Australia's embrace of high-rise living has short-term cost

Mon Jul 21, 2014 12:08am EDT

* Housing starts at record levels as low rates fuel long-awaited recovery

* High-rise apartments take bigger share, but have longer lead times

* Land costs, demographics, Asian demand driving shift to apartments

By Wayne Cole

SYDNEY, July 21 (Reuters) - Australia is enjoying a long-desired housing renaissance as a record amount of new building gets under way, and a shift in fashion toward high-rise living should lengthen its life span even if it tempers its immediate benefits.

In the past, the focus was all on detached houses which gave a concentrated burst to economic growth of 1 to 2 percentage points over 12-18 months. Apartment towers take far longer to get approved and built, spreading the gains over several years.

That's inconvenient for the Reserve Bank of Australia (RBA), which had hoped housing would be running hotter right now to help offset a cooling mining sector, and only adds to the case for it keeping interest rates at a record low of 2.5 percent for longer.

The wait has already been interminable. While the central bank began cutting rates in late 2011, it took until the start of this year for home construction to come to life.

There is no doubt a revival is finally under way. The value of home building done in the first quarter hit a four-year high of A$11.3 billion ($10.61 billion), while the number of new homes started was up 22 percent on a year earlier at a record 48,964.

Starts are running at an annual 190,000, heights not seen since 1994. The difference now is the emphasis on apartments.

"Currently, two high-rise apartments are being built for every five detached houses, which is double the historical rate," said Kim Hawtrey, associate director with BIS Shrapnel.

"In the next two years we'll also see the recent emphasis on high-rise units continue."

It typically takes six months to get approval to build a house, but that stretches to three years for the type of inner-city towers that are now in favour.

Just last month, three sky-high blocks were approved in Melbourne, including a 100-storey behemoth the Singaporean developer claims will be the tallest in the southern hemisphere. That followed the approval of five towers back in February.

The giant 319-metre Australia 108 tower will cost A$900 million and have 1,105 apartments.

Yet while these approvals show up immediately in the monthly data, building them is far more long-winded. Construction on the tower does not start until the middle of next year and it won't be complete until sometime in 2019.

So it could be five years before the ultimate owners have a need to buy all the furniture, white goods and paraphernalia that usually goes with moving into a new home.

It was notable that, after a strong start to the year, retail sales of household goods fell in each of March, April and May, a blow to hopes of a sustained pick up in consumer demand.

ASIANS BUYING AND BUILDING

The rise of apartment living reflects a range of factors both home-grown and foreign.

One is cost. Australians' love affair with houses that have gardens has led to sprawling cities and put a premium on land. The median price of home lots in the five largest cities climbed 140 percent over the last decade, well ahead of consumer price inflation which rose 30 percent.

Another is demographics. As the population ages, developers are wagering empty nesters will looking to free the equity locked in their houses and trade down to something smaller.

And, increasingly, there has been a rising tide of investment from offshore, particularly Asia.

While the data is sketchy it shows approvals for foreign buyers rose 99 percent over the nine months to March to almost reach A$25 billion, estimates Scott Haslem, an economist at UBS.

The bulk of that is for new apartment buildings, mostly in inner Sydney and Melbourne, and shows little regard for high valuations or an historically strong currency.

"The persistent nature of this demand is being based at least partly on 'international risk diversification' by foreigners," says Haslem. "We see a likely ongoing long-term uptrend of foreign investment in housing, which supports our still positive view on the outlook." ($1 = 1.0653 Australian Dollars) (Reporting by Wayne Cole; Editing by Kim Coghill)