Vacancies in Melbourne Report

Andrew Sadauskas

EXECUTIVE SUMMARY

– Broad Scope: Our research evaluated 652,695 properties across 23 different municipalities in the western, inner, southern, and south eastern suburbs of Melbourne. This represents nearly half of Melbourne’s 1,471,155 private dwellings.

– Genuine Vacancy Rate: The Genuine Vacancy Rate includes all vacant properties, including those not on the rental property market (i.e. speculative vacancies) in both residential and non-residential markets.

– 1 in every 15 Melbourne properties vacant: We found Melbourne’s Genuine Vacancy Rate currently stands at 6.86%. Many of these vacant properties are being withheld from the rental market in the form of speculative vacancies. This hoarding pushes rental prices up.

– Housing Bubble: The focus should shift from a housing shortage in Melbourne and towards the cause of housing bubbles. The rental crisis relates to a shortage of landlords willing to lease their properties. Encouraging speculative vacancies to become occupied properties would result in more affordable housing and place a downward pressure on rents.

– Federal and State Public Policy Failure: Government policy is based on the assumption that housing is being used efficiently and that there is a shortage of housing despite access to information that indicates the high proportion of genuine vacancies. This false assumption informs costly policies including the First Home Owners Grant (at the Federal level) and the Urban Growth Boundary Expansion (at the State level).

– Instant Housing supply: 14,149 houses could be made available for housing within days if more effective economic policy was adopted.

– 44,753 vacant properties were found across Melbourne’s inner, western, and south eastern suburbs: In comparison, this is similar in number to the City of Maribyrnong (covering Footscray, Maidstone, Maribyrnong, and Yarraville) which has 30,484 households in total.

– One in five commercial properties are vacant in Melbourne’s south east: In Melbourne’s south east nearly one in five commercial properties are vacant; a Genuine Vacancy Rate of 17.22%. This means that the Genuine Vacancy Rate for commercial properties is above the 15% office vacancy rate found in Boston.

– Rust-belt suburbs: We found significant vacancies in Moorabbin (9.85% vacancy rate with 44.5% of properties zoned non-residential), Dandenong South (10.33% vacancy rate; 91.19% of properties zoned non residential) and Bayswater (4.52% vacancy rate with 25.1% of properties zoned non-residential).

– Alarming inner city vacancy rates: Many inner city suburbs have high Genuine Vacancy Rates, including Collingwood (which has a 7.44% Genuine Vacancy Rate), Southbank (6.89%), and Princes Hill (8.76%). The most astounding results, however, came from the 11.05% vacancy rate in Carlton, the 16.56% Genuine Vacancy Rate in West Melbourne, and the 28.96% Genuine Vacancy Rate in Carlton South.

– Capital Gains trump rental income: The highest Genuine Vacancies are found in areas where high capital gains are expected due to new infrastructure projects (Dandenong South re Eastlink) and/ or the inherent demand found in cultural hotspots (Carlton South).

– Clear need for Tax Reform: Local Governments must switch from Capital Improved Value (CIV) rating systems to a Site Value (SV) rating system. This would re-balance the playing field between the family home and the speculative investor. Federal and State Governments must switch from ‘transaction taxes’ on land (e.g. Stamp Duty and Capital Gains Tax on property) to a Land Tax to discourage speculation.

– Turnoff speculative demand: Such tax reform would channel landlords towards focusing on rental income rather than capital gains.This would signal a preference for more building, more density.

– Conservative Methodology: We did not examine the possibilities for subdividing existing properties in this report.

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INTRODUCTION AND BACKGROUND

This is the Third Annual I Want to Live Here report on the Genuine Vacancy Rate in Melbourne, Australia. In previous years, the report has focused on the Genuine Vacancy Rate in the Bluestone Ward in the City of Maribyrnong (2007), and vacant properties in inner and western Melbourne (2008). The 2009 report is more ambitious in scope, examining Genuine Vacancy Rates in 23 different municipalities covering Melbourne’s south-eastern, inner northern, and western suburbs. In total, 652,695 properties were evaluated during our investigation.

