I have it on good authority that the saying that resonates throughout Victoria’s Spring St Parliament is that so long as the city is building, everything will be all right.
Of course this is hardly the pinnacle of economic thought but it is true, for a time.
But as we know, when eventually the game of capital investment stops, you usually discover a whole lot of capital mis-allocation. Either you’ve overbuilt so much that an oversupply squashes prices or some external shock hits demand. Then you have to face to up the fact that all you have is construction firms to keep folks employed and no reason to use them.
MB has been banging away at this for a couple of years as Melbourne has continued to build 35% plus of Australia’s dwelling stock:
But it seems suddenly the MSM is onto it, triggered by yesterday’s announcement that the monumental Australia 108 development has been approved. From The Age:
Planning Minister Matthew Guy has been dubbed ”Mr Skyscraper” after approving 20 high-rise developments for inner Melbourne and rejecting just one since taking on the portfolio about two years ago.
Mr Guy announced on Monday that he had approved plans for the tallest tower in the southern hemisphere – Australia 108 – which will stand at 388 metres and be 90 metres higher than Eureka Tower.
His decision to approve the Fender Katsalidis-designed apartment project on Southbank Boulevard will upset critics of the plan, including Melbourne lord mayor Robert Doyle, who argued it would cast a shadow over the Shrine of Remembrance.
The latest permit caps 19 other approvals Mr Guy has issued for tower projects in the Melbourne CBD and inner suburbs that range from 19 to 71 storeys high, since the Coalition won the 2010 election. He has also rezoned swaths of land at Fishermans Bend, Footscray and North Melbourne for high-rise development.
The AFR has more worrying statistics:
There are growing fears that apartment prices in Melbourne’s central business district could tumble amid a rise in off-the-plan sales and project approvals.
Victorian Planning Minister Matthew Guy has approved more than 17,000 apartments in 30 projects within the City of Melbourne since taking office in 2010.
…Property pundits warn that the latest string of high-density approvals will push the city into oversupply and that lack of demand will reduce apartment values and rental returns.
…SQM Research figures for February showed Melbourne had the highest rental vacancy rate of all the capital cities at 2.7 per cent, compared to 0.9 per cent in Perth.
Propell National Valuers Victorian state manager Matthew Singleton said Melbourne’s asking rents had fallen 1.4 per cent in the past year because of subdued demand and oversupply of units.
Questioned about the potential for apartment oversupply, Mr Guy said the government was approving developments in appropriate locations for development and that the construction activity generated by project approvals would stimulate the economy.
Yes, until it doesn’t. And what then?
Each Sunday I take my kid to Melbourne for school and have about 4-5 hours to kill.
Last Sunday I had a feed with an old mate who is a director level figure within DSE. He said straight out that the pollies (both sides) have been warned repeatedly that this will all end in tears. The thing I found amazing was that the old mate told me ‘I have been waiting for a property collapse for about 4 years’…..
I don’t understand MB’s double sided commentary on property. Housing is expensive and needs to drop and Melbourne still has the second or third most expensive housing market in the country, but it is a negative thing to build up big apartments which will increase supply and lower the price of apartments which will potentially create demand from FHb’s. I know lots of ppl who’d buy an apartment in the city if it were under $200k
Jimmy,
You are correct. Housing supply was choked and Australian prices and rents are far too high as a result.
The solution is more supply, less immigration, better transport, etc.
Now it appears that supply is finally coming through in Melbourne. If so, prices will drop which will be a good thing.
I think it’s important to look at what this ‘supply’ is designed to do. It isn’t to ‘give people a home’, affordable or otherwise ; it’s designed to give borrowers something to spend their debt on! The State and National Governments are pinning their hopes on property speculation to provide both employment and revenue. When this is over, there will be as more disparity between those who can afford a home and those who can’t; just a different number of dwellings – many of them sitting empty.
+100
You are saying exactly what I am, in a different way.
It’s a game of pass the parcel that lasts for 3 to 10 years until something stops the music. Whoever is holding the parcel then loses as the rental cashflow wont pay holding costs and capital values fall.
In the Home Units of Australia crash it was the developer who was left holding the stock.
With all the bank requirements for sales off the plan before commencement and requirements for deposits of say 10% (or deposit bonds) the main people who will be left holding will be off the plan purchasers who then need to rent.
If the music stops because of an external shock at a time of oversupply and causes unemployment (much of it likely in the building industry if there is oversupply as people move home, stay home etc) then you have the perfect storm and price falls also hit those who have geared up.
Rents also fall as those left holding the baby compete to get tenants, hurting those who really are marginal borrowers on investment units.
Victoria which is badly hurt by the squeeze on manufacturing has had to stimulate construction to maintain employment.
