Turning points in Australia’s housing crisis

Australia has fewer homes per adult than most of the developed world. First Sentier Investors Head of Global Property Securities Stephen Hayes is joined by Stockland Development CEO Andrew Whitson to unpack the challenges in meeting Australia’s growing housing demand – and where growth may emerge next.

This episode is for Australian audiences only.

Transcript

Stephen Hayes: Welcome to The Curious Podcast. I'm Stephen Hayes, Head of Global Property Securities at First Sentier Investors. Australia is experiencing an unprecedented housing crisis. Our total housing stock numbers are just 400 dwellings per 1000 adults, one of the lowest in the developed world.

There is a severe demand/supply imbalance that has led to high house price appreciation and major affordability issues, where home ownership for many Australians is soberly out of reach.

We are joined today by one of Australia's largest developers who we believe are part of the solution in increasing Australia's housing supply. Welcome to Andrew Whitson, CEO of Development at Stockland Group (ASX: SGP).

Andrew Whitson: Thanks, Stephen. Great to be with you.

Stephen Hayes: For the listeners' information, this is general information and for an Australian audience only, it isn’t advice. It doesn't take into account anyone's investment objectives, situations, or needs. When we talk about specific stocks, we are not making recommendations to buy or sell them.

For those that have not heard of Stockland, they are a top 50 ASX listed company with tangible assets of around $17 billion across mainly shopping centres, logistic centres, land lease communities, and are Australia's largest master planned community developer with a development pipeline of over 96,000 lots.

Andrew, it's no secret the Australian housing market is immensely challenged. Coming in from the development side, what are some of the big issues you are seeing in bringing new stock to market?

Andrew Whitson: Stephen, as you said, we are at a stage in the housing cycle at the moment where commencements are at more than a decade low, and there's some real challenges in bringing new stock to market at the moment. Number one has been some of the regulatory complexity in getting new supply approved, and that's through multiple levels of governments and multiple government agencies. It's never been more complex to get a planning approval today, and that's limiting the ability for some of the new supply to come to market.

Combined with that, last couple of years we've seen rapid escalation in construction costs. Construction costs have gone up, double digit increases in consecutive years, and that effectively means that feasibilities have been under a lot of pressure.

A lot of projects that were on the drawing board have been unfeasible and developers won't start releasing stock in that sort of environment.

And then probably the third element that's attributed to it has been housing affordability. And this is the ability of customers to afford new product and pay what is economic replacement value.

And that's a number of elements – particularly access to finance – and people's ability to afford has limited ability to pre-sell, which underpins the release of new stock to market.

Stephen Hayes: Thanks, Andrew. Well, there's really a lot to unpack there. We'll look to deep dive into some of these challenges over today's podcast episode.

As an investor, I'd love to talk to some of these numbers – to put the context to the extent of the housing crisis in Australia.

• The median house price in Sydney is now $1.4 million up 44% over the last five years. And Brisbane and Perth house prices are up 68% and 65% respectively over the same timeframe.
• On affordability issues, the national dwelling value-to-household-income ratio is at eight times, and the percentage of household income to service a new mortgage is now over 50%. Both of these measures are the highest on record.
• The national rental vacancy rate is just 1.1% near 20-year lows.
• Housing supply for 2024, which Andrew alluded to, was just 159,000 new dwellings. Outside of the pandemic that is at lows not seen for 10 years.
• Australia's population growth at 2.3% is growing at plus 600,000 people per year.

We simply do not have enough – and are not building enough housing – to shelter our growing population. It's clear to us that state governments with their planning and regulatory regimes are failing the Australian people.

There are two main ways to bring housing supply into Australia:

1. through medium density and higher density apartment development and
2. the development of master planned communities.

It’s exciting to have Andrew here today, as Stockland is the largest developer of master planned communities in Australia. Andrew, could you please describe what a Stockland master planned community looks like?