The 2009 report is particularly timely for three key reasons. The first of these is the ongoing rental and housing affordability crises in Australia, which has increased the real estate burden on home buyers, renters, and businesses alike. The second is the Global Financial Crisis (GFC), which has seen the housing bubble collapse internationally. Indeed, many of the leading economists who predicted the global financial crisis (including Fred Harrison and Bryan Kavanagh) have identified speculative real estate price bubbles as a key cause of the current crisis. The third reason for the importance of these findings has been key State and Federal Government policy decisions which have been taken in response to the GFC.

The ‘Genuine Vacancy Rate’ includes all vacant properties, including those not on the rental property market (i.e. speculative vacancies). In the context of this report, it refers to both residential and non-residential markets, except where noted otherwise.

The Vacant Property Shortage Myth and the Global Financial Crisis

Central to much of the discussion about the rental and housing affordability crises has been premised on the ‘vacant property shortage myth’. According to this myth, the primary cause of the rental and housing affordability crises is a lack of vacant properties within existing urban areas, with new housing construction not keeping pace with a growing population.

In light of the Global Financial crisis, the question of whether high land prices are a product of speculation (i.e. properties being withheld from the market) or a shortage of vacant properties has very severe ramifications for the health of the Australian economy.

Research by Dirk Bezemer, a Professor of Economics at the University of Groningen in the Netherlands found that the Global Financial Crisis was successfully predicted by the models used by twelve leading economists. In examining the common features of their models, Bezemer noted that:

“A broadly shared element of analysis is the distinction between financial wealth and real assets… A concern with debt as the counterpart of financial wealth follows naturally… There is a recurrent emphasis (e.g. Baker 2007), that home equity-fuelled consumption has in recent years sustained stable growth… Their view was that as soon as debt growth slowed down – as it inevitably would within years – growth would falter and recession set in… The bursting of the international housing bubble was seen to have a severe impact on the world economy”

In other words, the twelve economists who predicted the Global Financial Crisis did so by noticing a bubble in land prices. They examined the debt levels associated with such bubbles, and predicted the economic impact of such land price bubbles bursting.

Internationally, particularly in the US, this is indeed what has happened. Consider California, where house prices have dropped 41% between March 2008 and March 2009 on the back of foreclosures, and have continued to fall since (a further 12% in August alone). Retail vacancy rates in some parts of the US are now so high that whole shopping centres have been abandoned, as cataloged on websites such as www.deadmalls.com. Office vacancy rates stand at 15% in Boston, 18% in Philadelphia and 21% in Austin, Texas.

And that’s even before we consider Detroit; a city which has seen 30,000 people move out in the past year alone. The population of the Detroit metro area is believed to currently stand at 827,000; less than half its peak population of nearly 2 million. (The reasons behind Detroit’s rise and subsequent fall are discussed in an article by economic historian Mason Gaffney entitled “What’s the Matter with Michigan?“).

In contrast to the housing bubble collapse seen overseas, land prices in Australia have apparently hit record highs. According to a recent REIV report – for example – the Melbourne median house price recently hit $520,000. Much of the analysis of the strength of the Australian property market compared to the falls experienced overseas have been premised on the vacant property shortage myth; that property prices in Australian capital cities won’t fall like cities overseas have because we have an under supply of housing and land.

However, if a significant supply of land and housing is being withheld from the market, land prices in Australia may be far more vulnerable to a price collapse than is commonly anticipated (should this vacant land be suddenly released on to the market).

State Policy Responses

The vacant property shortage myth has also been central to recent Government policies at both a State and Federal level.

At a State Policy level, pressure to alleviate the supposed vacant property shortage has led it to recently announce an expansion of the urban growth boundary, allowing 41,000 hectares of additional urban sprawl on Melbourne’s outer fringe. Linked to this policy are a series of new freeways, including the E6, Peninsula Link, Banyule Tunnel, and Outer Metropolitan Ring Road – all designed to service the transport needs of this new sprawl.

