Paul Wallbank – Brilliant Communications

Now may not be a good time to buy Melbourne property

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Paul Wallbank

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There’s plenty of indicators that can be used to predict the health of an economy

While my favourite is the mini-skirt index, the most reliable is when rich folk start building huge skyscrapers.

Whenever developers propose a hundred storey building it marks the top of the property cycle. Should they get to actually build the thing, you can be guaranteed a nasty economic downturn is about to hit.

The Skyscraper Index’s historical record

This track record was set with the very first megatower – the Empire State building was started just before the 1929 stock market crash and completed as the great depression tightened its hold on the United States.

Forty years later New York’s ill-fated World Trade Center opened just in time to welcome the 1973 oil shock and subsequent recession.

A more recent example is Dubai’s Burj Khalifa, the world’s tallest building which was topped out in time for the city’s property crash and economic rescue by neighbouring Abu Dhabi.

In Australia, the most notable downfall was 1980s entrepreneur Alan Bond who planned to build a 140 storey tower on the World Square site opposite Sydney’s Town Hall.

The site was excavated but Bond went broke before work started and the hole remained for over a decade until a more modest 40 storey tower was built on the site.

Australia 108

So the news that property developers want to build a 108 storey tower on Melbourne’s Southbank should worry the Victorian government and unsettle the state’s property owners.

What’s always notable about these super skyscrapers is the garishness of the project. While Australia 108 won’t match the Burj for sheer Las Vegas gaudiness, it will feature the ‘Star burst’, a star-shaped Sky Lobby and hotel at the top of the tower.

Why the Skyscraper index works

The reason why 100 storey buildings are such a reliable economic indicator is because they illustrate there’s too much dumb money in the economy. It rarely makes sense to build such tall buildings.

Designing and building high rise buildings is complex and expensive – the higher you go, the more construction challenges there are as this Popular Mechanics article describes.

Skyscrapers are subject to the law of diminishing returns as the taller the building is, the more space that’s needed for services like elevators, air conditioning, water supplies and fire protection which reduces the landlord’s rentable floorspace on the lower levels.

When a building reaches a hundred storeys, there’s little space available on the lower floors for paying tenants. So the economics don’t add up.

Builders, property developers and financiers know this so when they start proposing projects that don’t make commercial sense it’s a fair indication the locals are gripped with irrational exuberance and Adam Smith’s invisible hand is going to deliver a short, sharp slap to the back of the economy’s head.

Does it matter to Australia?

And so it is in Melbourne, which is going to be interesting to watch as South East Queensland is the only Australian metropolitan area to suffer a prolonged property downturn in the last twenty years.

Hopefully Melbourne’s woes won’t affect the rest of the Australian economy but given how much the nation has invested in property and the stratospheric debt levels to service that speculation, it may well be that the rest of the country will follow Victoria.

Winning the next election might not be a good thing for Tony Abbot and his followers who genuinely believe a Liberal government will deliver a magic pudding to the home of every dinky-di Working Australian.

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Comments

28 responses to “Now may not be a good time to buy Melbourne property”

  1. Grant

    Yeah Whatever??? The tower will boost confidence in Melbourne and breed dividends for Melbourne’s economy. Start looking at the bigger picture. In China, tall buildings are seen as a positive thing, why is it not so here in Australia? Get real, get positive, get 108 in Melbourne. NOW!!!!!

    Reply
    1. Paul Wallbank

      Too right Grant, in fact we should build the thing to 324 storeys so we can treble the confidence in the proud state of Victoria. Personally I think we should build a spiral traffic ramp up the the side of the building so we can run the Grand Prix around it.

      Reply
      1. wayne

        Well if you don’t like it go to new Zealand you can stare at your trees all day long. Looser. It should be allowed to be built to what ever hight.

  2. Justin

    Oh wow.. what a pointless article. Get some optimism into you… optimism.. not pessimism. This will be a great building for the city and won’t be the last 100+ story proposed for the CBD. I think Melbourne will prove this “Skyscraper Index” very wrong. I am a young person (19) and I hope this building gets approved and subsequently built. If you oldies don’t like it move to another planet please. Oh wait the economics of that don’t add up either waaaah 🙁 boo hoo.

    Reply
    1. Paul Wallbank

      Justin, I admire your youthful optimism.

      A question for you, do you measure optimism and opportunity by the height and number of high rise buildings?

      I’d like to think you’d have a much better future in an economy that creates real wealth rather than speculates on real estate.

      Hopefully the numbers will add up for you and Melbourne 108, if they don’t it’s your generation that will pay just as the teenagers of Spain and Ireland are today.