Andrew Whitson: Master planned community development has been part of Stockland's DNA over our past 70+ year history. It's actually where the company started development – Ervin Graf in western Sydney – in his first housing development that he developed there.

Stockland's master planned communities are located around the growth centres for the four largest capital cities in Australia. They range in size from 500 lots to over 20,000 lots or home sites. What makes a Stockland community unique, and what we think is special about the way we deliver master planned communities, is we deliver more than just the home site.

Our diversified business model allows us to focus on creating both the hard and soft infrastructure that makes master planned communities great places to live. So, we'll deliver the retail town centres so that people have got a place to shop. We'll deliver a lot of the community real estate, and that can be childcare, medical, swim schools, storage facilities. And then we partner with state and local government to deliver a lot of the government-led infrastructure. Most of that is education based within these new master planned communities.

And then we invest a lot in what we call some of the soft infrastructure. And that's all the community creation programmes that we put in place to bring people together in these communities and add to their health and wellbeing. So that's what we think makes master planned communities unique in the way Stockland delivers them.

Stephen Hayes: What would it take to reduce housing supply barriers? Let's talk to some of the challenges facing developers. To start, how do you navigate the state's planning and regulatory minefield?

Andrew Whitson: Credit where credit is due, all state governments that we deal with now have really recognised that housing affordability is a wicked problem.

And they're leaning into looking at new ways to bring more supply to market because they do recognise the most affordable way to address it, and the biggest lever they've got, is on the supply side.

One example here in New South Wales, the state government have recently established the Housing Delivery Authority. And that is where you can make an application to the state, that will be assessed for eligibility within a four-week period.

If deemed appropriate, then the state government make a commitment to make a determination within nine months.

Nine months for a determination on a development approval or rezoning is pretty quick. So, you've seen a number of applications go through that process that was only introduced in January this year. That's a real step forward.

State governments are leaning into this complexity because they recognise that they need to be part of the solutions.

The way we deal with local government, we like to understand, what are their pressure points – and how can we work to effectively address the community issues?

What are some of the examples? In some of the growth centres it might be transport infrastructure. So how can we go as part of a development that we are delivering, upgrade transport, accessibility, be it public transport or other opportunities. Some of it might be other utility providers that we need to work with.

We look to try and understand within the areas where we're developing, what are the community needs and how can our developments contribute to a net community benefit.

Stephen Hayes: Thanks, Andrew. So just following on from that, how are you seeing timeframes at the local council and state government levels in getting development approvals through? Have they shortened?

Andrew Whitson: It varies Stephen.

In some local government areas, we've seen a real improvement and you're seeing a number of state governments publishing league tables now on development approval timeframes and holding councils to account to drive assessments forward.

In other areas where there's a level of complexity it can be more challenging and you get this elongation of timeframes. So definitely an area that with high quality development applications that proactively address the issues upfront, we think we can drive some improvement in that space.

Self-certification is another area. Developers like Stockland look to deliver high quality communities that are complying with local planning instruments. We think more self-certification should be available to take some of the backlog and pressure and workload from local government.

Stephen Hayes: Do you think examples like in New South Wales, where the state government has taken initiatives to privatise certification is a step forward?

Andrew Whitson: For some of the simplistic, some of the complying and more simple developments? Absolutely.

Like all things, there's variability within self-certification and sometimes it can be open to not working as well and we've seen some examples here in New South Wales of that occurring as well.

It’s definitely an appropriate measure if implemented well and regulated appropriately.

Stephen Hayes: With excessive inflation over the past five years, Andrew, it's put major pressure on development costs. Last year alone, 2,800 builders went insolvent. Can you talk to some of these challenges?

Andrew Whitson: Coming out of COVID, it’s well documented that real supply chain disruption – and that's getting access to plant materials, equipment, and then we had together with that a real labour shortage. We lost a lot of skilled labour from the building sector through that COVID phase and that's only started and partially rebuilt now.

