Amid the debate on the extent to which oversupply may cause a housing fall, a new report has revealed that a significant drop is expected by the year 2019.
A report released by Capital Economics has claimed that house prices in Australia will fall by about 10 per cent over 2019 and 2020.
Speaking on ABC’s The Business last night, fund manager Roger Montgomery said the situation could be even worse than current predictions.
“I wish that it was possible to be that precise. I think it’s going to be a whole lot worse than that,” he said.
“I know that in the short run things like price-to-income ratios, debt-to-income ratios, inflation, unemployment – these things will affect property prices.
“But in the long run, it’s supply that’s the issue and this time it will be supply that will be the catalyst for lower prices for dwellings in Australia.”
Mr Montgomery said Australia will require about 150,000 new dwellings per year to soak up household formation – and we’re currently well overshooting the mark.
“The current run rate, whether you look at commencements or construction, what we know from the ABS data is we’re producing at a rate of about 225,000 a year – 50 per cent more than what we require.
“That’s been going for about two or three years, and we’d end up with about 12 months of oversupply, which, by the way, is roughly what the United States had just before their crash.”
Mr Montgomery conceded the US market crash was driven by different forces – namely irresponsible lending – but said the catalyst for the predicted Australian price fall would be apartments.
“If we look at Australian statistics ... 96,000 [units] were sold in the last 12 months.
“The number of pre-purchased apartments due to settle in the next 12 months – ... not new and established, which is the previous figure I gave, but just new apartments – is 92,000.
“Last year’s number was based on a boom in the property market, so there were more transactions than there normally are anyway.”
Meanwhile, Mark Mendel, CEO of online property agency iBuyNew, said talk of the apartment oversupply is “overstated” as a number of proposed developments will “never eventuate”, with many developers unable to obtain finance.
“While there is a lot of discussion about banks toughening their lending policies for buyers, they are even tougher on developers,” he said.
“Developers with no track record are getting a blanket ‘no’ from lenders across the board, while those with a limited track record are also finding it extremely tough.”
However, Mr Montgomery brought the issue of mezzanine finance to the forefront of the discussion.
“The oversupply will continue because even though the banks have stopped lending to developers, we know that they are still securing finance from high-net-worth individuals through mezzanine finance.
“They’re continuing to construct, they’re continuing to oversupply, so the oversupply number of 12 months that I gave earlier, that presupposes that they stop developing now. But they are still developing.
Mr Montgomery said that this will cause problems for investors.
“They are not going to be able to sell these apartments at full price, they’ll have to discount them, and that means a lower return to everyone.”