We were seriously looking at buying an apartment just over 12 months ago in Melbourne CDB, but at the last minute got cold feet (due to corporate fees) we instead bought 5 acres in Woodend;-)) really pleased we done this now, its an altogether better lifestyle.
nothing much to understand really, the country it deciding what it wants to do.
Half australians fancy themselves property investors and want prices to go up, the other half just want a roof and they want prices to go down.
It’s practically a civil war minus the killing.
So far it looks that the first group is winning because they are generally better connected and richer.
It is a real milestone in NZ, that two major public opinion polls in a row have seen a majority of NZ-ers, including many existing home owners, agreeing that prices are unfair for the young. This probably has a lot to do with the government doing something about it now.
So long as the new supply is matched by rising immigration … the music keeps playing.
But the problem is that population growth, or decline does not correlate to house prices, so what else you got?
The sinking of the Titanic didn’t correlate to hitting the iceberg either.
You should learn the principles before searching data for correlations.
“Yes, until it doesn’t. And what then?”
Remember those Asian Tigers that were going gangbusters just prior to 1997 ?
Building like crazy, cranes and new high rise everywhere, then came the crunch as foreign capital fled the country.
Bangkok was a prime example, I remember seeing incomplete buldings littering the landscape for as far as the eye could see. They have only just recently managed to rectify the overbuilding that was rampant.
And the favourite pastime when all this was happening, swandiving off those tall buildings as overnite fortunes were extinguished.
Could it happen in Melbourne.
Nup, no way as we are different.
Finally, an economic train wreck that helps me rather than steals from me. It’s probably the only way to ensure we get ‘the property correction we needed to have’. In the mean time I get comparatively-cheap-for-Australia rent and I’m spoiled for choice on options.
If the state economy tanks in the correction, it just makes the ‘I want to move to Sydney / USA etc’ argument easier to my partner too.
All the while around me I hear low income, financially illiterate couples my age boasting about the latest IP they bought on high leverage and low yield. I just smile and say nothing. Don’t stop the music Melbourne
+1 this is a means to an end
If they get 5 years before the rapid appreciation stops and a few pay rises from promotion in addition to inflation they will be laughing and the falls won’t get you to a better opportunity than you have now.
It might be a good bet to jump on the band wagon now. You only need 3 or 4 good years of rise to be in front for a long time.
If you are really gutsy you buy off the plan at today’s prices with a long completion/settlement date and maybe even flick it at settlement for a huge percentage return on equity. Obviously you could rent it or live in it too. And if you are able to keep your living expenses down and keep saving for the year or so till completion you are further in front.
The Flaw 2011
(install https://mediahint.com/install_chrome.html to watch Hulu, netflix, pandora etc )
http://www.hulu.com/watch/424545
Also Money, Power, Wall Street
http://www.pbs.org/wgbh/pages/frontline/money-power-wall-street/
Watched shocked me about The Flaw was the real kicker, which I have never really seen discussed here or anywhere, was refinancing – not to with teaser rates as is commonly assumed, but the fees and charges which sucked out the equity. They had complicated models which allowed them to pin point anyone who could be targeted for a refinance and then hit them over and over again until they had sucked out all the equity via fees and charges.
Watching this, then looking at Melbourne and you quickly realise how much trouble people are in.
Thanks for posting this – interesting.
You doomsayers are ignoring the immigration card. If there is an oversupply of properties then immigrants are the answer. Quality of life doesn’t rate in the policy discussion. The masses are not revolting against population growth — not yet anyway. The game could still have some way to run.
Do you have any good stats (i.e. understandable by a layman like me) on the immigration rate / population growth rate? I took a quick look but didn’t see anything immediately helpful.
Also, what are the chances the bubble still bursts under a high immigration rate, and then goes on to reverse that high rate as unemployment spikes?
You are hoping by the sounds of it. The masses are getting pissed off with immigration, why do you think the gov is playing the 457 visa card, it’s a popular call. And I wonder how long it’s going to be before there is more on the student visa issues as they are rampant on scamming their working conditions.
If Australia’s economy crashes then immigration will become a hot topic, but also, as we have seen, Australian’s have no reservations in attacking immigrants when they feel they have no options.
If the economy crashes though, I would expect to see even less foreign students and 457′s because there will be less chance for immigration. Lets face it, Australian universities are visa factories that offer poor education in exchange for cash and PR.
Then you have the EU mess, Cyprus, Italy which are two unstable countries right now. Half of Australia in recession.
Dr Watson, you are dreaming if you think things are going to come right in the property market.
I’m not hoping. I’m just facing reality. The government is playing the 457 visa card but they are effectively campaigning against their own record. The visas have been granted by them. If Labor wins the election, I confidently predict a record number of 457′s will be granted in 2014.