From what we are seeing with the builders that we deal with, we are past the worst of it. Most builders have now reset their books so that they've got profitable projects in their forward pipeline.

And we've seen a real bifurcation, particularly in the home builder space. The home builder space, you've got now 5-6 very well capitalised home builders and we've seen a lot of, particularly Japanese money, move into that space. And they're the bigger builders that are driving forward with both increasing volumes of delivery but also innovating in that space to drive down the delivery costs.

I think it's an area where we need to continue to focus, productivity is still not back to levels that we saw pre-COVID. In our case to deliver a stage, we used to deliver it in 24 - 26 weeks. It's still taking us around 30 weeks to deliver it, so we've lost 10-20% productivity and that's both a combination I think of increased regulation, but also just losing some of the experience and capability from the construction sector.

Stephen Hayes: So those delays are mainly from the civil side in getting site prepared?

Andrew Whitson: Yeah, it is, but we're also seeing it in home construction.

In our Queensland land lease business, we build homes for ourselves. We've got a construction business that delivers the homes there. We used to deliver a home in under 20 weeks, that's now increased to around 22 - 25 weeks.

Once again, you've now got good access to materials which became very stretched and disrupted during COVID. That's normalised. We've got good access to subcontractors and site labour.

But just productivity's been lost through that, it doesn't look like we're going to return back to those levels of pre-COVID.

Stephen Hayes: I suppose it's an interesting little-known trend, isn't it, to have these large Japanese housing builders enter into Australia and I think that they own four of the five largest housing builders in Australia.

Andrew Whitson: Yeah, they do. They have come in and I think been very positive for the home construction sector, you know, injected some significant capital into the home builders. Obviously, the Japanese are well known for doing modular, so we're starting to see some real advancements in panelised and modular construction moving into the Australian home building sector and we've built houses the same way for the past 100 years – stick built. But getting more technology into home construction I think is good for the sector, but it's also good for the quality of the homes that are being delivered.

Stephen Hayes: Can you run through some of your engagement with federal and state governments and have you seen any improvement in state government housing initiatives?

Andrew Whitson: Obviously pretty topical coming out of the election where you saw both of the major parties have housing policy really at the centre of their campaigns.

We feel really positive about where the federal government is focusing their efforts. The housing affordability future fund, 40,000 additional homes, leading up to the election there was 7,000 of those are allocated in the affordable space. Another 23,000 to go –10,000 are going to be social.

So that program's going to continue to roll out and I think that's going to be really effective in providing affordable homes at 75% of market rent.

Together with that, talking about 100,000 homes for first home buyers and you're allocating $10 billion for that program, we see there's an opportunity for us to work and be part of that solution. 50% of our sales are to first home buyers.

And then you've got the 5% deposit guarantee program that's being expanded and shared equity programs being expanded to support first home buyers buying affordable product in this market. So federally, that’s the real focus there – understand it.

Supply though, most of the engagement that we have is with state planning authorities. And as I said, we're seeing state governments really leaning into this issue and it is complex, right?

There's not one easy solution to addressing housing affordability, but supply is definitely the biggest lever – and governments know that – and you're getting, the example I used, of the Housing Delivery Authority. We're seeing versions of that across the country, which is a real positive.

Stephen Hayes: With the recent modernisation of building codes in Australia and the Japanese entrance into the housing development market, have they gone far enough?

Andrew Whitson: We support regular reviews of the national construction codes because as we've been talking about, we’re seeing modernisation in construction techniques, are seeing improvements in energy efficiencies and we're seeing changes in the way people live, wanting to age in place in their homes.

The National Construction Code update that was NCC 2022, was really focused on two key elements, one energy efficiency and the second was accessibility. Yet we have seen variable take up from various state governments around that code.

And where the debate has been is the impact that some of these changes have had on cost of construction, with housing affordability being such a huge issue, trying to get that balance right. You've seen different state governments taking different approaches.