This new policy appears to be a significant deviation from the previous State Government planning policies outlined in Melbourne 2030, released in 2001. According to this earlier policy, “variation of the urban growth boundary will be infrequent,” (Melbourne 2030, p. 59) proposed that “Higher-density housing will be encouraged in and around Neighbourhood Activity Centres,” (ibid., p. 49.) and noted that “the average density of the metropolitan area at around 14.9 persons per hectare (pph) is low by international standards. Montreal has 33.8 pph, for example, and Toronto has 41.5 pph.” (ibid., p. 58). This higher density has also facilitated an increased modal share for public transport, with the report stating that “the proportion of motorised transport trips taken on public transport will more than double, from the present 9 per cent to 20 per cent.” (ibid., p. vii)

This proposed expansion of the urban growth boundary (with its associated freeways) has, quite understandably, generated significant grass roots opposition across Melbourne. In Melbourne’s south, the proposed Peninsula Link (which will cut through the 220 hectare Pines Flora and Fauna Reserve in Frankston North) is opposed by the Pines Protectors, who argue that bulldozing trees to build more freeways and sprawl is inappropriate given the seriousness of climate change. To the north, the Protect Our Heritage Group opposes the bulldozing of homes in the towns of Woodstock and Wollert in order to build the E6 freeway. And the Protectors of Public Lands oppose green wedges around Melbourne’s outer fringe falling into the hands of private developers.

This report will examine whether (in light of vacant properties within the existing Urban Growth Boundaries) the proposed sprawl and associated freeways are really as “necessary” or “inevitable” as currently claimed. It will also examine whether possible policy alternatives exist based on better utilisation of currently vacant properties within the existing Urban Growth Boundaries.

Federal Policy Responses

The vacant property shortage myth has also influenced politicians at the Federal level, most notably in the form of the First Home Owners’ Grant (FHOG).

The fundamental problem with the grant is that it increases demand for housing and land, and therefore places upwards pressure on the price of land. The net effect is to reward speculators who are withholding land from the market with higher prices, rather than encouraging them to sell and therefore putting downward pressure on the price of land.

Purpose of Study

Against the background outlined above, the purpose of this study is to expand the scope of previous I Want to Live Here reports by examining the number of genuine vacancies in the south-eastern suburbs, as well as the inner northern, and western suburbs of the Melbourne metropolitan area. The south-eastern suburbs are particularly interesting in that they cover a range of different categories of suburbs including industrial suburbs, upper class inner suburbs, middle class middle suburbs, and new outer suburban areas. Including the south-eastern suburbs also gives us a clearer picture of which suburbs have the most speculative vacancies.

METHODOLOGY

The key methodology for the 2008 I Want to Live Here Report was as follows:

“In order to determine the net volume of vacant houses in the inner suburbs we researched objective measures of occupancy that may be collected by an existing organisation. As an essential human need we chose water consumption as being the most indicative of a speculative vacancy at a given property…. 50L per day averaged over the first 6 months of 2008 was chosen as the maximum usage cutoff point. Leaking water systems can consume as much as 200L per day which means vacant housing can still consume water.

The 2009 I Want to Live Here report uses the same key methodology, with the survey period in the first six months of 2009.

For suburbs in Melbourne’s south-east (615,546 properties), we have improved upon this methodology in several ways:

1) We have divided residential dwellings into two categories: units (including flats, apartments, etc.), and houses (larger stand alone dwellings).

2) We have also included non residential properties (including offices, factories, warehouses, and shops) in our figures.

3) In addition to these, for each of our key statistics, we have also calculated a residential total (combining the figures for houses and flats) and an overall total (combining the figures for flats, houses, and non-residential properties).

4) For each suburb and municipality, we have calculated the number of vacant properties in terms of units, houses, non residential properties, the residential total, and an overall total.

5) For each suburb and municipality, we have calculated the number of occupied properties in terms of units, houses, non residential properties, the residential total, and an overall total.

6) For each suburb and municipality, we have calculated the total number of properties in terms of units, houses, non residential properties, the residential total, and an overall total.

7) For each suburb and municipality, we have calculated the Genuine Vacancy Rate in terms of units, houses, non residential properties, the residential total, and an overall total.

8) For each suburb and municipality, we have calculated the capacity for population growth within the existing housing stock assuming two residents per unit and three residents per house. We have also calculated a total capacity combining these two figures.

9) For each suburb and municipality, we have calculated the percentage of properties which are residential, and the percentage which are non-residential.

