Real Estate: Bridging the Wealth Divide

Today’s Weekend Markets and Money launches into what we hope will be another intriguing and prosperous year. Some things change, some things stay the same.

But let’s start today in London, England. The Telegraph reported on Tuesday that the gap between real estate prices in London and the rest of England is now at its widest ever.

To put that in numbers, British house prices have fallen 35% in real terms since their peak in 2007. London homes, on the other hand, are 46% above the last boom. The annual growth rate for the city for the 12 months to May was 20%.

Mark Carney, the Governor of the Bank of England, now faces the same dilemma as Australia’s RBA man, Glenn Stevens. They both preside over rentier economies that are based on exploiting capital gains in the land market. You have booming prices in one part of the country and relatively flat conditions everywhere else. But how do you set monetary policy for both? The answer is…you can’t.

Where England heads, it seems, Australia follows. The Australian Financial Review reported yesterday that the gap between homes and corresponding values across capital cities has reached an unprecedented high. This conclusion came after an investigation into the buying power of $1 million within three kilometres of each capital city CBD.

In Sydney, $1 million gets you about ‘a tiny two bedder’ while in Hobart you can pick up a ‘five bedroom home… with stylish interiors, a designer kitchen, Derwent views and a rambling cottage garden.’ Maybe Tassie weather wouldn’t be so bad after all…

The paper also cites evidence that the average age for first home buyers is rising from 25–29 to between 28–38. Not only that,

Record-high house prices are forcing many first time buyers to go straight to investment properties in the hope that rising values will help them bridge the deposit gap for their first home, according to developers and banks.

There are two points to this. One is that the low proportion of first home buyers regularly reported in the mainstream press does not account for those buying investment properties. This omission distorts the statistic. To what extent, I don’t know, but it’s something to be aware of.

The second point is how you can see the real estate cycle continuing to develop right in front you from behaviour like this. Make the most of it while you can.

Not only that, but international money flowing into desirable capital cities with secure property rights also doesn’t look like changing in 2015.

London is the best example of this. The Guardian reported last month that sites for close to 30,000 homes are owned by 10 foreign investors and,

 ‘These tycoons’ totems are nothing but fortified silos for parking “flight capital”, safety deposit boxes stacked high, and clad with reconstituted stone and glass. They will soon march along the Thames, from Battersea to Bermondsey and beyond.

They are described as things like “a new waterside village for London” (Royal Wharf), but the reality is that many will be Potemkin villages, flimsy facades behind which the lights may never even be switched on. Mostly sold off-plan in east Asia, these properties are not so much buy-to-let as buy-to-leave. Many will create empty swaths of zombie town, their retail units left untenanted, their private cinemas unused.

Is this true? Hard to be 100% certain from here, but this we do know: local authorities are biased towards approving these developments because they cash in on the uplift in land values after they give planning permission. And they need money.

Australian councils might find themselves under similar pressures. Parramatta City Council, reported the Australian Financial Review back in December, ‘wants to attract more skyscrapers and big-name commercial tenants to its CBD through a more accommodating planning framework allowing for greater floor-space ratios and no height limits.

Already a long queue of landowners are lining up to sell or to develop existing sites in the CBD, while developers are on the hunt to expand their footprint in the area.

Some things change, some things stay the same.


Callum Newman
for Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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