30/04/2008 - 22:00

Land affordability issues compound rates pain

30/04/2008 - 22:00

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Interest rates, labour shortages, material costs and compliance issues are affecting WA's housing industry, yet it's the issue of housing affordability that is front of mind for builders, as Emily Piesse reports.

Land affordability issues compound rates pain

If you don’t have first homebuyers, existing property owners don’t have anyone to sell their houses to. And if existing property owners can’t trade up, the whole market is affected.

It’s a simple premise, but one that home builders believe goes to the heart of housing affordability in Western Australia and its impact on the state’s home building industry.

Since mid-2005, the first homebuyer market has been in steady decline, ultimately leading to a slide in building activity.

Rising interest rates, labour shortages and increased material costs have all played a role in ramping up house prices, according to those in the industry.

But it’s the issue of land supply and price that is really stymieing the ability of builders to meet demand at an affordable price point.

JWH Group managing director Julian Walter told a recent WA Business News luncheon forum the decision to fold the former Urban Lands Council into LandCorp was the nail in the coffin of land affordability. 

“The State Housing Commission and Urban Lands Council did a very noble job of bringing on land and getting the entry-level stuff going,” Mr Walter said.

“All the bits and pieces are there to get affordability going again, but you’ve got to get affordable land back on the deck.”

The move to develop land through joint ventures between government and private developers, especially in the past decade, has also been blamed for affordability problems.

But according to Jaxon general manager Ross Napier, government could no longer afford to be the sole provider of low-cost housing.

“The reason the joint ventures were thought to be appropriate is at that point, back in the early 1990s, there was a very big push around small government,” Mr Napier said.

“To actually run the projects took hundreds of people.”

Nevertheless, most believe government is the vehicle best suited to bringing affordability back, through innovative models of ownership and finance.

“I don’t believe we should be fiddling with the government’s right to make money, or a private developer’s right to make a profit either, but I think the government has a social responsibility because there is a real need out there for people who can’t get over the hurdles [to home ownership],” Zorzi Builders general manager David Marks told the boardroom forum.

For WA builders, land prices are having a huge impact on costs, with prices having tripled during the past few years.

At the same time, the cost of building has gone up by about 40 per cent, according to Pindan Group managing director George Allingame.

And while rising interest rates have dominated the headlines, the escalating cost of land has had a bigger impact on housing affordability, according to some at the forum.

“Interest rates would have to be up at 13 or 14 per cent to have had the same impact that the change in the price of land has,” BGC Residential chief financial officer, Anthony Kinder, said.

However, there’s a sense that land prices have become unsustainable and will face increasing downward pressure.

“People who are in the development market will say [to land owners] ‘look, you may have been able to charge me ‘x’ two years ago, but there’s no way when that’s developed it’s going to support the pricing end’, so you’re going to have to pay less for land,” Mr Kinder said.

Programs such as the government’s shared equity scheme, First Start, are going some way to stimulate demand at the lower end of the market.

Yet whether it will be sufficient to arrest the decline in activity remains to be seen.

Overall, WA’s housing market has turned significantly since mid-2006, with detached house starts falling by 5 per cent, to 24,560, last financial year.

The Housing Industry Association of Western Australia is forecasting an even more substantial decline during the current financial year, revising its forecast to a 12 per cent fall.

As the sub-prime housing crisis in the US flows through to markets worldwide, some in the local industry expect WA will have its own moment of reckoning, and not just in the first homebuyer market.

Lending of property values up to 100 per cent could ultimately lead to banks making the equivalent of margin calls on homeowners with big debts, according to Julian Walter.

“We’ve never had the circumstances of over-borrowing yet, but we have got perilously close now,” he said.

“What has saved us is that property values have risen.”

However, with the Perth median house price sliding 2.7 per cent in the March quarter, most analysts are predicting the downturn in price has further to go.

“I think property values will go back 20 per cent. I think 10 per cent is being generous,” Peter Stannard Homes managing director, Peter Stannard, said.

Others are more optimistic about the price outlook. 

“There have been two instances in Perth of house prices dipping, and those dips have only ever been for six to nine months,” Mr Kinder said.

“There was no foot on the brake pedal when prices were going up, but there is a foot on the brake pedal [when they] come down, because there’s this concern that people are going to be in negative equity.”

He said interest rates should stabilise in the near future, with recent rises being offset by an increase in the state’s average wage. 

“The only people who I think are going to suffer from an equity position are those who have to sell their house, and...as long as they’ve got a job [they’ll be fine]. There’s plenty of jobs in WA at the moment,”  Mr Kinder told the luncheon forum.

And it seems the continuing strength of the WA economy is also creating pressure on the building industry’s supply chain.

Labour and material costs, especially steel, continue to climb and are ultimately passed down to the homebuyer.

While there has been a recent softening in building activity, lowering the pay rates of trades such as bricklaying is unlikely to translate into cheaper housing, according to Mr Kinder.

“There’s a lot of options for anyone who’s got any skills in WA at the moment, so the thought of housing affordability being solved by screwing the rates out of the trades is a furphy,” he said.

“Whatever comes off the trade price – if anything – is more than covered by the increases in materials and transport.”

One of the other major issues for residential builders in the current climate is financing, with banks becoming more risk averse and having restricted access to external funds.

“If you talk to some senior people in the major banks, they’ll tell you that they’re now only lending to their existing client base,” Mr Walter said.

“If you’ve got developers that have been there for a while, fine, but if you come in with a new deal, you’ve got Buckleys.”

“That’s going to have cascade effects with things like [government loan scheme] Keystart, where they have to go out and get finance.”

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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