I think the real focus with updating the construction codes needs to be with early engagement with the supply chain because what we've seen evidence of if you engage the supply chain, you can minimise the impact on home construction by some of these advancements in technology.

One of the examples we've seen the cost of PV cells and batteries come down dramatically as uptake has increased over the past couple of years. And as we continue to improve construction techniques, I think it's important to make sure that construction codes keep up that's going result in not only better quality, more affordable homes, but also affordable living because the running costs of houses really contributes to people's cost of living over time.

Stephen Hayes:

I think following on from that as well, it's an interesting point you make on government engaging, particularly at the federal level with supply chains. I mean we see in Germany where the cost of double glazing is cheaper than single plant glass, whereas in Australia, clearly at the stage we're at that's exactly the opposite.

Andrew, as, as Australia's largest master planned developer, how does Stockland view their social licence to operate?

Andrew Whitson:

We see ourselves as having to be part of the solution in addressing housing affordability. To your point, we deliver more new homes by an order of magnitude, than any other developer in the country.

Over 50% of our buyers are first home buyers outside of New South Wales and we like to operate right across the housing continuum. So, some great examples of what we are doing. We are partnering with key community housing providers to really ramp up the delivery of social and affordable housing within our communities. 

We've recently been appointed as the partner developer for the Waterloo South development. That development's going to ultimately comprise of 3000 dwellings on completion. 50% of those will be social and affordable.

Part of our consortia to deliver that is three community housing providers; Link Wentworth, City West Housing and Birabee Housing that we are working with closely to make sure that we can deliver these mixed tenure communities in a way that leaves a positive legacy for future generations.

And we think we've got an opportunity at Waterloo South to create a blueprint that sets a standard for these mixed tenure urban renewal projects, not just nationally, but globally.

At the other end of the spectrum, land lease communities is a great example of an alternative housing product that's got a different tenure option that also addresses housing affordability. The homeowner will purchase the home and lease the land. And you know, we're seeing those homes come in on a like-for-like basis, 60-80% of homes outside of those communities.

We continue to look at opportunities on how we can continue to deliver more affordable product. We've spoken about, yes, some of the opportunities for the home delivery side of it, but we think tenure options are also one of the solutions.

Stephen Hayes:

The recent announcement of Stockland and the consortium being appointed as the lead there on the Waterloo development, that's really groundbreaking I think for Stockland and the opportunity there as a test case to really see if we can combine within urban environments this social element to housing in a successful way.

Andrew Whitson: Great. And you look at it leveraging some of the investment that the state's made in transportation infrastructure with the opening of the metro directly adjacent and we think it's a fantastic opportunity.

Stephen Hayes: All right, let's talk to demand. Where are you seeing any green shoots?

Andrew Whitson: The market outside of Victoria we would describe as good to strong from a demand perspective.

The strongest market that we've seen nationally in the past 24 months has been southeast Queensland and that's really been on the back of strong interstate migration, which started to really gather pace post COVID and has continued. And together with that, you're seeing economic growth up there in the lead up to the 2032 Olympics.

They’ve got a big infrastructure spend that's rolling out and it had a real affordability advantage. Part of that's been eroded over the last two years, but southeast Queensland's performed very strongly. We've seen double digit price growth over the last two years and still seeing demand outstrip supply in that market.

The second market that's been strong has been Western Australia, the Perth market in particular. That market has passed its peak. We're seeing some moderation in demand there, but would still describe it as strong.

Going back 12-18 months, we’re seeing almost 40% of our inquiry was from east coast investors. That's pulled back and it's now being driven very much by local buyers, local first home buyers, local investors into that market. But once again, strong double digit price growth over the last two years has eroded some of that affordability and reduced that level of demand, but I still would describe it as a strong market.

New South Wales where we are, this market is chronically unaffordable. We only sell 11% of our product to first home buyers versus 50% in the other states that I mentioned. But this market continues to trade consistently due to a lack of supply and it's very much an asset transfer. So people will sell a home, upgrading, downsizing and buying into our new communities.

