Melbourne’s “mining boom” is false economy

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By Leith van Onselen

The Saturday Age published an article hailing the boom in Melbourne CBD apartment construction, with Lord Mayor, Robert Doyle, labelling it Melbourne’s own “mining boom”:

If you were to stack all of Melbourne’s newest buildings into a single skyscraper, you would create a tower that would look down on Mount Everest.

A boom in apartments, coupled with a still-healthy business sector, has brought a golden era for Victoria’s capital. For the first time in Melbourne’s history, housing has outstripped office space in the city centre.

Lord mayor Robert Doyle has dubbed it Melbourne’s own ”mining boom”…

Knight Frank research director Richard Jenkins said… ”insatiable” demand for city apartments, which showed no short-term signs of slowing, was being driven by overseas buyers and developers.

Cr Doyle said Melbourne’s boom era could last another decade, though ”not at this pace because this is pretty frenetic”…

Cr Doyle said it was essential the Metro One rail link was built by the state government…

”If they treat it just as a public transport option, they will miss the fact that it is not just about relieving congestion on the trains, it is about driving the economy of the central city.”

With the Melbourne’s manufacturing sector facing near-extinction, it is clear that the authorities have turned to selling citizenship, population growth, and foreign investment to drive growth. This is a false economy to my mind.
The latest annual state accounts by the Australian Bureau of Statistics (ABS) revealed that Victorian real Gross State Product (GSP) grew by only 1.6% in the year to June 2013, but fell by 0.2% when measured on a per capita basis (see next chart).
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To make matters worse, despite overall Victorian GSP growing strongly, real GSP per capita has shown essentially no growth since June 2008 (see next chart).

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This suggests that Victoria’s recent economic growth has indeed been driven by it’s nation-leading population growth (see next chart), with everyone’s share of that growth remaining largely unchanged. At least from a narrow economic perspective, Victorians have treaded water.

ScreenHunter_1446 Mar. 03 07.47

Much of this growth has been driven by increased construction to cater for the growing population, as well as rising foreign investment. Since the beginning of 2008, Melbourne has accounted for 37% of all capital city dwelling approvals, despite comprising only 28% of capital city households (see next chart). Obviously, when the construction stops, so does the growth that it creates, raising question marks about its sustainability.

ScreenHunter_1447 Mar. 03 07.50
Finally, Victoria’s trade deficit is immense, totaling nearly $39 billion in the year to December 2013, suggesting that Melbourne is sucking financial resources from the mining states in order to support its growing population (although a proper comparison would need to include interstate trade flows as well):
ScreenHunter_1448 Mar. 03 07.53
All of which raises the question: what is the end-game of Melbourne’s current economic model? If all the city is doing is growing for growth’s sake, pushing against infrastructure bottlenecks and failing to increase the living standards of the pre-existing population, where does it lead?
Many that live in Melbourne (myself included) would argue that it was a more liveable city a decade ago before the huge surge in the cost of living (think housing), roads and public transport became congested, and residents were forced to stump-up money to fund projects like the desalination plant, which arguably would not have been required had the population not grown so strongly.
High immigration and population growth is fine if it is for a purpose and fits an overall plan. Otherwise, it is merely uncoordinated ponzi-nomics. Melbourne seems to be following the latter path.

Comments

  1. reusachtigeMEMBER

    Nah, she’ll be right. The more booming construction the better! Air needs a place to live too…

  2. > Melbourne seems to be following the latte path.

    There – fixed that for you. You can thank me now.

    Cappuccino Economy – FTW!

  3. Leith, in the event of an economic downturn, do you see population growth slowing? I would have thought many overseas students will be unable stay here if they don’t find work, and expat workers are likely to find AUD denominated salaries less attractive in the event of a significant depreciation. In my view, this highlights the pro-cyclical effect of immigration on headline nominal GDP.

    • reusachtigeMEMBER

      All that and also the political pressure that would be applied to cut immigration anyway. A feedback loop in the making for sure! We can only hope…

      • +1 hope so
        All finger pointing will be proudly directed to foreign purchasers and specufestors when the time comes.

    • After 40 years in Melbourne I feel the city is reaching a tipping point on ‘liveability’.

      • Sydney has reached it’s tipping point also, something tangible has changed, it no longer feels like the same city, being overcrowded, less friendly, greedier occupants. People fighting over tiny blocks to live in dog boxes and paying over the nose for the privilege.

      • At least Melbourne is experiencing a supply side response to higher housing prices!

        Sydney isn’t because of the planning laws. And besides… If the Chinese are financing these new developments and things go bust… they take the loss and we (Australian community) still get the apartments…

        All of this is a function of us importing the Chinese housing bubble which is in its last stages now..

    • Absolutely. Population growth would likely slow, as it usually does during recessions/slowdowns. This makes Victoria’s ponzi model even more pro-cyclical and dangerous. Ireland is an extreme case of what can go wrong.

    • The quickest way to thin out the numbers in Melbourne would be to crack down on cash in hand work in hospitality, trades, taxi-driving, basically anything that exploits those who are desperate enough to work for next to nothing, or are subsidising their centerlink payments. Though I understand the need to subsidise centerlink, having been on it years ago when it actually did (just) cover cost of living.

