Author: Tom Curtis
Research Director: Karl Fitzgerald
Executive Summary
We estimate the Speculative Vacancy Rate for Melbourne in 2010 to be 4.94% or 46,220 of 935,305 properties surveyed.
Our Estimated Speculative Vacancy Rate is more than twice the REIV’s Rental Vacancy rate for the same period of 1.7%. The rental vacancy rate is the rate most commonly referred to in media coverage as ‘housing vacancy’.
Recent increases in house prices have been driven by speculation, not a housing shortage. Property buyers are restricting the supply of housing by holding their properties off the rental market.
More than 20 suburbs surveyed had estimated vacancy rates in excess of 8%.
15,237 properties surveyed consumed on average 0L of water per day.
The Speculative Vacancy rate was down from 2009’s rate of 6.84%. It is unclear how much of this fall is from an improvement in property usage and how much is attributable to changes in methodology/sample.
This report sampled 64% of dwellings in Greater Metropolitan Melbourne.
Download the 2010 Speculative Vacancies in Melbourne report
Introduction
The Speculative Vacancy 2010 Report sets out to answer the question ‘how efficiently is housing allocated by the market?’ We specifically look at properties in greater metropolitan Melbourne.
How many are empty?
Reported vacancies of 1.7% reflect the rental market. These are published and acted upon by the Real Estate Institute of Victoria (REIV), as at November 2010.
This report seeks to measure the vacancies in reality, regardless of property rights. It looks at whether there is a ready and waiting housing supply to provide homes to people who want to live in Melbourne and which could potentially provide lower costs of living through greater competition in the rental market.
This report will be of interest to those concerned with social and economic justice, and those concerned that Melbourne may have a property asset bubble. Vacant properties can be used to create a supply side shock and deflate the housing bubble dramatically. The genuine vacancy rate is a key factor in determining how big that bubble is.
About Earthsharing
Earthsharing Australia is a self-funded non government organisation, of people from all walks of life inspired by the economic justice that can be achieved by distributing the wealth produced from land among the entire community.
www.earthsharing.org.au
Methodology
The Speculative Vacancy Report follows the methodology used in the ‘I Want To Live Here’ reports (2008 and 2009). This involves obtaining data regarding the consumption of water at serviced properties. Water consumption is used as a proxy measure of vacancy. In this, and in previous reports, we assume that an average daily water consumption of less than 50L over six months indicates vacancy.
There are limits to this methodology. The 50L/per day maximum is significantly lower than Victorian Government campaign targets for daily individual water usage. A leak, such as a dripping tap, can consume up to 200L per day. An unoccupied dwelling may have an active sprinkler system that pushes water use above 50L/day.
Conversely, somebody who commutes between residences (e.g. occupying their Melbourne dwelling on weekends only) may end up achieving a daily average less than 50L. Therefore, it is possible our figures can understate or overstate vacancy for any given property.
However, the simplest and most likely explanation for low water consumption remains vacancy. We therefore provide a ‘definite’ speculative vacancy rate for properties averaging 0L per day, and an ‘estimated’ speculative vacancy rate for properties averaging 0-50L per day.
Findings
We successfully obtained the required data from City West Water and Yarra Valley Water. A third provider, South East Water, did not provide the data requested.
Data was organised by suburb. Suburbs where the total properties serviced (by both providers) were less than 100 have been excluded from our findings. For example, East Keilor had three properties serviced, only one of which met our definition of vacancy. This would lead to a 33% vacancy finding, which we feel misrepresents the true state of vacancies in the suburb. Therefore East Keilor has not been included in this report.
Overall, 935,305 properties were included from 261 suburbs. This represents 64% of the total dwellings captured in the 2006 Census for the Melbourne statistical division. Of these, 15,237 properties consumed 0L of water per day over the last six months and are definitely vacant. We estimate true vacancy to be as high as 46,220 properties or 4.94%. Almost 5% of properties consume less than 50L of water on average a day.
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Our estimated total speculative vacancy rate is more than double the REIV’s published figures for rental vacancies for the November quarter. The REIV employ a different methodology to determine vacancy. They take the number of rental properties listed to let and divide it by the total number of rental properties listed with their member real estate agents. This method only captures vacancies that are made available to let.
Compared to the previous ‘I Want To Live Here’ Reports for 2009 and 2008, the findings suggest that the vacancy rate has dropped. This may be due to the more conservative exclusion of suburbs with less than 100 dwellings. Each year the sample size has increased, providing a more reliable picture of the speculative vacancy rate.
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We believe it is an error to equate ‘rental vacancy’ with ‘genuine vacancy’. It overlooks the practice of speculating on the housing market. Speculation is the practice of buying property purely for anticipated capital gains, not rental income.
Top 20 Vacant Suburbs
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Our estimated speculative vacancies represent the number of houses that could flood the market given a downturn in confidence. Many suburbs boasting high vacancy rates are in prime inner city locations. Given their preferential location, this would have a domino effect on house prices in more distant suburbs.
