The AFR ran a report over the weekend on how the housing boom currently underway is driving developers to take-on abnormal risks in order to bring homes to market quickly and cash-in on the current insatiable demand from locals and foreigners:
Meeting that demand is pushing builders and developers to the edge – be it the edge of financial risk-taking, the edge of engineering or the edge of risk management – to supply more dwellings…
The strong market, which will inevitably ebb at some point, is pushing developers and builders to make the most of demand while they can, says Chris Johnson, the chief executive of Urban Taskforce Australia, a developer lobby group…
“A number of developers are thinking, ‘If we take a couple of years to get planning approvals, we may have missed it’. That’s leading to some developers saying, ‘It’s better to get a bit of extra cost into the price we pay for this to get the project going while the sales are up there'”…
The article also cites other developers who have taken on greater risks than normal, including paying over the odds for development sites, rushing through development plans, building more units on lots than would normally be the case (raising engineering costs), and vendor-financing of new housing developments.
The whole environment has some similarities to the Irish housing bubble, where developers took on great risks to build low quality homes in dormitory suburbs in a bid to cash-in on what was perceived as insatiable housing demand. Of course, the Irish bubble then burst, leaving a swathe of empty and half-finished developments.
While the situation is also different in some important aspects – namely the focus in Australia has been on apartments rather than dormitory homes – the risk profile of development in Australia has been raised considerably, with some developers likely to get burnt once the market turns, prices fall, and demand drops.