If Labor win? No I know you really have no clue at all…
Yes, but can immigration keep up with speculators and the rising numbers of empty properties?
Spain and Ireland both counted on high immigration, to the extent that the speculating maniacs were ignoring the AMOUNT of immigration that would have been necessary to keep the bubble growing….! I.e. an impossible amount.
Even now that their property prices have halved, the immigrants aren’t buying. And it is far easier to move within the EU than it is to get into Aussie.
But note that when an oversupply boom occurs without significant house price inflation (due to high short-run elasticity of supply), as in Texas in the 1990′s, the overhang of empty properties gets filled pretty quick and the economy is not sluggish for long.
Which is Melbourne looking like?
the numbers are there if they want them, but the main thing that makes australia attractive is low unemployment and high wages, but of which will disappear in the case of recession.
I can almost hear the govt (whichever govt): “we are not competitive, we must drop our salaries to boost our exports…”. Only there will be no exports to boost after the mining peak and industrial production tanked or migrated to Asia years ago.
Mmmmm.. no sense building inner city units when the growth is in the other burbs. Der!
http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/3218.0Media%20Release12011?opendocument&tabname=Summary&prodno=3218.0&issue=2011&num=&view=
“8. How have Melbourne’s Growth Area Councils grown between the 2006 and 2011 censuses?
Between the 2006 and 2011 censuses, Melbourne’s Growth Area councils (City of Casey, Cardinia Shire Council, Hume City Council, Shire of Melton, City of Whittlesea, and Wyndham City Council) grew by 183,726 people. This represented 50 per cent of metropolitan Melbourne’s total population growth.
The average annual population growth rate of the Growth Area councils was 4.6 per cent between 2006 and 2011, compared to Melbourne’s 1.9 per cent.”
http://www.dpcd.vic.gov.au/home/publications-and-research/urban-and-regional-research/census-2011/quick-facts
Or maybe it is the international students, counted in the pop growth rates that Dr W is referring to?
“20. What proportion of people who live in inner Melbourne are students?
Large numbers of students live in inner Melbourne: 14.2 per cent of the inner Melbourne population were enrolled at a tertiary education institution compared with 9.3 per cent for Victoria.”
“12. What was the growth in employment for Inner Melbourne between 2006 and 2011?
Between 2006 and 2011, employment in Inner Melbourne grew by 69,800 jobs.
The City of Melbourne had the single largest increase of all LGAs in Victoria during this period growing by 62,800 jobs.”
Wow, that is hardly any new jobs, so rising employment will not do it…
Not as fast as the last 50…
“Committee for Melbourne believes Melbourne’s population will continue to increase over the next 50 years, albeit at a slower rate than the previous 50 year period.”
http://www.melbourne.org.au/docs/population_growth.pdf
And no data on the death rates doubling over the next 2.5 decades… what the? They are dreaming.
You are onto it, Willynilly…..
That’s alright, as long as they all stay in the CBD. Lets build all the apartments but never approve the car park. Lock them in the CBD. Anyway, what am I thinking. They only buy properties to store their priced collectible — Dust.
“There are growing fears that apartment prices in Melbourne’s central business district could tumble amid a rise in off-the-plan sales and project approvals.”
I don’t fear this. I welcome it. Apartments are too expensive. The prices need to fall. Build, build, build! There is still plenty of demand.
Wander into a hi rise display suite, carefully examine the plans then casually ask the sales person ‘How much are body corporate fees?’ Quick as a flash, he will say ‘Fees have not been set.’
This is quite a reasonable and logical response on a new development, but hides a major and enduring cost to hi rise: the lifts.
Elevators are very expensive to maintain, and they are the ow(e)ners problem.
Check. Look at a flat for sale in a three year old development and ask after their body corp fees. Then run.
Don’t Buy Now!
This is bluster. A VicGov agency in the building industry sees very bad times ahead, as they said to me, and they should know as they sacked 30% of their staff before Christmas and have put all capex on stop.
Yes, yes, I’ve been hearing the old hypothesis about CBD properties in Melbourne for a long time…
“there are too many apartments already AND they’re building more, prices are going to crash!”… it’s been repeated continuously since about 2002.
WRONG! These days, most of the apartments built in Melbourne are purchased off the plan by overseas buyers (mostly Chinese). They’re rarely rented, instead they’re kept vacant or used occassionally for business trips and holiday accomodation for the family.
Selling the apartments is off the cards because getting the money back into China is almost impossible without answering some embarassing questions asked by the Chinese government. Hence they’ll sit mostly empty, for a long time (10+ years) in the hope that one day, they may be used as a permanent residence in this politically free society we call Oz.
so, hi-tech squatting begins ?
