Lessons from the 2018-19 Suburban Land Agency annual report.
The 2018-19 Suburban Land Agency (SLA) annual report reveals that the agency failed to meet its targets for land revenue, operating profit, dividend and total returns to the Territory, for the year.
Revenue from “contracts with customers” (i.e., land sales) was $484 million which is 31% below the original budget target of $701.6 million. The SLA operating surplus was $191 million, or 17% below the budget estimate of $229.7 million. The dividend was, as a result, reduced commensurately, by $38.7 million. The Agency’s total returns to the Territory were $377.4 million against a budget target of $503.3 million; a shortfall of 25%.
We have previously written about the increasing and unsustainable reliance of the operating budget on land revenues. The impact on the ACT budget of the failure of the SLA to meet its mandated 2018-19 targets can only be determined once the Territory’s annual financial statements, and relevant publications from the Australian Bureau of Statistics, become available.
In seeking to explain its problematic financial performance, the SLA annual report points to lower land sales volumes and general market conditions as the cause, stating on page 17:
“During 2018-19, land sale volumes slowed in SLA estates. This was mainly due to: tighter financial market conditions and negative market sentiment (influenced by Sydney and Melbourne markets); uncertainty in the lead up to the Federal election; increasing competition in other estates; and changing housing demand preferences from buyers (from freestanding housing to apartments and townhouses)”.
The Agency also reported that there were (as at 30 June 2019) 600 blocks of land available for purchase across four suburbs in SLA estates. While the implications of the SLA’s poor financial performance for the state of the ACT operating budget are undoubtedly concerning, some might argue that with land available over the counter, the Government is finally getting on top of supply constraints for standalone dwelling sites, albeit due to external conditions, that have made entry into homeownership impossible for a significant part of the market.
Unfortunately, we have found no evidence to support the claim made by the SLA that there has been a change, of any significance, in preference or choice from standalone dwellings to apartments. Data from the ABS indicates that in 2018-19, the median price for attached dwellings (units and townhouses) in Canberra increased by 1.7%, while the median price for standalone dwellings increased by 2.7%.
The market conditions were hardly negative, and for a Government land supply monopoly to expect higher price growth would be socially and economically irresponsible. The relatively stronger price growth for detached housing negates the assertion that housing preferences have shifted. The law of supply and demand is almost certainly the most brutally rigorous law in the land.
How, therefore, does one reconcile the unsold land on the shelf and solid price growth for detached housing?
A search on the SLA website reveals that the lowest priced land currently available over the counter is a single 341 square meter block in Taylor, for $295,000 (at $865 per square meter). Using standard industry calculators of the cost of housing construction in Canberra the lower end estimate of purchasing this block and building a modest three bedroom house on it would be $550,000. Using the criteria adopted by the Government in its 2018 Housing Strategy, which we note is premised on a severely unaffordable house price to income ratio, this price is beyond the reach of households in the second and well into the third income quintile, i.e., almost half of the residents of the ACT. In addition, there are significant other barriers to entry as the household will need to save in excess of $100,000 for a deposit and other charges while renting. In other words, the land on the shelf is simply unaffordable for a large section of the Canberra community.
Returning to financial results, it is instructive to compare the 2018-19 actual financial results with the corresponding results for the previous year (2017-18). This comparison reveals that the SLA’s revenue from land sales increased by 24% and the operating surplus increased by 18% from $161.3 million to $229.7 million with a commensurate increase in dividend. Total returns to the Territory increased by 17% over the previous year.
One area where the results went backwards compared to the previous year, was in the number of dwelling sites sold. In 2018-19 the SLA sold 3,204 sites compared to 4,203 sites in 2017-18, that is, 999 fewer dwelling sites. In short, despite selling far less land the Agency earned far more revenue and made a far higher profit compared to the previous year.
What this means is that any expectation of an improvement in conditions for entry into homeownership is illusory. In the context of lower than target sales, and indeed if the demand had softened, almost any commercial business would adjust its price down to the market clearing price. It would not be unusual in such circumstances for a business operating in a commercial and competitive environment to reduce profit margins in order to maintain volume and inventory turnover. Notably, the SLA’s gross profit margin was actually higher at 78.7% than the original budget of 70.8%. If the Agency was concerned, as it claims, about competition in other estates, it certainly is not evident in its commercial decisions. Indeed, the financial outcomes it achieved, driven no doubt by the Government’s short term revenue and budgetary considerations, can only be described as monopolistic and extractive.
This is quite apparent from the 2018-19 budget targets set for the Agency. For example, the 2018-19 budget target for land sales revenue was 80% higher than the 2017-18 actual result. The Agency was required to deliver a 42% higher dividend and a 55% increase in its total returns to the Territory compared to 2017-18. The target for residential dwelling sites was reduced from the 4,203 sites sold in 2017-18 to 4,060 or by 3%. As noted above, the actual result was 3,204 sites or 25% below the reduced target.
While the SLA’s aggregate supply and financial targets are clearly antithetical to housing affordability targets specific to affordable housing were also not met. The original budget target of 512 was just under 13% of the total supply target – a proportion which is lower than the 15% supply target that the Government has adopted under its housing affordability strategy. In actual effect, just 353 affordable dwelling sites were delivered, 29% below the budget target, and 11% of the total supply. In 2017-18, the Agency undersupplied affordable dwelling sites by 18%. On the positive side, accepting that the target was clearly inadequate the supply target for community housing sites was met and in fact exceeded. Notably, that target was set some 41% lower than the previous year. Over the two years 2017-18 and 2018-19, just 79 community housing sites have been made available.
In May 2018 Professor Peter Phibbs of the Australian Housing and Urban Research Institute at the University of Sydney described the ACT Government’s targets for affordable and community housing as “so small they’re almost insignificant”. Tellingly the targets that Professor Phibbs was referring to were 41% higher than last year’s target and even then the SLA failed to meet the new reduced target by 29%.
On the basis of the data included in the SLA 2018-19 annual report, it is certainly open to an objective observer to question whether the ACT Government’s purported concern about affordable housing is genuine.