Boom or bust: bubble fears are building

. September 29, 2016 . 0 Comments
Boom, bust and much, much worse: untangling the uncertainties of Australia’s housing bubble

By Jamie Thomson

Are we in a boom or a bubble?  Is the apartment market about to explode or just fizzle out. Are we looking down the barrel of negative equity in off-the-plan apartments, or does Australia’s rising population guarantee a housing shortage that can only be addressed by building more homes, specifically in apartment blocks.

Last week the business research company IBISWorld painted a rosy picture (with the odd caveat) of the Australian construction industry. The report cited record highs for the apartment and townhouse sector over the past five years, and trumpeted the presence of five Australian construction companies in IBISWorld’s Top 500 Private Companies list.

Weigh that against the announcement that Sydney’s housing market has been listed as the fourth riskiest in the world and you can understand why home buyers and investors might be confused.

BOOM

Paying tribute to the recent urban housing boom in Australian cities, , in a press release titled Sky-High: Surging Apartment Construction Is Driving Growth Across Multiple States, IBISWorld analyst Anthony Kelly cheerfully announced: “Underlying demand for new housing is underpinned by Australia’s migrant intake, population growth, foreign investment in the property market, historically low mortgage interest rates and an increasing desire to live in inner-city multi-unit apartments and townhouses.”

But a report in the Australian Financial Review didn’t quite see it that way – rather than take IBISWorld’s top-line good news at face value, they preferred to highlight a paragraph a little further down. In a piece called Apartment Developers ‘Are Slashing Prices’ as Oversupply Bites, they found a far more gloomy prognosis, quoting the report thus: “However, the industry has moved into a sharp cyclical correction in the current year, stemming from the recent completion of several large-scale developments and the accumulation of unsold and unleased apartments. The industry is in the midst of a sharp correction that is expected to continue through to a deep cyclical trough in 2017/18.”

Indeed, Mr Kelly himself had a slightly less heartening take on things the further you read: “Recent additions of new apartment stock have exceeded immediate housing requirements, and vacancy rates have climbed in several major markets, particularly in Melbourne and Brisbane. The decline in activity also reflects the anticipated completion of several major projects during 2016-17.”

The potential perils of supply outstripping demand was first mooted by financial giants Citi last month in an ABC news story titled Apartment Glut Looming In 2017, Property Downturn Imminent, Warns Citi.

OVERSUPPLY

Predicting that it is oversupply, as opposed to a rise in interest rates, that will bring the current housing boom to an end (and thus triggering a drop in prices), Citi analysts warned that, while there will be another couple of good years for builders and building material manufacturers, the risks are already rising for banks and developers.

Similarly, banking giants UBS have highlighted Sydney as being particularly prone to a steep drop-off in housing valuations, naming it as the fourth riskiest housing market in the world in its Global Real Estate Bubble Index. “Sydney’s housing market has been overheating since the city became a target for foreign investors several years ago,” the report states.

And nowhere is this perilous situation more apparent than in the off-the-plan market. ABC‘s “Apartment Glut” article also raised the spectre of a swathe of off-the-plan developments struggling to round up their settlement fees, when – in the wake of plummeting apartment prices – the would-be owners would find themselves in negative equity before even being handed the keys.

As the article says: “The main threat for developers, and also a big worry for banks, is settlement risk – that is where an off-the-plan apartment buyer who has put down a deposit does not complete the purchase when construction is finished.

Even though developers can chase off-the-plan purchasers for the full contract price of the unit, with many buyers located overseas there is great uncertainty about how successful these pursuits will be.”

But, as Title reported several weeks ago, that shortfall could pale into insignificance following the decision of a number of Australian banks to freeze Chinese loans – responsible for financing over 50% of off-the-plan purchases in some developments in Melbourne and Sydney – following the detection of widespread fraud in loan applications from Chinese brokers.

It’s not something that has been granted a lot of column inches in mainstream finance pages but the Australian’s financial columnist Robert Gottliebsen considered the issue in a piece titled It’s A Long Way Down In Looming Apartment Fall.

RECESSION

In it, he quotes “James”, the owner of debt and equity funding business “on the frontline of the apartment settlement problem”, who – via a comment left on a previous column by Gottliebsen, where the journalist blamed parochial racism on the reluctance of Australian banks to loan to Chinese homebuyers– offered a bracing rebuke, and hinted at a financial catastrophe in the making.

The problem is much worse than what you have described. Our analysis of every development in the country suggests that settlement failures will be between $1 billion and $1.5bn every month for the next 12 months. This is from the Chinese alone, but when settlement prices start coming more than 10 per cent under purchase prices, we will also start to see local buyers attempting to walk away from settling. As Julius Caesar famously said: ‘The die is cast.’”

It’s a scenario that goes far beyond a housing finance crisis, and one that could have severe ramifications for the economy itself – and could even signal the global recession finally pitching up on Australian shores.

In the final paragraph of the IBISWorld report, Mr Kelly has a far sunnier outlook on the future:

Multi-unit residential commencements are forecast to surge from 2019-20 onwards as more projects are brought to the start-up phase. Foreign investment in apartment developments, particularly from investors in China, Singapore and Hong Kong, is likely to support this growth.”

Whether it’s the bursting of the Australian housing bubble, or something even more ruinous, it’s hard to believe that their next report will have quite the same optimistic tone.

 

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