Christopher Joye has been a prominent proponent of bubble theory, as has bank economist Saul Eslake, who recently was quoted in the same paper comparing Australia’s housing market to Japan’s disastrous bubble in the late 1980s. Eslake said that rising debt levels, rather than boosting investment, were only driving up house prices. Even though growth and inflation were subdued, he warned against any further rate cut by the RBA.

Likewise, the ABC’s business editor Ian Verrender said last month that “huge property prices lie at the heart of our economic ills. And if there’s another interest rate cut it will only entrench an underclass.” He also has cited the absence of a tax on the family home and “an open slather negative gearing policy” as the causes of over-valued housing. (This attack on negative gearing overlooks the effective subsidy it provides to the rental market, mak­ing rent on most homes cheaper than mortgage repayments).

But one thing that will surely stem surging house prices is the supply response, a factor ignored by the bubble boosters, and this is already happening in a way that will make our major cities more affordable, sustainable and efficient places to live and work.

Instead of demanding new infrastructure such as low-density detached homes, medium-density housing makes better use of existing infrastructure.

BIS Shrapnel property analyst Angie Zigomanis says that rising prices are working to boost investment and secure more housing supply. “Eventually that supply will satisfy demand, and the market will correct itself,” he says.

This supply response means that there will be some correction on prices in overheated markets, and investors in apartments are most at risk. “There will be some getting their fingers burnt, more so in the apartment market. People buy in today’s market but the apartment will be completed in tomorrow’s market when it may be oversupplied,” he says.

He argues that if the RBA is looking to make further rate cuts then it could introduce further restrictions on lending. Prudential policies similar to those in New Zealand, which constrain the level of loans with high loan-to-value ratios, could prevent further excessive price growth and therefore limit the potential for a larger house price fall, he says.

Another option could be to restrict valuation ratios on loans of more than $800,000, for example, as this would prevent borrowers from becoming over-extended in expensive markets.

The Australian Prudential Regulation Authority is watching things closely. It advised lenders last December to introduce an interest rate buffer of at least two percentage points and to limit their portfolio growth to 10 per cent. It also has let them know that they will be more closely monitored at this critical moment.

“APRA has indicated it will be further increasing the level of supervisory oversight on mortgage lending in the period ahead,” the regulator said.

A closer analysis of RBA lending data indicates most banks and borrowers are remaining reasonably prudent. Even though debt to household income has risen to more than 150 per cent, it is still below its pre-global financial crisis level and borrowers are showing that they remain risk averse.

Since late 2010, excess mortgage repayments have been running at more than 2 per cent of loans and they have equalled or exceeded scheduled payments in each quarter since then. The household saving ratio, which has been around zero before the GFC, has since risen to about 10 per cent and remains at that level.

Banks’ non-performing loans, which rose steadily between 2004 and 2010 to just under 1 per cent, have since been falling steadily for owner-occupiers and investors alike.

The incidence for the latter has fallen to about 0.5 per cent.

While there’s no doubt that some lenders are trying aggressively to compete for business, one indication of the cautious approach taken by Australian banks is their reluctance to finance modular builds, such as the Success apartment block, because they perceive them as too risky. If the project goes bust, the construction work could be sitting in a factory rather than on site, as is the case with a conventional build.

This is why China’s CIMC, one of the world’s biggest makers of shipping containers, has been using its substantial balance sheet to take on the senior lending role for modular projects in Australia during the construction and early occupation phase.

During the mining boom, CIMC added 23,000 rooms to the Pilbara and central Queensland mining regions and has now turned its attention to fill gaps in the domestic housing market. In the past 12 months it has built hotels and student accommodation.

John Zendler, CIMC Modular Building System’s Australian general manager says the cost-effective and faster build-time means that many marginal projects that may not stack up with conventional building can go ahead.

Last December, when CIMC assembled a 303-room student residence at Charles Darwin University in just 16 days, the project went ahead in one of the tightest job markets in the country and has helped to ease pressure in the rental market, where lower-end rents have been rising rapidly.

Unlike Hickory, all of CIMC’s modules come fully finished from China. Even so, about 50 per cent of the building cost involves conventional building work, such as building structure, installation and finishing works to the modules, says Zendler. Instead of detracting from local jobs, these modular builds can boost growth in the economy by facilitating construction that otherwise may not have gone ahead.

