In the coming 12 months, Australia could be heading for a serious property "hangover" as the consequences of rapid price growth, over-development and increasing settlement risks catch up with investors.
Speaking at the BIS Shrapnel Forecasting Conference this morning, Kim Hawtrey, associate director of building forecasting said we are facing a “once-in-a-generation event – an event we’ll be talking about for years to come”. The event, he said, is “the greatest apartment boom of all time, possibly of any country, relatively speaking”.
Despite some cities such as Sydney playing catch-up after years of undersupply, Mr Hawtrey warned that in many locations, when it comes to apartments “we’re getting way ahead of ourselves” – and way ahead of underlying demand. He noted that high-rise building is normally “a solution to an economic problem – a solution to land shortage and unaffordability”.
“Use of sky acreage [in Australia] has gone beyond effervescent to positively humongous. Pumped up by investors, it’s theme park scary how many apartments we’re building,” he said.
The number of apartments we’re building, relative to the norm, is “possibly unprecedented in any other country”, Mr Hawtrey said, and is “driven by the highest population growth in the developed world, the lowest interest rates in history and the flight back to bricks and mortar by investors in the wake of the GFC”.
Despite these underlying drivers, he noted there is still significant cause for concern.
“You’ve got to be concerned when we’re getting such a glut of rental properties flooding into the market and getting so seriously ahead of ourselves. In the 2015-16 financial year, we built 116,000 attached dwellings – that includes medium density – [and] 70,000 of those were high density. It’s an unsuitable high. We’re sitting on a precipice and supply is outstripping demand.
“And it’s like an all-night drinking binge – we’re going to have a huge apartment hangover the morning after.”
He also said investors should be wary of the whipsaw effect – a phenomenon where an asset’s price heads in one direction but quickly switches back and moves in the opposite direction – “which we’re likely to see in the next couple of years”.
Mr Hawtrey noted developer risk was particularly increasing in Melbourne, due to the sheer size of the city’s apartment boom, where we’ve seen “a variety of colourful players coming into the market” who have “what you might describe as varying balance sheet strength”.
“What we’re now starting to see in Melbourne is foreign developers who paid too much for the land, they bought too late in the cycle, maybe in the last 12 or 18 months. They paid too much and now they’re under pressure to sell that land, probably for less than they paid,” he explained.
“And the risk of that is those sort of small-scale, mini property developers can more easily start to get into financial trouble when the market starts to soften.
“We’re noticing that developers are starting to raise commissions to try and move their unsold units, for example.”
Settlement risk is also increasing in Brisbane, with Mr Hawtrey noting that investors who bought off-the-plan may find they get a “nasty surprise” in the next 12 months as lending becomes more expensive and interest-only loan arrangements exacerbate price discrepancies.
“Settlements are already taking longer to finalise and we may start to see over the next 12 months projects being shelved and banks pulling back on loan commitments and a reduction in foreign buyer interest in the market,” he said.