The authors comment
There has been an unprecedented surge in high-rise apartment completions in Melbourne since the late 2000s – far more than in Sydney, which was once the epicentre of such development. They are located primarily in the inner city, particularly the City of Melbourne (COM) and suburbs on the fringe of the COM.
The apartment surge is just beginning. The inner-city skyline was transformed in the three years 2010-2012 when 22,605 apartments were completed. This transformation will accelerate in the next few years when around 39,000 additional apartments are likely to be completed. These are all apartments which have been released for sale (that is, part of developments where off-the-plan marketing has begun) or where construction has commenced.
The apartment boom is driving Melbourne’s extraordinary share of Australia’s dwelling approvals. In 2012-13 they constituted 24.3% of the Australian total. Yet Melbourne’s share of Australia’s population in mid-2012 was 18.5%.
Does this mean that households in Melbourne are embracing inner-city apartment living? Our analysis indicates that it does not. Rather, it is an investor rather than an occupier driven boom. Investors are responding to financial incentives, including those deriving from negative gearing.
Apartment residents remain overwhelmingly young singles or couples who are renters. As in the past, they are transients who will move into family-friendly housing when they decide to raise a family. Most of the growth in new households in Melbourne will be looking for such housing. There is no large potential source of apartment occupiers (including empty nesters) come near to filling the expansion in the apartment stock expected.
Melbourne is not like Sydney, where restrictions on outer suburban expansion have compelled 11% of households (including some families with children) to occupy apartments. In Melbourne, there are huge tracts of outer suburban land zoned for the development. Detached houses can be bought for far less than two bedroom apartments in the inner city. By 2011, only 4% of households in Melbourne lived in apartments of four stories or more.
In the case of the COM, there has been an increase in the number of those who live and work there. Nevertheless, by 2011, they comprised just 27,912 of the 344,790 persons who worked in the COM. Overseas students have also been an important source of apartment occupiers. In addition, to our surprise, there has been an increase in the number of those who live in the COM and work outside it. They increased by 5,246 between 2006 and 2011 to 19,108.
There will have to be massive increases in the numbers in each of these categories if they are to approximate the expected surge in apartments on the market. Local apartment developers, who dominate the inner suburb apartment market are backing off on new proposals. Overseas developers are undeterred. They have the resources to outbid locals for sites in the inner city and are likely to approach 100% of completed apartments in this area by 2016. They are responsible for the recent surge in proposals for CBD apartment towers.The authors argue that
Melbourne is a more attractive to developers than Sydney because there are more potential sites for high-rise apartment projects which can be developed at prices affordable to most investors (less than $500,000). These pricing priorities are also responsible for the increasing share of apartment projects comprising tiny apartments (mostly sub 50 square metres in net living area).
Inner Melbourne has also attracted because of its amenities. These have been enhanced by massive State Government and COM investment in infrastructure (including CityLink and Southern Cross Station), public spaces (Federation Square), parks (Birrarung Marr) and laneways. This investment was intended to enhance Melbourne’s prospects of becoming a centre of knowledge-intensive industries by enhancing the city’s liveability. It was hoped that this would attract the ‘creative class’ believed to drive this transformation. For its part, the COM has long wanted to transform the CBD and surrounds into an inviting mix for residence, work and entertainment.
This investment has helped in the fashioning of a ‘Melbourne Story’, which has been particularly attractive to Asian developers and investors.
However the apartment boom is squandering this investment. It is delivering tiny, poor quality apartments that will repel rather than attract the ‘creative class’. The COM planners have recently issued a withering critique of the outcome. The chief advocate of the COM’s original vision, Rob Adams, has declared that the current ‘flood’ of apartments has gone too far.
Despite warnings of an apartment glut the State Government and the COM are pressing on with plans to facilitate further urban renewal. They include Fishermans Bend and the City North and Arden-Macauley precincts of the COM to the north of the CBD. The COM’s planning blueprint assumes that the number of dwellings in the COM will increase from 67,533 in 2012 to 110,533 in 2031.
The State Government wants the apartment boom to continue because it is one of the few bright lights of the current Melbourne economy. It can ignore the COM planners’ concerns because it holds the planning authority for apartment towers in excess of 25,000 square metres floor space. It is approving almost all proposals put to it. The outlook is that the investment in the city’s amenities will be squandered. The city is heading towards becoming a dormitory rather than a centre for knowledge-intensive industries. The balance between apartments and offices in the CBD is swinging rapidly towards the former with the prospect that apartments will crowd out sites for offices in prime CBD locations.
