The second instalment in ‘Ten Reasons Why the Boom has Ten Years to Run’ is something I call “The Densification Dividend”.
Think about this for a sec.
Imagine a suburb with one house. The house is valued at $1m. The median house price for that suburb is, obviously, $1m.
Now imagine some one comes along, subdivides the house and builds another house on the back block. Both houses are now valued at $600,000.
But now what’s the new median price of this suburb?
$600,000.
So the suburb has seen the median price fall from $1m to $600K. That’s a 40% fall. (Steve Keen is finally right. I had to construct a theoretical universe for it to happen, but a win’s a win.)
But do you see what’s happened here? Home-owners (only one of them) have seen the value of their property holdings increase 20%. But the median house price has actually fallen 40%.
Whooo-oooo.
Prices are down. Equity’s up. This is the Twilight Zone.
Someone once said that statistics are like a bikini. What they reveal is exciting, but what they conceal is vital.
We never hear the footnotes that go with property statics when people are talking about them in the papers or on the news. But no statistic is perfect. They’re an abstraction of reality. They’re not reality itself.
And that’s definitely true of median house prices. They’re good for giving you an indication of trends, particularly over short to medium time frames.
But they’re no good at capturing structural changes in the market – in this case, a move to higher-density living.
Now, what does this mean for us?
Well, pretty much across all the capital cities, there is a relentless drive right now towards higher density housing. Housing is being structurally reconstituted.
For a long time we’ve had a reputation in Australia for large homes on sprawling quarter acre blocks. We built as if we had an abundance of land and endless plains to share. (Where did they get that idea?)
However, the size of new homes actually peaked in 2009 at an average of 222sq metres.
And since the GFC it’s been falling. The average new home now stands at 192sqm, making it smaller than in 2001.
Partly that’s about the wave of apartment building we’ve seen in recent years, but detached house sizes are falling too – from 249sqm in 2009 to 223sqm today.
And our sprawling back yards are going the way of the Hills Hoist. The average lot size of vacant lots in the capitals has fallen from around 700 sqm in 1996, to about 450sqm today.
But none of this will be any news to investors.
Sub-division deals or townhouse developments can be some of most profitable deals going. They’re some of the sweetest fruit on the property tree, and the easy ones do seem like they’re getting harder to come by.
And the trend towards smaller houses and smaller lots seems locked in. It’s not going anywhere. For land in particular, it’s One Direction only.
(That was for you Niall. If you’re reading.)
And then there were some really interesting stats in the latest census results. The one that really jumped out at me was the surge in townhouse developments.
We here are lot about apartments but really, the biggest news in property is the emergence of the townhouse.
Between 2006 and 2016, the number of townhouses in Australia increased a massive 61%! Compare that with 14% for high-rises, and 11% for detached houses.
Now think about what that means.
Statistically speaking, higher density housing is putting downward pressure on median prices. Townhouses are cheaper than the houses they replace, even though there’s more of them per block.
So if we imagine an inner-city suburb where prices are growing at say 10% a year, those equity gains aren’t equally distributed.
Recent generations of home buyers – say someone who bought a new townhouse – they’re seeing house prices increase by 10%.
But older generations of buyers, say those who bought the original quarter acre blocks, they’re seeing that 10%, plus a whole lot more – the value of being potentially able to subdivide and develop.
And so there’s a boom within a boom – the older generations of buyers get two booms for their buck.
And the longer you’ve been in the market, the bigger you “densification dividend” tends to be.
But that’s the thing. Time makes “old buyers” of everyone eventually. As the relentless densification of our suburbs marches on, eventually everyone finds themselves the beneficiaries of a densification dividend.
I mean, Brisbane is a classic example. There’s a whole bunch of high-rises going up, but mostly they’re not replacing detached houses. Mostly they’re replacing those old 6-packs you see about the place.
So even if you bought a unit in one of those 6-packs 20 years ago – even if you bought something that you thought never would be – you’re still eligible for the densification dividend today.
But it isn’t something that is captured by statistics about median prices.
And if you look at the planning strategies for all the capitals cities, increasing densification is a cornerstone of all of them.
That means that any buyer in the next 10-20 years is going to be eligible for a densification dividend eventually.
Even if it doesn’t show up in the suburb-level stats.
This is what I mean when I say its the hidden boom within a boom.
It’s also one of the reasons why I’m more interested in land prices than house prices, but everyone talks about house prices so what are you going to do.
And it’s one more reason why this current boom has at least 10 years to run. This is number two. If you missed number 1, you can read it here.
So remember it. Densification dividend. I just made the term up, but I reckon you’ll be hearing more about it soon.
Have you see a densification dividend on any of your properties?
ron goddard says
hi jonno,
the area of attadale where i live is one of those suburbs thats been ‘outzoned’, meaning that the ‘R’ coding is now so tight that almost all of the lots in the area are locked into 800-1200 sqm . a bit different to outer areas like beliar and hammond park where the lot size is betwween 240-340 sqms and the buildings adjoin. we are doing a development now of 8 homes on blocks ranging from 245-285 sqms.
perth is going through a most difficult time now as you are well aware, so builders are falling over themselves to get work and quite a few are going to the ‘wall’.
notwithstanding that we know that things will aright themselves soon so we keep on ‘keeping on’ developing. we have a pool of investors funding the projects of which quite a few are in the pipeline. so fingers crossed we will make some dosh.
my son has me out every day looking the type of property you are talking about. i go to about 10 different suburbs and doorknock. usually these properties are for 2-5 dwellings. other than that we pick up subdivided land in outer areas. i am a very busy man i can tell you, but hard work never hurt anybody..its the worry that upsets people:-) (stress) cheers from ron in west oz
hugh says
Look at Mark Rolton’s programs for subdividing, options etc.
ron goddard says
thank you hugh..we started his program before you were born 🙂 i well remember a chap who bought the majestic hotel on a $2,000 ‘option’ in 1981; price $1.8m. 7.5 acres of land(plus the hotel) overlooking melville water and just 6 miles from the perth g.p.o. seems a super bargain now. fast forward one year to settlement.(1982) this man did actually settle with a contemporaneous settlement of $5m to the one and only alan bond. fast forward again to 1988 and alan bond got $17m from the japanese and they got their fingers burnt mightily. i valued the property at $12m at the time. the japs also bought ‘sun city’ i a joint deal and that got bondie out of a bit of strife:-) anyway the plot is always the same just the deals differ in location and price just to protect the innocent:-)
cheers from ron in west oz
Jose Olivera says
Property is a necessity of life and they should not play games with it as they have for the last 40 years.
To be honest I keep on thinking how can a person earning 55k per year (there is a lot of them) afford to even mount a deposit for a unit??? Are we all crazy that we have sold our country to the first foreigner that makes the highest bid???