10) For each suburb and municipality, we have calculated the percentage of vacancies which are residential, and the percentage which are non-residential.

Notes on Methodology

The vacancy figures described in this report will be inherently conservative. The methodology does not count sites which could be created through sub-dividision – thus achieving a higher population density – if properties were used more efficiently. A vacant land holding is counted as just one vacancy, despite current trends for two – three dwellings to be placed on a typical suburban block.

Another example – were large sprawling open air car parks replaced with multi-level car parks or parking under buildings, those sites could in turn be subdivided. Therefore, the potential population of each of the suburbs and municipalities in this study is significantly higher than even the Genuine Vacancy Rate suggests.

Another point to keep in mind in regards to water consumption is that water meters are installed in the property as soon as the land owner applies for it. In general, these meters are read 3 months later; whether the building construction is completed or not is not recorded. During the construction period the builder will use water. This small amount of water use will be recorded on the meter.

Perhaps the most conservative of all is that dripping taps in vacant dwellings further water down the Genuine Vacancy Rate. Some taps drip up to 220L p/day. Our 50L per day cut off does not include such sites.

Exclusion of Land Banking

As The Age’s Ben Schneiders and Royce Millar uncovered in 2007, a major form of land speculation comes in the form of ‘land banking’ by developers. This is the practice of developers stockpiling vast supplies of undeveloped land and then drip-feeding it into the market slowly in order to maximise prices. In the 2006 / 07 financial year, for example, it was revealed that the six largest property developers acquired 38,000 more lots than they sold, and had managed to acquire $70 billion dollars worth of land, predominantly on Melbourne’s outer fringe.

The figures quoted in this report do not include the number of properties which could be built on ‘land bank’ holdings. This is because (as stated above) the methodology used in this report only counts existing subdivisions. If possible subdivisions were included, the Genuine Vacancy Rate would be significantly higher than the figures quoted in this report. For this reason, the figures quoted in this report will inherently be conservative.

KEY RESEARCH FINDINGS

The raw data of our research can be found in Appendices 1 and 2.

Genuine vacancies in the CBD have increased from 7% to 8.63% over the last year. We are repeatedly told that vacancies are at 1.4% or less in the CBD.

We found that the Genuine Vacancy Rate currently stands at 6.86%. This means that approximately one in every 15 Melbourne properties are currently vacant.

The vacancy rate is significantly higher than this in a number of suburbs and municipalities. These include the City of Melbourne (8.63%), the area around Tullamarine Airport in Hume (7.99%), and the City of Yarra (7.03%). The worst offender in this regard was Cardinia in Melbourne’s outer south-east, which currently has an extraordinary 20.87% vacancy rate.

The suburbs we examined in the City of Monash (the only municipality left employing Site Value Rating) had a vacancy rate of 3.65%; roughly half the Genuine Vacancy Rate of the 6.86% rate we found for Melbourne as a whole.

The State Government has recently pressured Monash into switching to the less efficient CIV rating system.

In total, we were able to identify 44,752 vacant properties. To put this number in to context, the City of Maribyrnong (covering Footscray, Maidstone, Maribyrnong, and Yarraville) has 30,484 households in total, while Hobsons Bay (covering Altona, Laverton, Newport, and Laverton) has 35,891 households in total. In other words, speculative vacancies are effectively withholding the equivalent of a whole municipality from the property market.

The biggest surprise was the sheer number of vacant shops, warehouses, factories, and offices revealed. Unlike the western suburbs of Melbourne, Melbourne’s south east is overwhelmingly residential. While non residential properties make up one in nine properties in Melbourne’s south east, nearly half (42.61%) of all property vacancies in Melbourne’s south east were non-residential. In effect, non-residential properties were four times more likely to be vacant than residential properties.

Alarmingly, nearly one in five non-residential properties are vacant in Melbourne’s south-east; a non-residential Genuine Vacancy Rate of 17.22%. This means that the vacancy rate for non-residential properties is above the 15% office vacancy rate found in Boston, at the centre of the global financial crisis. That such a glut is allowed to persist in light of the rental and housing affordability crises should be a serious concern for governments at all levels. In total, there are over 10,000 vacant shops, factories, offices, and warehouses in Melbourne’s south east.

