Despite the perception that there is an ongoing undersupply of housing in Australia, forecasters have warned the country is actually on track for a significant price correction – and it may not be as far off as you think.
A “very significant construction boom” has meant most major cities across Australia – with the exception of Sydney – are in oversupply, or heading in that direction, according to BIS Shrapnel’s managing director Robert Mellor.
Speaking yesterday at BIS Shrapnel's Forecasting Conference Mr Mellor said the research house was predicting a four per cent decline in median house prices after the market peaks, which will likely occur in the early part of 2017. In addition, BIS Shrapnel forecasts point to residential building peaking “very shortly”.
“If it hasn't peaked in the June quarter, we expect it will start to ease off particularly in the second half of the financial year and through calendar year 2016,” he said.
Kim Hawtrey, BIS Shrapnel’s associate director building forecasting, said multiple signs indicate we’re at the turning point in this boom.
“When you’re in a boom, you think it’s going to keep on going forever. Like Sunday afternoon, it’s a little bit seductive – but Monday morning is coming.
“The home building boom is peaking and we need to get ready for a tightening market. Head winds are looming,” he said.
Mr Hawtrey said slower migration, curbs on investors, affordability issues, caps on foreign investment and calmer auction activity were all signs that we’re on the precipice of change and “we can only go one way from here”.
Brisbane, which appears to be undersupplied in aggregate terms according to BIS Shrapnel’s figures, is at “significant risk” of heading into oversupply, particularly with inner-city apartments, Mr Mellor said.
“We think there’s just too much building,” he said. “They’re building about two to three times the level that they were building on average over the last 10 to 15 years.”
Mr Mellor conceded there had been a shift both in the owner-occupier and rental markets towards a preference for high-density living – but said even this evolution did not “justify how much high-density construction we’re seeing”. He said the result will inevitably be significant oversupply.
With the exception of Sydney, Mr Mellor questioned whether the current levels of construction across the country are sustainable.
“The big question is: can this be sustained or what will bring about the downturn? And the conclusion that I've come to is that it’s the same as what we've always seen. When the signs of excess supply come through with rising vacancy rates – that’s typically somewhere between vacancy rates going above three per cent towards four per cent – in that sort of environment you start to get falling rates, eventually falling values and, as a result, prices decline," he said.
He said: “It’s not going to be different this time to last time. Markets always remain the same between demand and supply […] there will be a correction in those markets. It’s not different this time."
The story will unfold at different times across the country, with markets that have benefited from foreign investment in off-the-plan projects likely to be slower to shift, Mr Mellor said.
“Yes, it might be different in some markets where you’re getting 15 to 20 per cent or more of investors being overseas investors buying off-the-plan. They take longer to respond. Some of them might want to sit on the property and be quite happy to have a vacant dwelling for a period of time and take a long-term view,” he added.
Despite this phenomenon, Mr Mellor said investors won’t be lining up to buy the next lot of off-the-plan projects, so developers may struggle to get financing.
“The reality is a correction will come through in those markets. Is it going to come through within 12 months? We think potentially in Melbourne. We hope it does. Brisbane? Both of those markets, yes, somewhere within 12 months and certainly within 18 months, a downturn will be underway."
He added: “[With] the speed of the downturn, hopefully it’s quite quick so the oversupply isn't as severe as what it could be. But at the moment it's looking like in those markets [there is] fairly significant oversupply.”