(my student dau is paying 338 a month rent in a 4bed 2 bth in Yarraville, commutes to Uni 3 days a week. Works for us for now !)
Make no mistake, all booms bust.
There will come a point when the investors pull out as the numbers do not stack up, when this happens, the prices will drop, and then some …
There are two major factors in play, the first is obvious, the amount of money to service the loan, meaning the banks will stop lending and start repossessing to protect their interest, this will accelerate the fall until they realise they have to stabilise the market (or go bust).
The second reason is that the economy is driven by waves – big and small. Forget all the politics and economic rhetoric and concentrate on the biggest wave of all … spending (ie: demand for goods and services). Make no mistake, we are in the final throws of the biggest spending wave in our lifetime (and then some). People go through a predictable spending cycle, from their teens into their 20′s, 30′s and so on. They stop spending when the get to their late forties and then start saving – the plateau is between 45 and 50 years of age.
Now … remember the introduction of the pill?
This started in the early 1960′s, births immigration adjusted peaked in 1962/4, which marked the start of X gen, and reduced in the western world for 13 years until 1975 when Y Gen turned up (the inflection point).
Start the overlay with the predictable spending pattern we all go through (almost a perfect parabola) and you have a very god correlation to GDP.
The reality is the western world has 10- 15 years of a major downturn (understand Japan from 1990 to 2010 and you will get an idea of what is ahead … Tokyo lost 65% in property prices and still has not recovered from that adjustment – their ageing demographics by the way are extreme, currently 120mil set to become 80mil – more houses???).
Governments know the problem, as do the banks, they are desparately trying to fill in the hole (GDP – unavoidable drop in demand for gods and services). Immigration is part of the solution, as is building more buildings/houses and bringing new poeple to the city/country, however this hole is TO BIG TO FILL)
Make no mistake, all booms bust.
There will come a point when the investors pull out as the numbers do not stack up, when this happens, the prices will drop, and then some … THEN WATCH THE GOVERNMENT FLOAT THE BANKS AND TAKE FROM THE PEOPLE … sounds familiar (Cyprus).
There are two major factors in play, the first is obvious, the amount of money to service the loan, meaning the banks will stop lending and start repossessing to protect their interest, this will accelerate the fall until they realise they have to stabilise the market (or go bust). The bottom will be found at about that time, I am guessing 35%.
The second reason is that the economy is driven by waves – big and small. Forget all the politics and economic rhetoric and concentrate on the biggest wave of all … spending (ie: demand for goods and services). Make no mistake, we are in the final throws of the biggest spending wave in our lifetime (and then some). People go through a predictable spending cycle, from their teens into their 20′s, 30′s and so on. They stop spending when the get to their late forties and then start saving – the plateau is between 45 and 50 years of age.
Hello, we have an ageing population … but why is that the case?
Now … remember the introduction of the pill?
Introduced in the early 1960′s, BIRTHS IMMIGRATION ADJUSTED peaked in 1962/4, which marked the start of X gen, and reduced in the western world for 13 years until 1975 when Y Gen turned up (the inflection point). Births is the biggest wave of them all.
Start the overlay with the predictable spending pattern we all go through (almost a perfect parabola) and you have a very good correlation to GDP. Makes obvious sense once pointed out.
While numbers increase (hitting peak spending), you get … consumer confidence thrown in as a bonus. Everyone is hapy, even the Government as wages go up and the tax collection follows suit. The reverse effect is more than ugly.
The reality is the western world has 10- 15 years of a major downturn (understand Japan from 1990 to 2010 and you will get an idea of what is ahead … Tokyo lost 65% in property prices and still has not recovered from that adjustment – their ageing demographics by the way are extreme, currently 120mil set to become 80mil – more houses??? No immigation).
Governments know the problem, as do the banks, they are desparately trying to fill in the hole (GDP – unavoidable drop in demand for goods and services). Immigration is part of the solution, as is building more buildings/houses and bringing new people to the city/country, however this hole is TOO BIG TO FILL).
Inevitably immigration will become unpopular when this investment folds as the business case just does not stack up – then confidence falls and prices drop.
So to summarise, it is coming, our pollies are desperately trying to kick the can down the road and not get caught on their watch.
And don’t forget that the downturn will accelerate as the banks pull the pin and tighten credit, even if the Governments float them by taking bad loans off them (they will hold the $ and firm up their balance sheets … because that is good for the country. oops the shareholders …LOL).
I fear for those approaching their peak debt, early 40′s, they might think they are new rich, but man oh man are they in for a massive surprise. God help the ones who lose their jobs as the downturn kicks in, there will be some ugly outcomes for families.
For the record, I own my home and have a very healthy super fund, of which means I can withstand the unavoidable readjustment in front of us.
Most people have no idea of what is about to happen.