The high non-residential vacancy rate has seen the emergence of a string of formerly industrial ‘rust-belt’ suburbs across Melbourne’s south east. These include Moorabbin (9.85% vacancy rate with 44.5% of properties zoned non-residential), Dandenong South (10.33% vacancy rate; 91.19% of properties non residential) and Bayswater (4.52% Genuine Vacancy Rate with 25.1% of properties zoned non-residential). Worse still is the result for nearby suburb of Lyndhurst, which has an astronomical 18.59% vacancy rate.

Finally, many properties remain vacant in the new developments in some of Melbourne’s gentrified inner suburbs. These include Collingwood (which has a 7.44% vacancy rate), Southbank (6.89%), and Princes Hill (8.76%). The most astounding results, however, came from the 11.05% vacancy rate in Carlton, the 16.56% vacancy rate in West Melbourne, and the 28.96% rate in Carlton South.

ANALYSIS

Speculative vacancies are motivated by capital gains being disproportionately higher than rental returns. While median house prices in Melbourne have climbed by $30,000 in the three months to September this year (The Age, 24th October), Melbourne’s landlords currently make a 4.2% return on the median price of a rental house (The Age, 7th July). Even with the power to write off costs under negative gearing, the variance between capital gains and rental income is often three to one.

Speculative vacancies also have lower holding costs than a properly maintained rental property, both in the form of lower property upkeep costs, and lower council rates (under a CIV system). In addition to these low holding costs, the withholding of properties over prolonged periods is motivated by high transaction costs on properties (in the form of stamp duty on the purchase of properties and Capital Gains Tax on the sales price of properties).

Non Residential Vacancies and Rust Belt Suburbs:

The alarmingly high rates of non-residential speculative vacancies and the emergence of a number of rust-belt suburbs cascade into detrimental impacts on businesses, the economy, and the residential property market.

The speculative vacancies in a number of ‘rust belt’ suburbs in Melbourne’s south east distort the commercial and industrial property market by withholding properties from the market. This in turn pushes up land and rental costs above what the prices would be were these properties available for sale or rent on the open property market. This has the flow on effect of making it more expensive for businesses to finance the purchase or rent of premises to conduct business.

The result is that a higher proportion of business revenue is devoted to financing the purchase or lease of property than is otherwise necessary. This revenue may otherwise have gone towards additional wages or jobs, investments in plant and capital, or higher dividends for shareholders. Alternatively, higher real estate costs are passed on to consumers, making Australian businesses less competitive in a global economy while putting inflationary pressure on the economy at large.

High non-residential vacancy rates and non-residential speculation also has an adverse impact on the residential property market. If there are properties which are surplus to the requirements to commerce and industry during a tight residential property market, then there should be a clear and straightforward process to redevelop vacant commercial and industrial properties for residential use.

It is worth noting that creative redevelopment and subdivision can yield a number of residential properties from a redeveloped warehouse or commercial site. In Melbourne’s former rust-belt inner city suburbs, such conversions (into loft-style apartments) have become quite fashionable. These have demonstrated the multiplier effect of one commercial or industrial property yielding several residential properties.

With increasing signals from Canberra that Australia’s future wealth is in the mining sector, the prevalence of non-industrial vacancies commands policy perscriptions to encourage infill.

Upmarket Suburbs:

The relatively high Genuine Vacancy Rates in several desirable inner city suburbs (including Collingwood, Southbank, Princes Hill, Carlton, West Melbourne, and Carlton South) suggests that property speculation is withholding housing from the property market, artificially pushing up real estate prices in these suburbs. This has the flow on effect of ‘pricing out’ people who would otherwise be interested in purchasing housing in these suburbs, and therefore increases demand for properties in the sprawling suburbs. A key priority must be to discourage speculation so these properties are released onto the market.

KEY RECOMMENDATIONS

An independent body (such as the Australian Bureau of Statistics) should gather Genuine Vacancy Rate statistics regularly so that the true state of housing supply is available.

Current Government policies aimed at addressing the housing and rental affordability crises (at both a State and Federal level) are structured to encourage more housing supply. Yet such policies do nothing to prevent this new supply being tied up in speculative vacancies.