      Reply
  3. John Mason

    Hey Paul,

    If you are so clever, try suggesting your very best vision of wealth creation for Melbourne and do something about it. This is a green for go for now and it will add to GDP whether you say otherwise or not. Your future comments likely will continue to be negative and lack relevance. Building always involves risk/return and that is the investors call. If we follow your philosophy, we may too often sit idle with our heads buried in the sand and watch on as other cities continue to grab these wonderful opportunities! Remember, investing in this building will atleast likely add some human capital let alone additional investor excess capital over and above the cost of the apartment to Melbourne and remember the multiplier affect! Paul, your not from Sydney, by any chance?

    Cheers John Mason from Lysterfield.

    Reply
    1. Paul Wallbank

      Thanks for the comment, John.

      My vision of wealth creation for Melbourne, and the rest of Australia, are tax and social security systems that put all types of investment and innovation on the same footing. At present we favour passive investment, such as property speculation, over everything else.

      http://paulwallbank.com/2012/04/09/what-if-bill-gates-had-been-born-in-australia/

      I want to see smart Aussies being able to build real businesses in everything from advanced manufacturing to biotech and industries we haven’t yet thought of, not just being encouraged to get a safe job and negatively gear their way to a self satisfied retirement.

      On the Sydney matter, I grew up in Melbourne. The provincial cringe is one of the reasons why I live in Sin City. I hate to break the news, but most Sydneysiders don’t really care about the confected rivalry between the two cities – in fact many northerners are quite fond of Melbourne and enjoy visiting.

      If you think property speculation and building high rise buildings is the future of Victoria’s economy, good luck to you. You’re certainly in good company with most of the media, business and political communities agreeing with you.

      Personally I think Australians are capable of building a better, more sustainable economic future.

      Reply
      1. Mark

        Don’t let Melbourne catch the Sydney disease!!

        We have a housing crisis in this country, we need as many new units as possible, especially in the city centre! No room for that Sydney NIMBY attitude.

  4. John Mason

    Hi Paul,

    Thanks for our response. Just a few more points below from your response:

    May i suggest your vision needs more explanation, very socialist in outline and generally Governments trying to provide for all, as it implies, is a totally failed concept globally, North Korea as a present day example. Good Government should regulate to help achieve desirable outcomes and stear capitalism to meet demand (needs and wants) proactively. Generally, Governments should only step in to (A) regulate against bad outcomes and (B) provide a good or service where profitability is unachievable to motivate the market e.g. rail, road, schools, hospitals, police and all other very costly Infrastructure to initially set up that capitalism wont provide…for lack of profit incentive. When a need and or benefit exists where the mixed or free market does meet demand, Governments should then step in. SustainableGDP growth of around 4% should be Governments target. It is proven to be a very desirable aim to best benefit us all. Actually, numerous good governments have aspired to achieve this and many liberal ones have!…text book stuff. The message in retarding the market alone scares and spooks economic activity! May i only suggest you change tone a little to talk up the economy. I am not against constructive critism of the project, just bad information to markets from your message that creates negative market responses. Quoting Deakin Universities, Terry Boulter, Finance Lecturer, “information to the market is the most pertinent factor that drives them” Remember a core primary objective is to encourage broad ranging forms of economic GDP activity to pursue the desired 4% growth in GDP. You have some point just please don’t be counter productive.

    Have a great day!

    John Mason of Lysterfield.

    Reply
    1. Paul Wallbank

      Hi John,

      I’m not sure where the North Korea reference comes from or how you get the idea I’m advocating government intervention. You might want to read this blog a bit more, maybe start with the following posts;

      http://paulwallbank.com/2013/02/16/government-film-industry-subsidisies-hurt-business/
      http://paulwallbank.com/2013/01/18/the-australian-wine-industry-represents-aussie-business-and-economy/
      http://paulwallbank.com/2013/01/06/how-australian-nanny-state-hurts-business-and-society/

      From your comment I suggest we’re not poles apart on our views on government intervention. What I’m pointing out is Australia’s taxation, social security and banking systems favour property speculation over productive investment and this has caused long term damage to the nation’s economy and social fabric.

      http://paulwallbank.com/2013/02/02/high-costs-down-under-australia-and-the-dutch-disease-redux/

      On the topic of Australia108, what I’m pointing out is that proposals to build 100 storey buildings always marks the peak of a property boom and the beginning of an economic correction.

      Don’t miss that important point. I notice while I was in Melbourne last week that the changing of the Premier overshadowed the news that may Victoria have entered a technical recession with two quarters of negative growth on some measures.

