The Effect on the Australian Economy’s Oversupply of Apartments in Top 3 Capital Cities

The Effect on the Australian Economy’s Oversupply of Apartments in Top 3 Capital Cities

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Property prices in 3 of Australia’s capital cities: Sydney, Melbourne and Brisbane, are predicted to fall in response to an oversupply in housing. This may bring hope to those hoping to purchase properties in the major cities’ CBDs, but will also bring suffering to banks, investors and developers, and bring greater financial instability to Australia.

Risks associated with the suspected oversupply include: settlement risk; the risk of off-the-plan buyers putting down deposits but then not being able to complete the purchase after the dwelling space is built, occupational risk; the risk of buyers purchasing but not being able to find anyone to live in the space, putting excess pressure on rent, and a secondary market risk; offshore buyers buying brand new properties but then selling quickly after realising they are not getting good return.

According to Domain, the comparison website Finder gathered survey results from 26 housing experts and economists to find that 75 per cent believed Melbourne had too many apartments, 70 per cent stating that they believed Brisbane was in oversupply and 40 per cent saying that too many were currently being built in Sydney.

The expectation for an oversupply in Melbourne has lasted several years, yet, in September 2016, Victoria broke the record for the highest number of building approvals. Because of the misjudgement of the number of buyers in these top capital cities, economists and bank research teams such as Citi’s have predicted that the current boom in property prices will soon come to an end, despite the usual cause being a sudden rise in interest rates, which is why this price cycle has lasted so long so far, providing reason for the excess developments and record prices.

While Melbourne and Sydney are yet to see a reverse in the direction of prices, Brisbane has already undergone a 5.7 per cent fall, according to Domain Group data. AMP Capital chief economist Shane Oliver predicted that the outer suburbs of Sydney would see price drops first, although altogether, Sydney would last longer in the cycle than Melbourne will or Brisbane has, unless there was a dramatic rise in interest rates. In response, apartment supple in Melbourne and Brisbane has declined slightly recently, leaving several apartment buildings still yet to be completed.

An undeniable positive in the situation is the increase in affordability of major capital city houses, but there are several financial risks Australia and its banks, developers and investors are reluctant to take, though the oversupply may eventually hurt them all. One of the risks the oversupply is related to is the settlement risk. reported REA Group Chief Economist, Nerida Conisbee’s words: “Banks see it as risky, or a bad investment” when prices drop and that their lending is restricted, capping the growth of their lending so that they have time to decide whether an apartment is worth lending for. If the bank deems the apartment unworthy of a loan, buyers will, leaving several apartments empty, contributing to the price fall that may result in a blow to Australia’s financial situation.

Another contributing risk, the occupational risk, involves buyers not being able to find people to live in the apartments after the loans have been approved. Ms Conisbee highlighted the high risk of increased pressure on rent, something Perth and Brisbane’s CBDs have already seen. This will be a huge disappointment investors, who will not receive return on investment when rent switches from declining to disappearing altogether.

The third risk is similar and is a secondary market risk, simply the risk that offshore investors will decide to sell after not receiving good return, leaving a gap with no obvious way to be filled. ABC News supplied the statistic of 27 per cent of pre-sales buyers being offshore investors. This also links back to the settlement risk, as developers sometimes choose to chase investors up for the full contract price, but it is made significantly harder when those investors are based overseas. The quick selling of properties after lack of return could cost banks millions of dollars, as they are highly leveraged in housing and will be left exposed. Ms Conisbee mentioned that is was “very worrying that… a geographically small part of the economy could have such a huge impact on Australian banks.”

While affordability will generally increase, if the predictions of a major fall turn out to be true, the oversupply may still last despite the cost of the apartments, as the popularity of apartments will lag behind, houses in Melbourne, for example, being of higher demand than apartments. Ultimately, the fast drop in price could end up being unimaginably costly to banks and developers and inconvenience several investors at once, with no help from the unavoidable risk factors involved.

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