However, there are public policy alternatives open to government at all levels (Local, State and Federal) that can address the structural issues causing vacant properties to be withheld from the market.

Local Government Policy: Council Rating Reforms

At a local government level, the most immediate structural remedy is to adopt a property ratings system which encourages disused properties to be released to the market.

The objective here should be to implement a property rating system which reduces the burden on households and businesses which effectively use their properties, while increasing the costs on vacant landholders to discourage speculation. In effect, all classes of property holders are then on an even footing.

To this end, economic historian Phil Anderson has noted in his comprehensive research into Victoria’s Municipal Ratings Systems (PDF 2.03MB) that:

“When Site Value Rating is the system in operation, the following classes of ratepayer generally pay more: vacant land holders, any sites with development potential, properties with a higher land to building ratio. The following pay less: extensively improved properties on small sites, owners of flats and units, ratepayers working in office suites, shopping centre lessees, properties with a higher improvement to land value. When CIV [Capital Improved Value] is the rating system in operation, the question of who pays more and who pays less is generally the reverse of that above.”[xxi]

A Capital Improved Value (CIV) rating system charges rates for both the underlying value of land holdings as well as any improvements to the land, making it cheaper (in terms of council rates) to hold a completely vacant block of land than it is to have a well maintained and effectively utilised property. The perverse consequence of this (as Anderson points out above) is to encourage more properties to be withheld from the market than would be the case under a Site Value Ratings system.

In contrast, a Site Value Ratings (SVR) system charges only for the underlying value of the land being held, and excludes the value of any improvements from the assessed rates for properties. This reduces the council rates on extensively improved properties, while increasing the burden for those withholding property from the market. This, in turn, discourages vacant land speculation and therefore discourages properties being withheld from the market.

Home-owners should not be taxed for developing their sites. Families should not pay higher taxes than land banking speculators.

State and Federal Policy: Tax Reform

At a State and Federal level, there is also scope for structural reforms to help rectify the problem of properties being withheld from the market.

The most notable structural cause of speculative vacancies at a State and Federal level is the imposition of transaction taxes on the sale of land. This occurs in the form of Stamp Duty at a State Level, and Capital Gains Tax at a Federal level. These transaction taxes insert a perverse incentive into the market in that they tax people who wish to make a vacant property available to the market, while not taxing people who withhold vacant properties from the market. This delays the turnover of property.

These State and Federal transaction taxes should be replaced with an improved State or Federal Land Tax. The Land Tax should be broader and flatter than at present. It is important to note that the introduction of a higher and flatter Land Tax should be coupled with revenue neutral tax cuts on Stamp Duty, Capital Gains Tax, and Payroll Tax. At a minimum this should be implemented to fund a 50% cut in income taxes.

These structural reforms would remove the government imposed market distortions which systematically encourage the withholding of properties (in the form of speculative vacancies), and encourage buyers and sellers to meet in the market place in order to transfer property and satisfy demand for accommodation.

CONCLUSION

Speculative vacancies continue to hamper the housing supply crisis.

Melbourne’s CBD vacancies have increased over the last year from 7% to an 8.63% Genuine Vacancy Rate.

The vacant property shortage myth must be corrected so that economic policy can be more effective. With the government’s preference for rapid population growth and the continual signals that Australia’s economic future relies on the development of ‘quarry Australia’, seaboard governments must seriously address the role of land hoarding in the affordability crisis.

With small business the largest employer in Australia, the role of speculative vacancies in the non-residential sector is of national significance. This is akin to a 17% unemployment rate for land. The higher rents this enforces on small business is a sleeping issue that will rise rapidly as businesses battle for a price advantage in the global marketplace. With interest rates the RBA’s only policy to cool the housing market, the high dollar will continue to sacrifice the manufacturing sector.

The role of land prices in the affordability crisis must be questioned when a 3 bedroom fibro house in the mining town of Port Headland costs $870,000.

It is time for governments to look at the speculative side of the housing supply issue in order to understand the market in detail. If housing is a human right, then our tax policies must genuinely reflect this.

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Download 2009 Report PDF

Appendix 1
Appendix 2