      Reply
  5. John Mason

    Hi Paul,

    Thanks for our response. Just a few more points below from your response:

    May I suggest your vision needs more explanation, very socialist in outline and generally Governments trying to provide for all, as it implies, is a totally failed concept globally, North Korea as a present day example. Good Government should regulate to help achieve desirable outcomes and stear capitalism to meet demand (needs and wants) proactively. Generally, Governments should only step in to (A) regulate against bad outcomes and (B) provide a good or service where profitability is unachievable to motivate the market e.g. rail, road, schools, hospitals, police and all other very costly Infrastructure to initially set up that capitalism wont provide…for lack of profit incentive. When a need and or benefit exists where the mixed or free market does not meet demand, Governments should then step in. Sustainable GDP growth of around 4% should be Governments target. It is proven to be a very desirable aim to best benefit us all. Actually, numerous good governments have aspired to achieve this and many liberal ones have!…text book stuff. The message in retarding the market alone scares and spooks economic activity! May i only suggest you change tone a little to talk up the economy. I am not against constructive critism of the project, just bad information to markets from your message that creates negative market responses. Quoting Deakin Universities, Terry Boulter, Finance Lecturer, “information to the market is the most pertinent factor that drives them” Remember a core primary objective is to encourage broad ranging forms of economic GDP activity to pursue the desired 4% growth in GDP. You have some point just please don’t be counter productive.

    Have a great day!

    John Mason of Lysterfield.

    Reply
  6. TNA

    John Mason reads like one of those baby boomers who’s only experience is a rising property market.

    Everything I read about Melbourne suggests that the one thing there isn’t a shortage of is apartments.

    Still, invest away at will into another 100 floors of them, should work out fine unless we are turning Japanese.

    Reply
    1. John Mason

      Hello TNA,

      Actually, I am an x gen with a Chinese wife. The Japanese crack is odd, Asia is our region.

      Paul, I understand your points, yet an increase in money supply is a key to a speedy economic recovery. Aussie’s need a variety of different types of investment, yet very poor policy and fiscal management at the federal level has severely affected us. We demographicly reside in Asia, and I suggest we start accepting a much more populated Australia and appreciate some capital inflows in lots forms, including suitable highrise development that may attract many Asian investors.

      Thanks again for the great forum.

      John Mason

      Reply
      1. Paul Wallbank

        Again John, you need to have a good read of this blog. I spent a week dissecting the Australia In Twenty-First Century report.

        TNA’s point about turning Japanese is pertinent. In the 1970s and 80s the Japanese thought they’d cracked the code by ramping up property prices. In the 1990s it turned out not to be so and their economy hasn’t recovered.

        The worry for Australia is we have the same belief after Glenn Stevens decided that to “go early, go hard” with interest rate cuts and stimulus packages to avoid recessions like that of the early 1990s.

        It worked for Howard and Costello with the LTCB collapse, Asian Currency Crisis and September 11 – something overlooked by partisan commentators criticising the Rudd Government’s identical response to the GFC.

        Unfortunately it’s left Australians believing they are economically invulnerable. We’re not.

        Each sugar hit to the economy has worked but require more money each time.

        Melbourne 108 itself is a good example of these ‘sugar hits’, it’s good for short term employment but does bugger all for the economy in the long term.

        If you want to be proud of a big building, that’s great. Personally I’d like to see real jobs in the industries of the future.

        BTW, I worked in the construction industry before going into tech. I saw the bubbles pop first hand in Tokyo, London and Bangkok.

  7. TNA

    I mean, “isn’t a shortage of”.

    Reply
    1. Paul Wallbank

      fixed

      Reply
  8. TNA

    The reference to Japan is with regards deflation and a twenty year property bust. But you knew that, right.

    I’ll pretend to be a xenophobe if that helps though.

    Reply
  9. John Mason

    Hi TNA,
    Japans stagflation is far from an exclusive property crash.

    Reply
  10. John Mason

    Paul,
    Your voice is too big for me. We can see economics is not really your gig.

    Reply
  11. TNA

    Not sure what you mean by that John. I suspect you’re probably going to say “demographics, but I’ll tackle that one if you do,

    Paul seems to have a fairly healthy scepticism of unsustainable booms from wItnessing them 1st hand and, importantly, their related busts.

    Credit is not wealth,

    What’s Australian for “entrepreneur”?

    “Landlord”.

    Reply
    1. wayne

      Who cares who owns it. in the US, Asia and Europe skyscrapers are mostly foreign owned or have world wide investor’s. You talk rubbish. Thing is that some sceptical morons just like this John doesn’t like the fact to see Australia kick on because it blocks the view of their favorite tree they like to stare at everyday. as my opinion to people like them go move to New Zealand and let Australia grow.