“There is an affordability crisis and modular can play a very big role, especially in building high rise residential,” says Zendler.

CIMC now has six new projects on its books with a combined total of 990 apartments.

Jemma Green, a researcher with Curtin University Sustainability Policy Institute, has studied the Success project in detail, and says it clearly demonstrates the benefit of the modular approach in responding to the housing boom. The funding costs and construction time were about 35 per cent below that of a conventional build. The total build time for the block—from earthworks to final fittings—was just under 12 months.

The modular approach won’t solve all of Australia’s housing needs, but it surely demonstrates how strong demand—and the profit incentive—can be the catalyst for innovation and invention, making housing supply more responsive to demand pressures.

Veteran developer Harry Triguboff, who has built more apartments than anyone else in Australia during the past 50 years, has recently become a man of steel with his latest 30-storey apartment complex on Sydney’s lower north shore.

Working with OneSteel, Triguboff is taking the Meccano approach by assembling the frame with 850 tonnes of prefabricated steel, the first for a residential building in Australia.

Even though steel buildings make the design more limited when compared with those made from concrete, the octogenarian says he wanted to try the new technique simply because it allowed him to cut the build time by six months.

In a hot property market, where cost pressures can derail projects and the wider economy, faster and more efficient building techniques are proving to be an effective way of responding to demand while keeping the economy on track.

It’s worth repeating: this is good for home buyers, and it’s good for growth.

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The RET bomb is set to explode

David Leyonhjelm

You know you have a dog of a policy when the government, opposition and various minor parties agree it should be reformed, but the Greens and their cheer squad think it’s great.

That policy is the Renewable Energy Target. What seemed like a good idea – to encourage renewable energy – is now a mess of rising energy costs and a distorted electricity market.

Renewable electricity generators have received $9 billion in industry subsidies over the 15-year life of the RET, in addition to the price they receive for the electricity they produce. Without change, a further $22 billion will be paid by 2030. In the words of the Warburton Review, the RET is “a cross-subsidy that transfers wealth from electricity consumers and other participants in the electricity market to renewable energy companies”.

The renewable energy legislation was designed to ensure renewable energy makes up 20 per cent of the energy market by 2020. Electricity retailers must purchase Renewable Energy Certificates – from power companies that generate renewable energy – for at least 20 per cent of the power they sell. Each certificate (representing 1 megawatt-hour (MWh) of electricity) currently trades for around $40, which retailers then add to your electricity bill.

However, the legislation also contains a hard target for renewable energy of 45,000 gigawatt-hours (GWh), which at the time was assumed would equate to 20 per cent of the market. Due to falling consumption, this is now expected to be closer to 30 per cent. The problem is – leaving aside small-scale solar (ie rooftop panels on houses), which is allocated 4000 GWh of the target – we currently generate just 16,000 GWh of large-scale renewable energy towards satisfying the target.

Put another way, in 15 years we have incorporated 16,000 GWh of new renewable energy into the RET, leaving just five years to generate another 25,000 GWh to meet the large-scale target of 41,000 GWh. Nobody believes this is possible.

If retailers cannot purchase enough certificates, the legislation requires that a penalty charge of $65/MWh be imposed. With retail margins added, this will nearly triple the cost of the scheme to electricity retailers, who will pass it on to consumers. Electricity prices will skyrocket.

Everyone with knowledge of the electricity market knows this is a political time bomb about to go off, most likely within 18 months when interim targets are not met. Electricity retailers have for some time been refusing to enter new long-term agreements to purchase power (and Renewable Energy Certificates) because they know the scheme will implode due to bill shock and political pain. The public will not stand for increases in electricity prices of up to 20 per cent.

With this problem looming and negotiations between the government and opposition stalled, late last year I developed a detailed reform package for the RET. Since most opposition to reform is based on cuts to the 41,000 GWh large-scale target, my plan is to maintain this but to recognise established hydro-generation in the calculations – essentially Snowy Hydro and Hydro Tasmania – which together produce about 15,000 GWh. There would also be no cap on small-scale solar generation, which is expected to grow to 13,000 GWh.

My proposal would ensure the renewable target is achieved, with no penalty charges kicking in.

There would be strings attached for existing hydro-generators, though. To be allowed to produce valuable Renewable Energy Certificates they would have to commit to upgrading their existing generators, thereby introducing around 3000 GWh of new renewable generation into the grid.