Limitations
It is beyond the scope of this study to detect ‘land banking’. Land banking is property that is completely undeveloped and not serviced by a water company. The practice of land banking contributes to urban sprawl but does not provide immediately available housing. We cannot detect these properties because if they have never been connected to water utilities (i.e. have no meter) they will not show up in the data.
This potentially applies to the entire Melbourne ‘Urban Growth Boundary’. This survey is unable to measure, advance or record how efficiently this land is released to the market to achieve housing affordability.
Conclusion
Our findings show increases in house prices since 2007 are mostly attributable to speculative market behaviour rather than a housing shortage.
Demand does exceed supply, but housing is not being used efficiently to accommodate our population. These speculative vacancies are inflating housing prices and driving urban sprawl.
Melbourne has a Property Asset Bubble, with a potential supply shock of housing ready to enter the market and reduce prices, given a loss of confidence in property. Speculative behaviour is unpredictable in nature but is definitely occurring. Property speculators are foregoing rental income in the hope of realising capital gains.
The myth of the housing shortage is being perpetuated by equating a ‘lack of housing to let’ with a ‘lack of housing’. The response from government has been to make more land available for residential development without addressing the underlying inefficient use of housing in Melbourne.
Recommendations
As in previous ‘I Want To Live Here’ reports we find a pressing need for regular and comprehensive gathering of data on the Genuine Vacancy Rate to be referred to by government so that policy can be formulated in response to real and accurate figures.
We urge people to consider the risks of buying property in Melbourne given the potential for a sudden increase in supply to generate a crash in property prices.
We urge all levels of government to rethink their taxation policy and the impact it has on the efficient use of land. Speculation occurs largely because property speculators can afford to sit on vacant housing given the low holding costs and tax incentives to do so. We call for a shift in taxation bases from income and consumption to land and natural resources as per the Henry Review recommendations.
Appendix 1: Further International Vacancy Studies
The interest in housing vacancies has increased following the US property crash that precipitated the global financial crisis.
Californians were convinced in the mid 2000s that affordability issues were due to lack of land supply. ‘We need more re-zoning’ was the catchcry from developers.
In 2006, Thousand Oaks Acorn reported:
The California Building Industry Association (CBIA) continues to express alarm over what it calls an ongoing housing crisis in Southern California.
“lan Nevin, the association’s chief economist, projected in a 2006 CBIA Housing Forecast that only 185,000 to 205,000 building permits will be granted this year, far short of the 240,000 new homes needed each year.”
By April 2009, this building industry call was dispelled – houses were bulldozed in California’s ghost estates as a means to re-balance supply and demand as property prices were in free fall.
The importance of an accurate, unbiased source for housing supply figures has gathered importance. There are many different techniques.
Syracuse, USA relies on $400,000 software to track vacancies.
Some enlist homeless aid groups to survey the land on foot in New York.
Ireland’s UCD Urban Institute Ireland has deducted there were 170,000 vacant homes in 2010.
They extrapolate Census figures.
“The number of housing units completed from 2006 to 2009 has been aggregated from DoEHLG data. The numbers vacant and occupied have been estimated by use of data on population and population to stock ratios over this period allied with discussions with financial and market sources indicating that over one third of additional stock over the period remains vacant.” (p16, Managing an Unstable Housing Market Williams, Hughes and Redmond, 2010).
Watch the related youtube clip
The State Grid Company of China recently revealed another tactic, releasing data using a similar utilities-based survey of land and housing usage, this time with electricity usage. They found a staggering 65.4 MILLION empty homes using zero power over six consecutive months.
Watch the SBS special
Appendix 2:
Tables of all 261 suburbs and their water usage, vacancy rates.
Download the 2010 Speculative Vacancies in Melbourne report
9 Comments on “Speculative Vacancies in Melbourne 2010”
How do the water suppliers deal with properties that have no meters? (Many inner city houses, at least in Sydney, have un-metered water.) Is it possible that these are being reported as using 0 litres?
HI Danny,
they arent included in the study, unfortunately.
Other issues understating our figures include:
– many 20 – 30 yr old apartment blocks run off one water meter, overlooking any vacant apartments in the building.
– most quarter acre blocks are now subdivided into 2 – 3 townhouses, not the one as we count.
– leaking pipes within property boundaries can leak more than taps, hiding other vacancies.
In quite the same way house prices are based on supply versus demand of property for sale, rents are based on supply versus demand of rental property. Rental vacancy rates in some cities (Sydney for example) are tight by historical standards, while in other cities there may be a surplus of rental stock. Investors sometimes use the “excuse” of rising interest rates to try to increase rents, but they can only raise rents to market value, not beyond, otherwise they will have an empty rental!