In the three years 2013 to 2015 there will be three times the amount of floor space completed for apartments in the CBD and Docklands for new office space. The planning elites shaping Melbourne’s future are ignoring the disconnection between the investor driven apartment boom and real housing preferences. Their plans for the inner city’s expansion and for its economy are based on a property boom that our analysis indicates will implode.They go on to suggest that the COM case for massive inner-city growth is unconvincing
The COM commissioned two consulting firms to advise it on the city’s economic prospects. The first by ACIL Tasman puts some flesh on the widely disseminated claim that the COM is already a thriving knowledge city. The report is optimistic that the COM is well placed to contribute to the long-standing State Government ambition to make it a focal point of knowledge industries in Victoria. It states that the COM already has recognized strengths in fields ‘such as advanced manufacturing, biotechnology, creative industries (particularly design) event management, financial services’ and so on. It also has key ‘World Class’ assets including the Walter and Eliza Hall Institute and the University of Melbourne.
ACIL Tasman repeats the Florida thesis discussed earlier in the context of the Victorian Government’s original vision for Docklands. It states that:
Melbourne has many of the attributes that Richard Florida (the leading international theorist on what attracts creative people to certain locations) believes the “the creative class” attaches much importance to, such as a vibrant and diverse street life; compact, distinctive and authentic neighbourhoods with a diversity of buildings; a finely meshed street pattern; and pedestrian-friendly public spaces.
The Report provides a good account of the kind of economy so many of Australia’s leaders aspire to create, now that the impetus from the mining investment boom is waning. The hope is that the exports of services into Asia will fill the gap. Unfortunately, the Report does not document the COM’s achievements so far. There are no case studies of successful start-ups, for example, in bio-technology. It does not acknowledge that the ‘World Class’ assets, including the Walter and Eliza Hall Institute are mainly academic research institutes almost totally dependent on Commonwealth and State government support. The Institute does indeed have a fine research record, but the revenue it generates from royalties or other commercial offshoots is minimal (just $2.5 million in 2011).
This is not to knock these aspirations. It is vital for Victoria that new knowledge industries do emerge in the Asian Century. The point is rather that the aspirations expressed in the ACIL Tasman Report and the COM’s own claims to be a knowledge city are a flimsy base for the COM’s dwelling and population growth projections. The second report commissioned by the COM was by SGS Economics & Planning (SGS). It is entitled, Understanding the property and economic drivers of housing and was released in January 2013. It offers an interpretation of the factors generating the surge in job creation in the city between 2006 and 2011. It argues that these factors will continue to drive job creation in the COM and that many of those attracted to these jobs will be interested in residing in the COM.
The SGS report shows that, over the thirty years 1961 to the early 1990s, there was little growth in employment in the CBD or in the COM. Thereafter, job growth was rapid, except for a slowdown in the early 2000s. As noted earlier, an unprecedented 46% of all job growth in Greater Melbourne occurred in the COM over the years 2006-2011.
The report makes a convincing case that this job surge in the COM since early the 1990s was a consequence of successive Hawke and Keating Government economic reforms. They included the floating of the Australian dollar, the dismantling of restrictions on foreign financial firms operating in Australia and on international financial transactions and tariff reductions which forced Australian-based enterprises to compete in the international marketplace.
The result was a massive increase in trade, information and of commercial interchange with the global economy. SGS argue that Sydney and Melbourne have been the main beneficiaries of this process. They have provided the dominant sites for the international and domestic firms engaged in this interchange. Also, their size has generated agglomeration effects which SGS puts great store on. These refer to the synergies and efficiencies which emerge when there is a high concentration of professional service firms clustered around the main domestic and international institutions in the service economy (like the big four banks and Telstra). According to SGS, these agglomeration advantages will become more pronounced as Sydney and Melbourne continue to grow.
Though to some degree in Sydney’s shadow, Melbourne has done relatively well in recent years because it has provided more space for office expansion (Docklands), much cheaper rents than are available in Sydney and improvements in ease of access to the CBD (CityLink and the Ring Road), again by comparison with Sydney. SGS argue that:
For Melbourne, the ongoing shift in global trade is likely to mean continued growth of the knowledge intensive and Advanced Business Service sector. This is one key area in which Melbourne is internationally competitive… Given Melbourne is a location with high liveability and a highly skilled work force, it is very likely it will continue to be an attractive location for such firms in the long term, provided, of course, the city can maintain the competitive strengths inherent in its urban quality and functionality.