The only losers would be the major wind-energy generators, which are eagerly waiting to build dozens of new wind farms in an effort to meet the target and get on the subsidy gravy train. Against that, many people are hoping these are never built, among them those who suffer adverse health effects from the inaudible infrasound they generate, plus those (like me) who hate to see our majestic eagles and hawks splattered all over the countryside.

The importance of reasonably priced electricity cannot be overstated. My plan will reinforce Australia’s commitment to renewable energy while solving the RET problem before the time bomb goes off.

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Senior NSW Labor officials call for investigation of federal leadership ballot

Two of NSW Labor's most senior officials are pushing for an investigation of possible rorting of the 2013 national ballot that saw Bill Shorten elected party leader, after revelations the addresses for dozens of voting papers were altered.

NSW Labor assistant secretary John Graham and the state secretary of the Australian Manufacturing Workers Union, Tim Ayres, who is also on the national executive, have written to general secretary Jamie Clements calling for the move.

Mr Graham also wants more details about the involvement of Labor Senator Sam Dastyari's office in changing the mailing addresses of scores of leadership ballots, including to the addresses of an accused branchstacker.

Mr Ayres says the revelation about ballot changes "calls into question the integrity and transparency of the NSW Branch's membership system, the conduct of the staff of the NSW Branch and the conduct of a Senator."

In February Fairfax Media revealed that the ALP's internal Review Tribunal found the mailing addresses for 50 ballot papers in the leadership ballot between Mr Shorten and Anthony Albanese were altered by NSW Labor head office.

The changes were made at the request of Michael Buckland, then a staff member of Labor Senator Dastyari, who is a senior member of the right faction that backed Mr Shorten in the ballot.

Twenty ballot papers were diverted to Hicham Zraika, an Auburn councillor who the tribunal found engaged in "unworthy conduct" during an unrelated preselection for the state seat of Auburn, in which he was accused of branchstacking offences.

He was subsequently suspended from the ALP for six months.

Senator Dastyari has repeatedly denied knowledge of the request to change the mailing addresses for the leadership ballots, which in itself would not have affected the result.

The tribunal heard membership address changes were requested in an email from Mr Buckland to NSW Labor head office, but the email was never produced and Mr Buckland did not give evidence.

On Wednesday, Mr Graham wrote to Mr Clements proposing the NSW administrative committee instruct the tribunal to "investigate this matter further".

This should involve a "full independent audit" of membership records "to determine exactly how many changes to membership addresses took place during the ballot period".

The letter, obtained by Fairfax Media seeks the whereabouts of Mr Buckland's email, precise details of how many ballots were changed and proposes that the Australian Electoral Commission conduct future ballots.

"What is to stop similar events occurring in the ballot for National President about to be conducted by the Labor Party?" Mr Graham asks.

The letter from Mr Ayres, sent in February, also seeks an audit and requests a "full report" on the matter be provided to the NSW administrative committee, which meets on Friday.

On Thursday, Mr Clements said there was no need for an independent audit.

"I have provided Mr Ayres and Mr Graham documented proof to assure them that the irregularities identified by the Review Tribunal were isolated to the Auburn electorate alone," he said.

Mr Clements said Mr Buckland's email does not exist and that the request was made by phone. He would write to the electoral commission  seeking a quote for having it run future Labor ballots before a decision is made.

A spokesman for Mr Shorten and Senator Dastyari declined to comment.

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Union shame file embarrasses Qld. Labor premier Palaszczuk

DES HOUGHTON

AT THE time it seemed innocent enough. Annastacia Palaszczuk giggled as she posed for a selfie with Dave Hanna at a union rally outside Parliament House last month.

It was the same Hanna, president of the notorious CFMEU, who last year was adversely named at the Royal Commission into Union Governance and Corruption.

Hanna was accused not only of workplace breaches but of engaging in criminal activity by threatening Hindmarsh Constructions from going about its lawful business during the building of an apartment tower, Brooklyn on Brookes, in Brisbane’s Fortitude Valley last year.

“Mr Hanna engaged in criminal activity, committing offences under s359 of the Criminal Code (Qld),” the royal commission heard.

Threatening to cause detriment to another is an offence carrying a five-year jail term, the commission noted.

Hanna is well known in Labor circles and was boss of the Labor Unity faction and is a member of the Queensland Central Executive of the Council of Unions which dictates Labor policy.