      Reply
  12. John Mason

    Guys, this building will generate some elements of the money multiplier affect. I agree with Paul, however, that we need to focus on creating other long term sustainable industries, but beggers can’t be chooses in our two speed veggie economy. Actually the long term outcome of this recession has an upside, that being, the comparative lowering of our real wages relative to China and other trading partners. Thanks can go to our self promoted executive PM for this… she’s such a socialist genius. Maybe long term, we can regain some competitive labour advantage back…particularly if our budgie smugler, Tony one day reduces union power and restructures the fair work award regulation. Both are crapping up our global labour competitiveness and wrecking our industries.

    Reply
    1. Paul Wallbank

      John, I worry that you’re right that beggars can’t be choosers in a “two speed veggie economy” and that’s why we’re locked into short term sugar hits like Melbourne 108 to stimulate the building industry.

      I wouldn’t put too much hope on the Liberal Party though, Tony Abbott is as much a opportunistic party apparatchik as Julia Gillard and his shadow cabinet is as full of clueless, time serving careerist hacks as hers.

      You may want to read the Liberal Party’s policy paper to get a hint of this. It’s full of middle class welfare funded by magic puddings and unicorn milk. It’s as if the Global Financial Crisis never happened.

      We need better leadership and it starts with us – we have to start voting for decent candidates rather than blindly following party slogans and stop buying into the faux red team versus blue team arguments that mark politics in Australia and most of the western world.

      Reply
      1. John Mason

        Yes I agree. Our political parties appear to be an inbred incestuous lot and it’s difficult to see some true short or long term economic clout, let alone much; brilliance, innovation, leveraged vision or leadership. Suggest you flag that and advocate some new minds that think bigger, deeper, broader. We need sharp astute leaders to drive and realise our countries truly great labour and gifted potentials. People who can maximise a paradigm shift in politics to shunt forward Australian direct investment into industrial and technological progress along with retail, online, health, education, mining and real estate to name a few. I believe our leaders should heavily focus on sourcing and channelling the value from new future foreign direct investments and not obstruct these too much! China achieved this from having a globally competitive labour market supply advantage. We can achieve this through other means, like marketing our naturally healthier environment, cultural diversity, kowledge smarts, idle resources, land mass, oceans, farm land, diary, new stronger water reserves and so on, and we need to dynamically globally target market these aggressively!

  13. gale

    If the building is to high it will cast a shadow on the yarra and not good for the environment? Lol these skeptic people stop the world from turning, they dislike change and are loosers.

    When has tall buildings affected the environment in the US or Asia none I hope this building gets built and many more.

    The oldies just stay under your rock let us Aussie live, or go retire in New Zealand their you can stare at your trees all day long.

    Reply
    1. Paul Wallbank

      Whatever you say, Wayne/Gail. If you choose to re-read the post, you’ll find I didn’t care one jot whether the thing was built or not. My point was about the skyscraper index being a pretty reliable indicator too much dumb money is slushing around the economy and a downturn is looming.

      BTW, the developers cancelled the project as they failed to make the numbers work out. I guess that makes them ‘loosers’ too? Maybe they moved to a tree plantation in New Zealand.

      Reply
  14. Jemma

    Hmmmm just doing some research as I am in the industry. PAUL, it appears the project is proceeding with CBRE marketing launch in 2 weeks (with allocation of certain stock already offered late 2014 in Asia).

    Your high rise/economic downturn indicator is interesting. Your evidence of buildings are true & accurate examples which support your theory but may I rebut with examples of substantial hightise developments that refute your claims…

    Q1 Surfers Paradise launched 2001 or 2002ish & completed 2005ish

    Eureka Melbourne launched 2000ish completion (2006..?)

    Vogue Melbourne launched 2008, completion 2013ish

    I have enjoyed reading your comments. Looking back 12 months later, I would love to see a comment. 🙂

    Reply
    1. Paul Wallbank

      Thanks Jemma, I wouldn’t suggest the high rise index is an infallible measure but it’s a pretty good indicator of irrational exuberance. When we see 100 storey buildings, particularly residential ones, it’s clear the numbers are out of balance.

      What we should keep in mind is we’re coming to the end of the greatest period of money printing ever seen by mankind as the US finishes its Quantitative Easing and the Chinese rebalance their economy. The last six years of easy money has seen massive overinvestment in property as we’ve seen from London to Melbourne.

      I’d also argue Q1 in Surfers did mark the local peak as the property market there hasn’t exactly been stellar since.

      This chapter has a long way to go, but I fear Melbourne is putting way too many economic bets on a barista and builder economy.

      Reply

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