  4. Great closing paragraph, so true. Melbourne pre-2003 was great, then the property boom kicked off.

  5. Thanks Leith,

    A really good piece and it provides an accurate picture of the state of things in Melbourne

    I would definitely agree that the quality of living in Melbourne has dropped over the past decade, the booming property market commenced in 2001, prior to that it was possible to purchase a 3br family home in an average suburb like Mount Waverley for $320k

    Recent auction results show that you now wouldn’t get much or any change from $1 million, though this has been primary driven by international buyers over the past year due to them wanting to buy in the school zone.. you can still pick up a 3br in Blackburn for $650k

    Traffic congestion is an issue that now extends to the weekends, peak hour begins an hour earlier than it did a decade ago on the Monash freeway

    The desal plant has been a costly elephant.

    My major gripe over the past 2-3 years has been the amount of apartment projects being given the green light, around my office there is a 50 storey tower that has just been completed, a 55 storey tower almost done and now approval for a 63 and 55 storey tower next door, these will no doubt be lopped off and sold to overseas investors and students

    While in the short term it does create jobs in construction, what is the long term impact of these ghost towers

    • Long term impact is ghettos. We’ve got 3-4 storey boxy apartment blocks going up in the west and absent the Asian buyers they eventually get sold to NRAS investors. The change to demographic and local amenity is immediate. The local agent and council spruik that they’ll house dual income professional couples turned out to be completely farcical. The whole process post construction took two years before they achieved an occupancy rate of even 50% and this is 100m from a zone 1 railway station. So much for supply shortage.

      • I think you’ll find these apartment developments are either NRAS or not from day 1, they don’t become NRAS at a later date

        We have the same thing happening in the East, especially the middle ring like Burwood, East Burwood, where it is taking three years for a development to get off the ground, these are usually the developments that aren’t close to transport. Anecdotally, I only see asian australians living in them, a year or two later they come onto the market at a heavily reduced price, $449k off the plan is now $360k after two years and they still can’t sell

        NRAS sounded good in theory but have failed to live up to expectations, the restrictions in place in terms of the tenants income made it quite difficult for investors to find enough tenants and the rents I have seen offered to these tenants wasn’t that much below the market rate, just from what I have seen

        The bonus for renters is that there is an oversupply in the suburbs, Southabank and Stkilda Rd, offer $30 – $50 less pw than the advertised rent and you will probably get an OK

  6. PessimistMEMBER

    what is the long term impact of these ghost towers

    It is ammunition for the big bang.

  7. I’m not sure there’s been a ‘huge surge in the cost of living’. Average annual growth of 2.9% (NATSEM living cost index) is not a huge surge and well and truly put into the shade by increases in incomes. One can use either the ABS CPI or living costs index which does include mortgage interest to show this. I would agree that the building boom in Melb is not in line with the State’s growth and it’s bound to crash over though.

    • Fair enough. I was obviously referring mostly to housing, where rental costs and mortgage costs as a proportion of median household incomes rose by 21% and 13% respectively between the 2006 and 2011 census’.

  8. I spotted John Edwards of Residex on the Skybus from Tullamarine today.

    I could hear the words ‘recession’ and ‘unemployment’ liberally thrown about in his conversation with the gent on the next seat .. I bet he won’t use the ‘R’ word in the Residex press release though 😉

    • What really happened was that he spotted you first and then decided to loudly speak a few choice words to stir-up things on this forum.

  9. Liu MianzhiMEMBER

    All true enough, but if you can’t stop the money going in to residential real estate anyway (and I fear the trend is indeed bigger than Dennis Napthine), it is surely better to let it increase supply rather than just inflate the price of land. At least you have something to show for it after the boom ends.

    Half of inner Melbourne was built with silly money. The Block Arcade bankrupted its investors, but it is still there and pulling in the tourists 120 years later. And much of the housing and suburbs opened up in the 1880s and 1890s provided good supply for decades to come.

    Admittedly, it is hard to see tourists admiring one bedroom high-rise dogboxes in 120 years time. But hopefully some of it will have enduring value.

    The lack of a corresponding investment boom is disappointing though. It would be nice if we could find some private investors silly enough to do their dough on excessive infrastructure, which is how many of Melbourne’s tramways were built until they went broke and were taken over by the government.

  10. Thanks for your emphasis on per capita income and GDP and your reference to the “hidden” declines in standards of living that are not measured.

    Travel conditions, travel times, street crowding, park crowding, friendliness, community cohesion, social mobility based on intellect and hard work not family socio-economic status, general physical and mental health and well being, lack of stress most of the time, lower dependence on drugs and alcohol for enjoyment. All of these are keys to quality of life that are not measured in the quest for bigger populations to drive corporate growth and executive salaries. Divorce rates, proportion of single parent families, levels of volunteering, time spent playing with or primarily devoted to children are probably also relevant.

    • Very well put. Quality of life laid before the altar of never ending exponential growth.

      Even sadder that it is generally perpetuated by those who already enjoy the best.

  11. Ironic that this article appears with an advertisement spruiking “new Melbourne apartments from $339,000”.

  12. Great article, Leith. I wish more of your articles appeared in the mainstream media. I also wish there was some way to force the politicians to read more of your articles. Daily.

    • Email the article to your local member. Can’t guarantee that they will read it, or even open it.

      Easy to automate as well if you are so inclined.