makao.com.au REPAIR — RETAIN — REINVEST BY KLEVIN MUREITHI — SEPTEMBER 25, 2023 | COPYRIGHT ©MAKAO GROUP. ALL RIGHTS RESERVED. P A G E | 1 Retain — Repair — Reinvest C H A S I N G O U R T A I L : H O W W E H A V E M A D E A B A D P R O B L E M W O R S E B Y K E L V I N M U R E I T H I — S E P T E M B E R 2 5 , 2 0 2 3 Happy Monday, It's been quite some time since my last newsletter — a gap largely filled by our expanding clientele, growing project portfolio, and time spent cultivating both old and new relationships. I trust you've been achieving your goals and adapting to the so - called New Normal we hear so much about. I'm excited to reboot our monthly newsletter, shar ing our insights on industry trends and happenings. So, welcome back! Today, we dive into the choppy waters of housing affordability, exploring its ongoing narrative. This is an 8 - minute read. Read on... THE STORY IN NUMBERS 417.60 — As of 2 2 nd September 2023, the concentration of Carbon Dioxide in the atmosphere was 417. 88 ppm . A year ago the concentration was 41 4 81 ppm. The concentration limit of the UNFCCC Paris Agreement is 430 ppm (for 1.5°C global warming) and 450 ppm (for 2°C). 4.8 — With just over 4.8 million re sidents , has Melbourne overtaken Sydney to be Australia’s biggest city? (A title that Sydney has held since 1905). This largely due to now including City of Melton (fastest growing area in Australia). 192 — Melburnians s pend an estimated 192 hours (or about 8 days) in rush - hour traffic annually. At a median wage of $37 per hour, this equates to around $7,1 04 per year, although individual experiences may vary. 22,000 — Melbourne City Mission estimates that over 22,000 Victorians are homeless, with 6,000 of them under the age of 25. THE BIG STO RY A Peaky Intro (Spoiler Alert!) There's a memorable scene in the BBC show "Peaky Blinders," set in post - World War I Birmingham, U.K., where Cillian Murphy's character, Tommy Shelby, meets Winston Churchill for the first time. In this scene, Churchill comments on Tommy's social mobility over the years, saying: “A tent, then a boat, then a house, and now a mansion. That’s something, isn’t it?” Churchill is alluding to the dream promised by free markets, fuelled by the Industrial Revolution. The promise is simple: work hard, and each successive generation will experience a better life than the on e before. ⎯ The quality of one's housing serves as tangible proof of this upward mobility. ⎯ Just as Tommy's life was better than his mother's, which, in turn, was better than his grandmother's. Today, however, that promise seems to have hit a roadblock — or p erhaps more accurately, buckled under its own weight. Walking up a down - escalator A glaring indicator of the issue at hand is the broken relationship between average house prices and average income — a problem that has persisted for some time now. MAKAO.COM.AU REPAIR — RETAIN — REINVEST BY KLEVIN MUREITHI — SEPTEMBER 25, 2023 | COPYRIGHT ©MAKAO GROUP. ALL RIGHTS RESERVED. P A G E | 2 D W E L L I N G V A L U E S N A T I O N A L L Y H A V E A L M O S T T R I P L E D O V E R T H E P A S T T W O D E C A D E S , U P A B O U T 1 9 4 P E R C E N T A S O F D E C E M B E R 2 0 2 1 , W H I L E W A G E S C L I M B E D A B O U T 8 1 P E R C E N T . And again , housing stands as a hallmark of this trend. ⎯ People in their 20s, 30s, and even 40s are increasingly moving back in with their parents. For context, the home ownership rate for 30 – 34 - year - olds was 64% in 1971, compared to just 50% in 2021. ⎯ Some are optin g to become “ full time children ” ⎯ Local councils are seeing emergence of tent cities ⎯ The rate of homeless is on the rise — with over 22,000 people affected in Victoria alone. As Peter Saunders put it: “ Some of the lucky ones are being helped out by their parents, who are cashing in some of their capital gains from the housing market to give their children a leg - up, and others are taking advantage of some ill - advised government schemes designed to subsidise fi rst - time buyers’ deposits. But many have no choice but to remain in the private rented sector, where escalating rents make saving for a huge deposit a soul - sapping experience akin to walking up a down - escalator .” So, how did we get here? As you’d expect, the issue is complex and multi - faceted. And there are many voices itching to be heard on this matter — each take as unique as the next one. ⎯ Some make the solid case that house prices are closely linked to interest rates — higher interests r ates, lower house prices. Lower interest rates (as we did pre - 2022) translate to increased house prices. I’m not an economist so I don’t think it’s useful for me to dive into this argument. Other more qualified professionals at ING Bank and Rabobank have spoken in great lengths about it. ⎯ Others point to land hoarding by developers, conservative zoning or planning authorities ( w hich respond to local residents by refusing development permits ) , and greedy landowners , changing household patterns 1 Note that positive feedback loops ironically, can (and often do) lead to negative results. ⎯ Then there are those who (very pass ionately) argue that the answer is straightforward: immigration is at the heart of the probl em. Yes, but: As with most wicked problems , the answer is likely nuanced and the result of multiple smaller issues creating positive feedback loops 1 Zooming Out I recommend reading The Emergent City , a publication by Ryan Flanigan (Senior Urban Designer and Strategic Planner ) where he dives deeper into this topic her e , here and here In one of his recent posts, he visually maps out this big, hairy problem: I G O T T H I S I N F O G R A P H I C F R O M T H E E M E R G E N T C I T Y Whether it's based on anecdotal evid ence or empirical data, it's clear that we have a housing problem. This issue manifests in various ways: from housing affordability , which affects both rent and mortgages , to housing quality related to health and comfort; and housing availability , where th e supply of new homes struggles to meet demand. Lucky for us, problems have solutions. At least most of them. The question now is, how do we go about solving this complex issue? Can we roll up our sleeves and start tackling this monumental challenge? Vari ous solutions are emerging ⎯ Some have pointed to the YIMBY movement. ⎯ Some to up - zoning and inclusionary zoning. ⎯ The government has announced $10 billion towards addressing the housing crisis. MAKAO.COM.AU REPAIR — RETAIN — REINVEST BY KLEVIN MUREITHI — SEPTEMBER 25, 2023 | COPYRIGHT ©MAKAO GROUP. ALL RIGHTS RESERVED. P A G E | 3 ⎯ Reducing development fees. The third initiative has a Utopia - esque vibe, time will tell its effectiveness. From my POV: Building more houses will have negligible impact on prices. Built to Rent projects, governments subsidies for first home buyers and other demand side strategies will fuel the flame. These measures, I believe, are not resolving the problem but rather, they are postponing it. Public Housing (Overlooked and Under - invested) One perspective that often goes unnoticed is the reduced availability of social and in particular, public housing I G O T T H I S F R O M H O B S O N S B A Y C I T Y C O U N C I L ’ S D R A F T A F F O R D A B L E H O U S I N G P O L I C Y I T I S A D A P T E D F R O M T H E C O N C E P T O F H O U S I N G C O N T I N U U M . A C C O R D I N G T O T H I S C O N C E P T , H O U S I N G E X I S T S O N A C O N T I N U U M . O N O N E E N D , T H E R E A R E I N D I V I D U A L S A N D F A M I L I E S I N C R I S I S , L I V I N G I N E M E R G E N C Y S H E L T E R S O R O N T H E S T R E E T S . I N T H E M I D D L E A R E I N D E P E N D E N T R E N T E R S W H O R E L Y O N A S S I S T A N C E T O P A Y T H E I R R E N T . O N T H E O T H E R E N D A R E I N D E P E N D E N T R E N T E R S A N D H O M E O W N E R S . T H I S C O N C E P T W A S O R I G I N A L L Y C O U R T E S Y O F N O R T H U M B E R L A N D C O U N T Y I N C A N A D A . With fewer people able to afford housing in the green segment above (due to over - valued property prices), it’s no surprise those in the purple segment are feeling the pinch more than ever. The responsibility for housing provision is increasingly shifting to the private sector. However, for people with low or very low incomes (those earning $47,630 or less annually), the private sector is showing many signs of market failure. This is why alternative housing options are crucial. And that’s why non - market public sector housing (the yellow , grey and blue segments in the image above) is crucial. Victoria has already announced plans to demolish 44 public housing towers. While I understand the reasoning behind this decision, I highly doubt that the long - term consequences will be positive. A Modest Proposal: RRR, a Potential Solution? R E P A I R , R E T A I N , R E I N V E S T : A F E A S I B I L I T Y S T U D Y C O N D U C T E D B Y O F F I C E . What is it? Retain, Repair, Reinvest (RRR) is a site - specific strategy developed by OFFICE for evaluating the refurbishment potential of existing public housing. OFFICE is a not - for - profit design and research practice based in Melbourne. Over the past few years, I've had the privilege of collaborating with their team on various projects. ⎯ Under the RRR model, OFFICE c onducted multi - disciplinary research into two public housing projects: Barak Beacon Estate and Ascot Vale Estate ⎯ Both studies concluded that it would be more cost - effective to retain and repair existing public housing stock rather than demolish it The saving s could then be reinvested into maintenance or the construction of new infill housing on available land, thereby increasing the number of homes. ⎯ Makao's role in this was to provide advisory services on how these buildings could meet modern standards for co mfort and energy efficiency. MAKAO.COM.AU REPAIR — RETAIN — REINVEST BY KLEVIN MUREITHI — SEPTEMBER 25, 2023 | COPYRIGHT ©MAKAO GROUP. ALL RIGHTS RESERVED. P A G E | 4 M O D E R N I S I N G T H E A S C O T V A L E P U B L I C H O U S I N G E S T A T E ( C O U R T E S Y : O F F I C E ) Scalpels, not sledgehammers. At its core, the RRR model proposes a gentler, more pragmatic, and affordable way to address the broader housing issues we' ve discussed. The beauty of this model is that it can be replicated in other public housing sites in need of repair, without uprooting the communities that call these places home. All while increasing the quantity of public housing. FINAL THOUGHTS Addressing a challenge as monumental as housing affordability is no small feat. With a cacophony of stakeholders, each with their own vested interest, finding a solution can feel like attempting a Melbourne Hook Turn — in reverse, blindfolded, and with your hands tied (behind your back) 2 It's a delicate, daunting task, and as Martin Wolf put it: "If a solution were politically easy, it would already have happened. It is not." In a period where housing affordability is slipping further out of reach, the need for acti on has never been more urgent. A multi - pronged approach is essential, one that involves not just policy changes but also community - driven initiatives. These efforts must be supported by rigorous analysis of government commitments. But solutions don't just arise from policies and initiatives. They also come from honest, intentional dialogue aimed at finding effective solutions. 2 Do not try this. Please. As for us at Makao, we're committed to being part of the solution. We'll continue to collaborate with forward - thinking organisations like OFFICE to improve housing quality and affordability. Our focus remains on creating healthy, comfortable homes that are accessible to all. Thank you for reading, Kelvin Mureithi