Here’s a great blog that talks about all the empty dwellings in Sydney for example…..
Property Shortage Myth Busted
It’s only a matter of time before the Aussie housing bubble collapses under its own weight, and when it does we’ll see a tsunami of of empty houses flooding onto the market as the specufestors panic and fell for the exits. Too late for them of course. The days of never-ending capital growth have gone forever, and soon houses will be affordable again to decent hardworking Australian families.
Peter Brown
Australian Property Bubble Forum
Good point Peter that rents can’t be raised beyond the market price. That is why we want a Land Tax in place….the tax can’t be passed on, tenants will move into the new (hidden) housing stock that were speculative vacancies, as their rents would likely be cheaper. At the same time under-capitalised sites (large blocks of land with tiny old homes) would become uneconomic and new buildings would come into play, also increasing supply. A Land Tax set at a significant enough rate on land valued yearly would add to supply, scare speculators away and act to fund the abolition of harmful taxes like Payroll, Income, GST and the like, just like Dr Ken Henry wanted to. Tax havens become obsolete as you cant hide land. This would be a fairer way to run society, providing a re-balance back toward genuine entrepreneurial activity, not the speculative largesse that has brought the global economy to its knees of recent.
I wish we had the resources to do a similar study in Sydney. My bet is that we would discover a similar amount of spin occurs up there with ‘tight vacancy rates’, forcing FHO’s & renters to behave desperately. ‘Nowhere to live’ was the same sort of catch cry they had in California before the crash too.
This housing price bubble we have seen in Australia has been the most successful in the world. It has a crucial part of the belief system of many Australians that houses will only go up and up regardless of any other factors. Governments have assisted in maintaining the bubble in various ways. I hate to think what will happen to consumer confidence if prices were to drop. (We already have the highest male suicides in the world!)
I’m a self funded retiree, have not spent even a single night away from my home in the last three months and use 56 litres of water per day according to my last quarterly bill. I could certainly use considerably less if I had a rain water tank and/or any water saving devices in the house. So your ‘estimated’ methodology is flawed.
Thus, regarding your statement “the simplest and most likely explanation for low water consumption remains vacancy” – The simplest and most likely explanation for low water consumption is that your ‘estimated’ methodology means that you are picking up the bottom end 2.5% (or whatever?) of the most frugal water users in it perhaps?
I don’t buy the “housing shortage” story either. But it was interesting to note that using your methodology, vacancy rates have decreased over the last three years. (In that regard, might I suggest that you reverse the order of the years on the X-axis in Fig 1.2 to make that less confusing?) Though it is also possible your methodology reflects the fact that more people have become more frugal about many things (including water usage) over the last three years, ie post GFC, moreso than any ‘fact’ that vacancy rates are actually decreasing perhaps?
Re your statement “Property speculators are foregoing rental income in the hope of realising capital gains” – Why would an investor NOT rent out a property to gain income on it? (As well as the supposedly hoped for capital gain. Plus to tap into neg gearing for a lot of them.) Your statement just doesn’t make sense to me.
That said, as a homeowner, I did once let my home sit vacant for quite a few years when I was working overseas. Though I had a rental property as well – And that was always tenanted.
I do actually know one chap who has three houses, lives in one and leaves the other two vacant – It has absolutely nothing to do with landbanking. They are his deceased parent’s and bother’s homes on the family acreage. Where his own home also is – It was originally his grandmother’s. He’s emotionally attached to the property I gather. And pretty wealthy I also gather – So you could tax him as much as you want and much to the disappointment of all the local RE agents who’d very much like to effect a sale tomorrow, he’ll hold that property with two vacant houses on it until he dies I reckon. But he’s the only ‘normal’ person I know who is sitting on vacant property. Most simply just can’t afford it I’d suggest? Though it could be different for developers?
HI Herbie,
you make some valid points ie the change in behaviour of water consumption is an issue, however, there are probably as many vacant homes with leaking taps or underground pipe leakages that are not calculated in our figures. There are over 15,000 empty properties using zero water. At current sub-division rates of 2 – 3 townhouses per quarter acre block, the one vacant home could well equal 3 possible homes. Throughout the report we state that water consumption is a ‘proxy’ for vacancy.
When investors own dozens of properties, having a few vacant actually works to their advantage. Less property on the market -> scarcity -> higher rents/ property values. When rents earn $17K but capital gains can be 5 times that, the real thing investors are looking forward to is the next time they can get their portfolio revalued so they can leverage off the new higher value to buy more land.
As you state, it is quite easy for one reason or another for property to lie vacant. We are trying to raise an important issue here that housing should be a human right. Why should we be so accommodating to lazy land uses when people are going through such hardships to find and/ or keep a roof above their head?
We look forward to refining our report. You have to admit this is a better technique for housing supply than the National Housing Supply council, who laughably say there is an 85,000 home shortfall in Australia because there are 85,000 homeless people.