Interestingly the SGS report does not play up the ‘knowledge city’ factor. It merely suggests that, with continued growth in the finance sector and associated professional services, this will attract more professionals and in the process generate demand for a range of supporting services in retail, cafes etc. SGS goes on to say that: ‘The amenity that this creates will also attract some firms e.g. creative architecture/ IT/ start-up firms into the surrounding areas.’ The operative word is ‘some’.
The SGS report is much thinner on the prospects of the additional workers it believes will work in the COM deciding to reside in the COM. It asserts that the ‘shift towards inner city living is likely to continue’. It cites international evidence that well paid knowledge workers like to live in ‘dense urban environments and large cities, reside in well-established knowledge communities and seek cultural and education opportunities as well as affordable housing’. But, there is no probing into whether the kind of apartment stock being added to the COM will be attractive to these knowledge workers. Nor does SGS grapple with the recent evidence, cited above, that only a minority of the extra persons employed in the COM were resident there by 2011.
The weak point in the SGS report is that it does not substantiate its argument that the COM is now ‘internationally competitive’ in the provision of services. The COM has undoubtedly benefited from its role as a financial mediator between Australia and the rest of the world. But, the main impetus to employment in the COM in recent years has been the provision of financial and professional services within Australia which are linked to Australia’s rapid economic and population growth during the 2000s and the increased income of most its residents.
Employment growth in the COM has already diminished, with the peaking of the mineral investment boom and the overall slowdown in the Australian economy. As credit growth has slowed, the big banks and finance enterprises are no longer taking on new staff. Rather, some are looking to augment their profits by aggressive outsourcing and offshoring. As a consequence, the Melbourne office market is softening. According to BIS Shrapnel, Melbourne faces a ‘bleak’ two year period.
One indicator is that the net absorption of office space in the Melbourne CBD contracted slightly in the year to July 2013.
There is reason to believe that there will be no rapid revival of the housing and consumption boom of the 2000s. As a number of economic commentators have pointed out, during the commodity price boom of the past decade, nearly half of the increase in Australian residents’ real income came from the improvement in Australia’s terms of trade. As a consequence residents were able to buy more imported stuff per Australian dollar than before.
This source of real income growth has come to an end with the slump in commodity prices and decline in the value of the Australian dollar. Maybe it is just a short-term phenomenon. Nonetheless, its impact will be significant while it lasts because, if the terms of trade do continue to fall, the impact will be felt as a contraction of real income. The outlook, according to the Australian Treasury, is that Australia’s terms of trade will decline steadily over a prolonged period to 2029-30. If this is the case, one major source for the property boom of the 2000s, according to the Reserve Bank and other authorities quoted earlier, will diminish. This is the increase in real household income which made it possible for households to take on high levels of mortgage debt and the mortgage payments resulting.
If SGS is correct, the situation will be rescued by Melbourne’s ‘internationally competitive’ knowledge-intensive industries. However, the recent record is not encouraging. The education industry has been by far the largest exporter of services in Victoria. This derives from the expenditure of overseas students on fees and expenses while in Australia. The COM has been an important site for this industry, not just via enrolments at RMIT and Melbourne University but also by branches of regional universities, notably Central Queensland University. It has also been a focus for TAFE institutions offering hospitality courses. At its peak in the late 2000s, there was a string of kitchens and hairdressing salons in the COM providing such courses. Most are now gone. As noted earlier, enrolments in the higher-education sector have also declined. The export of education-related services from Victoria, which peaked at $5.5 billion in 2009-10 have since been estimated to have fallen to $4.4 billion in 2011-12.
Official estimates for the export of telecommunication and business services from Victoria indicate that the level is low relative to NSW and declining. The peak year for the export of business services (which includes legal, accounting and management consulting as well as architectural, engineering and scientific services) was in 2008-09 when they reached $1.93bn (compared with $4.4bn in NSW). After falling sharply in 2009-10, they have since increased to $1.87bn in 2011-12. We conclude that there is no convincing case that the COM will repeat the jobs boom of the period 2006-2011 in the medium term. If this is the case, it is unlikely that this important driver of demand for apartments will continue as in the recent past.
We conclude the warnings by BIS Shrapnel and others are correct. The massive number of apartment completions to be completed from already released projects plus those soon to be released by overseas developers in the CBD and vicinity is far more than is likely to be needed.