Most investors are aware that housing markets across most parts of the country (Perth & Darwin excepted) have been in a prolonged state of price increases. The more aware will have drilled down to what has been driving the boom and will know that in answer to the demand, developers have been building apartments in record numbers, for record prices.
What is currently causing jitters is that no one seems to know if the number of apartments that have been constructed, are under construction or approved to be constructed, will ultimately prove to be too many for the demand. If so, many fear that could lead to a downward price spiral and a protracted period of flat growth in prices.
Let’s have a look at the situation from a macro viewpoint and see if we can make sense of it.
Firstly, the apartment boom of the last three to four years has been mainly confined to the Eastern seaboard – Sydney, Melbourne & Brisbane.
The biggest price hikes have occurred first in Sydney, which had a long period of little or no growth in ten years prior. Some say that the catch up was overdue. What really changed things was the opening up of the new housing market to overseas buyers by the Rudd Government in response to the GFC and what was then very poor residential housing markets. The trickle of buyers built up in to what has become a raging river. The most recent ANZ-Property Council report says that 24% of all residential property sales in the three months to June were to overseas buyers, mainly from China.
To a certain degree this could have been buyers trying to get in ahead of the stamp duty hikes for foreigners imposed by the Victorian, NSW & QLD governments, who understandably are trying to cash in on the boom too. Raising taxes at the expense of foreigners is not going to lose them votes at home, and on the face of it, should in the short term, improve the government coffers. Long term, I think overseas buyers will begin to look elsewhere, which means a lower level of building, jobs and economic activity. A good way to crush any boom is to tax it.
Foreign buyers were approved to invest $61 Billion in 2014-15, which was up 75% on the previous year. Though with the punitive stamp duty increases and jitters in some parts of Asian and Chinese economies along with new restrictions on capital outflow, that could all change very quickly. We could see the level of foreign investment drop sharply, along with the commensurate economic loss of jobs and tax revenue.
The Melbourne market followed Sydney – everywhere I drive now around the city, I see cranes. Ordinarily that is a good thing, but I know from experience that it can’t last. Brisbane had its fair share of the apartment boom near the CBD and nearby surrounds. In the last few months a number of high profile developers announced they would be shelving their latest Brisbane towers, citing issues with financing, sales and most importantly, the cost of building which has jumped markedly. The much higher volume of work meant that previously profitable projects were now marginal at best because of higher construction costs.
This might spell bad news for some, but in actuality, I think it is probably good news overall. It signals the end of a cycle, which means that the coming oversupply that many commentators fear, may not eventuate. A similar story seems to be playing out in Melbourne and parts of the Western corridor of Sydney.
The level of building approvals also sit at record levels. If all of these houses and apartments are built, then for certain, the looks to be a major oversupply leading to substantial price decreases. However, it is not likely that will happen. Many of those projects will not go ahead because they can’t be funded and/or they can’t achieve the level of pre-sales required. And realistically, you can only count an approval in to the supply numbers when the project is actually completed.
For the last two years, the major banks have pulled back hard on lending to developers, which means that less projects are getting to construction. And those that do get there are those that are almost fully sold out before a brick is laid. The lenders simply won’t fund otherwise. So for all of those cranes you see, you can be reasonably sure that most of those apartments are already sold.
The issue then becomes – will the buyers, who have paid deposits of 5-10% actually be able to settle when the projects are complete? Many of them got their finance approvals one or two years ago, at a time when lenders were happy to do so. Since then APRA have leaned on the banks to pull back lending to investors which might mean that buyers will come to settlement and find their banks shaking their heads – those people may need to scramble to get finance elsewhere. And if a large proportion of the project was sold overseas, many foreign buyers, who were previously able to get financing from local banks can no longer do so. Developers who have sold 30-50% or more of their apartments to offshore buyers might be having a few sleepless nights.
This is where the problem lies.
I attended a meeting last week of about 130 developers who discussed this very situation. So far, they reported that, for the most part, buyers are settling with little difficulty. Though clearly some of those sales will need to be massaged to get them over the line. They were all seemed quite annoyed that the media has spent a lot of its time beating up the coming property crash because of oversupply, when it simply isn’t happening. Not right now anyway.
The bottom line is this – the banks are the ones who really control supply. If they foresee issues, they pull back on lending, which they have done. That in itself diminishes potential supply. The last thing the banks want is property prices dropping as it would not be good for their profits. They have seen a potential future issue with CBD & near CBD apartments and have applied the brakes. On the other hand, lending to owner occupiers for house & land packages and townhouses on the urban fringes is strong, as is demand. This is because people can afford this type of housing and many people still want a bit of land rather than a balcony.
So what does this mean for you?
Central CBD or near CBD apartments should not be on your target list. You may do better focusing on rings that are 5-20km from your CBD, with townhouses or house/land that are walking distance to rail transport and other wanted facilities like schools or shops.
I think the next decade is going to be very price sensitive with much of the price growth occurring in the more reasonably priced properties. Look to the higher end price brackets at the beginning of the next economic upswing.