Glut or no glut, what exactly is happening with apartments in our major cities?

Apr 2016 - News

On one hand we hear doom and gloom stories of too many units being built in our capital cities, while on the other we’re seeing data that shows unit prices are still rising — even if only slightly.

While Sydney apartments shot up a whopping 11.9 per cent last year, they were only up 1.5 per cent in the three months to January according to CoreLogic data. The yearly figure in Melbourne shows the rise was 11.4 per cent, but during the quarter flats were flat at an increase of just 1 per cent. However, in Brisbane where there has been less development than the bigger cities, the overall median unit price increased by a very modest 1.3 per cent during the year, and has remained neutral at 0 per cent for the quarter.

So as the major cities’ skylines rise, are unit prices going to fall?

WHERE THE IS THE SO-CALLED GLUT?

Anyone familiar with the landscape of our three east coast capitals knows there seems to be a growing number of cranes dotting the horizon.

Cue the RBA and its biannual Financial Stability Review. The report basically warns developers and potential buyers about building and buying in these high-density neighbourhoods.

ABS figures show that Sydney recently took over the mantle from Melbourne as the leading capital for apartment developments with 35,538 approvals recorded over 2015 compared to 33,023.

Across Sydney, Melbourne and Brisbane almost 45,000 apartments are due for completion and settlement by the end of 2016 according to figures from planning consultancy MacroPlan Dimasi.

The RBA singled out these various inner-city apartment booms as a significant risk to the country’s ­financial future by pointing out concerns that high-rise unit developers could struggle if buyers back off or are unable to fund settlements due to lenders’ reticence around residential towers.

WARNING: BACK OFF OFF-THE-PLAN

It’s not all units that are at risk, but the warning bells are ringing in relation to the copious off-the-plan developments in these three cities.

Just last month Fairfax reported that an oversupply in apartments had lead major home loan lender AMP to “blacklist” off-the-plan purchases in certain inner-city suburbs in every state.

The central bank said in its review that investors should carefully consider buying units in city-fringe suburbs of Sydney, Melbourne and Brisbane, pointing out that an oversupply in stock would place a downward pressure on rents and resale prices.

“An ongoing risk comes from the significant and geographically concentrated growth in supply of new apartments in Sydney, Melbourne and Brisbane due for completion over the next few years,” the review said.

“If that occurs, investors will need to service their mortgages while earning lower rental income and any households facing difficulties making repayments may not be able to resolve their situation easily by selling the property,” the bank said in its report.

In other words, landlords face not getting the rent needed to pay the bills and owner occupiers who need to move on could struggle to get the price they want, when they want it.

“This is one reason why it remains important to have prudent lending standards ahead of such a possibility,” the RBA said.

WHY INDUSTRY INSIDERS DISAGREE

Chris Johnson, CEO of the Urban Taskorce said the RBA’s statement would act as a “brake on bank loans” for new housing when in actual fact, more homes are needed, particularly in Sydney.

“The NSW Department of Planning says that 33,200 new homes are needed each year for 20 years in Sydney but last financial year only 27,348 new homes were completed,” Mr Johnson said.

“With a shortfall of nearly 6000 new homes during the boom times it is essential that more homes are built across Sydney. Our concern is that the RBA’s warnings will encourage banks to tighten up on lending for new homes particularly for apartments.”

“Our members believe the market is still strong for new apartments in key parts of Sydney where cosmopolitan living is becoming the norm. They are concerned however that the market could be destabilised by a series of negative actions that combine to lower confidence in the industry,” he said.

“My feeling is that the Melbourne market is a bit more stretched, with the potential for oversupply possibly more likely, and perhaps a bit more likely in Brisbane, but Sydney is quite secure, in terms of future markets,” he said.

Mr Johnson said he saw an immediate future where apartment prices would plateau.

“I think in the long term value will remain and that’s because of a fundamental shift in lifestyle. A lot of people are preferring a cosmopolitan lifestyle that’s close to public transport, shops and amenities and this is what’s going to keep prices up,” he said.

“I don’t think there is going to be a fundamental drop in the price of apartments,” Mr Johnson said.

WHAT’S THE WORST THAT COULD HAPPEN?

A surge in apartment approvals and a subsequent rise in unit prices across these three cities in recent years all stemmed from an insatiable investor appetite for flats. But since late-2014 when the banking regulator stepped in to tighten lending standards for investors, apartment activity has noticeably quietened.

These tighter credit standards could pose “near-term challenges” for some high-rise unit and office block developers, according to the RBA, particularly for those who have been targeting Chinese investors.

“Any concerns over settlement risk and/or a slowdown in demand for Australian-located property by Chinese and other Asian residents could lead to difficulties for particular projects,” the RBA said.

It’s speculation at this point from the RBA, but the report added that it would only take a hit to the global economy for investment in the Australian apartment sector to take a tumble.

“There is some uncertainty about how these foreign buyers would react to a downturn in their home countries or in the Australian property market,” the report said.

The RBA also referred to the state of affairs for the commercial property industry describing it as “adjusting with a lag to a slowing in demand”, particularly in cities that are heavily exposed to mining such as Perth.

“This is most noticeable for office buildings in the resource-intensive states, where vacancy rates remain very high as further supply continues to come on line,” the review stated.