The market that's lagged the rest of the country has been the Victorian market. You know, it’s well documented, some of the economic and tax headwinds that that market has faced. We are starting to see some improvement in that market. It now sits and screens as the most affordable capital city market in the country, more affordable median house price now sitting below Adelaide, substantially below Sydney, and below Brisbane and Perth. We've recently seen a reversion in net interstate migration. It's turned positive for the first time this decade in the last two quarters.

So, people are starting to recognise that affordability is returning to Victoria together with resale listings, they've started to come back and cancellation rates in our communities that were well above 20% are now back to about 15%. So, people are seeing valuations hold up better and settling homes and new purchases better.

So, we're seeing a gradual improvement in that market, but still, volumes are at very low levels and we would look to see a step change as this market improves.

Stephen Hayes: Yeah, it's interesting with Victorian woes from where it's been in the past. The state government is flooded full of debt, they've had credit downgrades, now the state government debt – its credit ratings are the lowest out of all the states.

And to your point on recent new taxes have been introduced offer quite a large disincentive not only at the demand level but also at the supply level for developers like yourself.

But it’s interesting to see that on the demand side that maybe with affordability coming down a little bit that we might start to see some green shoots there.

Andrew Whitson: It is an interesting market, right, when you dig into it a bit more deeply. We've seen those investors that were buying into Perth 24 months ago are now looking at Melbourne because if you look at it on a total return basis, even with some of the additional taxes that you've referenced, if you assume you're going to get even slightly above trend capital growth, it's starting to screen as a good investment opportunity.

So. Investor inquiry and activity picking up, builders picking up and you've seen the core logic numbers the last four months have been positive median established house market growth. There's some early lead indicators there that are pointing to better conditions ahead in Melbourne.

Stephen Hayes:

Looking at demand and growth is certainly something I focus on as a property investor, however, assessing structural challenges and opportunities can be complicated.

Firstly, there are the macro factors that we've spoken about in today's podcast. Such as cost of living and affordability, both are majorly challenged in Australia.

Consumer confidence is well below trend levels GDP growth in 2024, which is 1.3% fuelled by immigration and government spending.

However, Australia remains in a per capita or productivity recession. Unemployment is stubbornly low leading to persistent services inflation pushing up the cost to build and the household savings rate at just 3.6% is still very low.

As discussed, housing supply is also structurally challenged. However, some state governments, as we've heard today from Andrew, are now being more proactive helping large developers like Stockland help solve the housing crisis.

With regards to the federal government, the Labor government's policy, the first home buyers help to buy scheme, is making some difference. But it doesn't really go far enough to help bringing down housing prices.

Other industry trends such as the growth of build to rent apartments in Australia are positive with 9,000 apartments currently under construction, with approvals for further 20,000 to be built over the next five years.

Although the build to rent government land tax work is a headwind to development feasibilities and the New South Wales, Victoria, Queensland, South Australia, Western Australia state governments giving 50% land tax relief really doesn't go far enough.

So, there's a lot to grapple with the expected returns and risks with these opportunities. However, overall expected central bank interest rate cuts are supportive of the investment thesis.

So just to wrap up, I'd like to thank Andrew for joining us today. Stockland is a major part of the solution in helping solve Australia's housing crisis and I found his insights invaluable. Thank you, Andrew.

Andrew Whitson: Thanks Stephen. Really enjoyed it.

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Curious is a podcast series that asks professional investors about the trends and opportunities that have their attention in markets. First Sentier Investors is a $200 billion-dollar active manager that invests across equities, fixed income, infrastructure, property and alternative credit globally. Its investment teams include AlbaCore Capital Group, FSSA Investment Managers, Igneo Infrastructure Partners, RQI Investors and Stewart Investors. You can subscribe to the series here.

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