November 21, 2016

Potentially Not Enough People To Buy

A report from in Australia. “Apartment prices are falling in Australia’s CBDs and it is a major cause for alarm. Prices in our major city centres dropped by an average of 6.3 per cent in the 12 months to July, according to CoreLogic figures. Every capital city CBD posted a decline in growth but where the largest declines are coming from is even more telling. It is being driven by our two highest performing capital cities. Sydney CBD apartment prices tumbled 9.1 per cent over the 12-month period while Melbourne CBD units dropped in price by 8.4 per cent.”

“A column in The Australian cited a one-bedroom apartment in Melbourne recently selling for $161,000. The asking price for that $161,000 apartment in the general market would have been in the order of $550,000, the column claimed. ‘Clearly, one seller was sick of the fact that their apartment was not selling and simply put it on the market for sale to the highest bidder,’ the column read.”

“This is because we are seeing more and more large apartment developments coming into the market, prompting fears of an apartment oversupply. The concern is amplified by the fact Chinese investors are largely the buyers of these new developments — regulation states offshore buyers can only purchase new real estate — leaving a ’secondary apartment market’ of property that sells way below the values investors are paying for off the plan.”

“‘In the next six months many tens of thousands of apartments in Melbourne and around Australia that have been bought off the plan by Chinese and other Asian investors will come up for settlement,’ the column stated. But more stock keeps coming. REA Group Chief Economist, Nerida Conisbee, said the amount of development in some of our capitals is ‘eye watering.’”

The International Business Times. “Sydney and Melbourne CBD are good places to rent an affordable apartment as the cities show a large decline in the apartment prices. Over the 13-month period, Sydney CBD apartment prices dropped in price by 9.1 percent while it’s 8.4 percent in Melbourne CBD. REA Group Chief Economist Nerida Conisbee told that there are three main risks that the market faces due to the lowered price of apartments. The risks include settlement risk, occupational risk and secondary market risk.”

“Settlement risk rises when the prices or values drop as banks see it as a bad investment. It occurs when a buyer is not able to meet the legal obligations of a loan ending up defaulting on the loan. In effect, the buyer must pay a large deposit to make up the difference. The buyer may also end up paying more than the original cost.”

“‘Banks are now being restricted on the amount that they are lending, particularly to investors. They are being capped on the growth in their lending so they may see that particular apartment development as not being worthy of their lending. People have put down deposits two years ago … but the banks can change their approach to risk quite significantly,’ Conisbee said.”

“Occupational risk happens when an apartment is completed but there are no tenants renting. According to Conisbee, it is already happening in Brisbane and Perth CBDs. ‘While declines in rents are not great for investors, a large increase in the vacancy rate is even worse. No tenant equals zero rent, and therefore no return on investment,’ Conisbee said.”

“Secondary market risk happens when an offshore buyer has a slim chance to sell the apartments after realising that it does not give a good return on the investment. ‘The likelihood of Australians buying the 18,000 apartments [in Melbourne] coming to market in the next 18 months; it is a far smaller pool. There is just potentially not enough people to buy those apartments,’ Conisbee said.”

From the BBC. “Bidders slugging it out for a A$1.7m (£1.02m; $1.28m) shed. An apartment bought for A$750,000 in 2015 selling for A$1,08m this year. Neighbours quadrupling the value of their homes by banding together to sell their land in one transaction to developers with pockets that are hundreds of millions of dollars deep.”

“Welcome to Sydney, the glittering coastal city built around a blue-water harbour where the median price of a house is more than A$1m. Good value? For those who can afford it. Sydney is after all the financial capital of a country enjoying a record 26-year economic dream run. ‘We’ve seen some crazy results,’ says Hannan Bouskila, an agent with Raine & Horne Bondi Beach who recently sold the same property for the fifth time in eight years - a beachside studio that fetched A$461,000 in 2009, A$525,000 in 2011, A$610,000 in 2013, A$750,000 in 2015 and A$860,000 this year.”

“Add a construction boom that is seeing residential towers mushroom throughout the city, and you enter bubble territory - an economic phenomenon where price ranges for assets deviate strongly from their intrinsic value. ‘We have 300 cranes in the sky over Sydney building new apartments. I don’t think there’s a city in the word aside from Dubai with more cranes,’ says Lindsay David, co-founder of LF Economics and author of Australia: Boom to Bust.”

“‘The cracks are going to start to appear next year, once all these new dwellings under construction in Sydney, Melbourne and Brisbane come online and there won’t be anyone to rent them. It’s going to get messy,’ he says, predicting a bloodbath by 2017.”

“Property prices in Sydney have increased by 45% since 2012, while rents and wages are growing at their weakest rates in a decade. ‘That’s the smoking gun,’ he says. ‘Under any mathematical account, it’s a credit-fuelled housing bubble.’”