He was secretary of the Builders Labourers Federation before it merged with the CFMEU.

I believe the Premier is an honourable woman and I am not for a moment suggesting she was involved in any impropriety with Hanna or other CFMEU officials facing charges.

However the cosy selfie confirms the deep links between her party and the union described in Parliament as a criminal organisation renowned for its “extortion, thuggery and lawlessness”.

Palaszczuk is, like many in her Cabinet, close to the unions. She “paid tribute” to the unions in State Parliament in 2013.

She lavished praise on the CFMEU, the BLF, the AWU and the AMWU “for standing up for workers’ rights in this state”.

Really? In the royal commission’s interim report, former High Court judge John Dyson Heydon detailed how the CFMEU raided a workers’ welfare fund and siphoned money to the ALP.

The judge added: “The evidence indicates that a number of Construction Forestry Mining and Energy Union officials seek to conduct their affairs with a deliberate disregard for the rule of law.

“That evidence is suggestive of the existence of a pervasive and unhealthy culture within the CFMEU, under which the law is to be deliberately evaded, or crashed through as an irrelevance.”

I hope Palaszczuk is embarrassed to read that. Heydon also said union officials “prefer to lie rather than reveal the truth and betray the union”.

“The reputations of those who speak out about union wrongdoing become the subject of baseless slurs and vilification,” the inquisitor said.

As reported on these pages on March 28, Heydon also recommended criminal charges against CFMEU Queensland secretary Michael Ravbar.

The CFMEU has been fined more than $5 million for breaches of various laws since 2000. In the same period the CFMEU donated more than $9 million to the ALP.

It also funds sinister groups like GetUp!

So the workers pay and pay. So do the cowardly building companies who pay in to dubious union welfare funds for the sake of industrial harmony.

Decent Labor folk like Martin Ferguson have demanded the CFMEU be “brought to heel”, saying its behaviour in the Victorian, Queensland and WA branches was intolerable and bad for investment.

Ferguson spoke after Fair Work Building and Construction director Nigel Hadgkiss warned last week about increasing lawlessness in the industry, saying 75 CFMEU officials were before the courts, facing 403 alleged breaches of workplace laws.

With many breaches in Queensland, Palaszczuk has some explaining to do.

So do Labor leaders everywhere, especially Opposition Leader Bill Shorten, who has deep links with the CFMEU and went into bat for it when he was ACTU president.

Federal Parliament was told in September last year that the ALP was consorting with criminals by protecting the CFMEU.

The Senate was told the CFMEU had links to criminals and bikie gangs, a point not lost on Campbell Newman, who was howled down for saying so.

“It now appears that there is only one degree of separation between the CFMEU and organised crime figures, a murdered standover man, bikie gang and forces, and a jihadist executioner,” Bridget McKenzie, Nationals senator for Victoria, told Parliament.

She added: “The current attitude of the CFMEU harks back to the worst days of the BLF. However, the close collaboration with organised crime now makes the modern CFMEU far more dangerous than the BLF was at its worst.

“Never before has this union been so brazen and never before has the Labor Party been so craven. Consider the reasons why the Labor Party opposes stronger workplace laws in the building industry.”

When will Labor show some decency and cut ties with this anti-social gang?

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The Ban Has Been Lifted On Raw Milk Cheeses In Australia

You may have missed the news but as of February this year, Food Standards Australia and New Zealand now allows cheese makers to use unpasteurised, or “raw”, milk in their products. It was previously rather difficult to get your hands on raw milk cheeses, but with the ban history, the doors are well and truly open.

The restrictions surrounding the production and sale of raw milk cheeses went under review in late 2014 and at that time, a decision was expected to arrive in a few months. True to its word, the FSANZ has since eased the rules.

For the curious, the organisation has a handy FAQ available explaining what the changes mean for businesses as well as consumers. If you take a peek, you’ll see the amendments don’t just apply to making and purchasing raw milk cheeses locally, but snapping up the stuff from abroad too:

In February 2015 further changes were made to the standard that allow for the production and importation of a greater range of raw milk cheeses where defined safety outcomes can be met, including ensuring pathogens are able to be controlled during manufacture and are unable to grow in the final product.

If you’re wondering about raw milk in general, nothing has changed; raw cow’s milk sold for consumption is still banned in all states.

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