Melbourne unit boom squeezes landlords

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ScreenHunter_01 Mar. 22 09.40

By Leith van Onselen

Following on from last week’s post on the huge surge in Melbourne CBD apartment approvals, the Age over the weekend published a great article on the large lift in apartment approvals across Melbourne’s CBD and inner suburbs, which is depressing apartment rents across the city:

The number of apartments built in South Yarra, Richmond, Prahran, Footscray and Abbotsford between 2010 and 2014 will be double that of the whole previous decade.

About 25,500 units will be completed by the end of next year in metropolitan Melbourne, four times what was built in 2005, when the market for apartments last peaked, according to analysts Charter Keck Cramer.

The figures do not include many of the 20 high-rise projects approved by Planning Minister Matthew Guy in the past 28 months or plans for 17 towers in the new inner-city suburb of Montague…

The flood of new stock is expected to depress rents and potentially cause a blowout in vacancies in popular inner-city areas, leaving landlords facing poor returns.

The effects are already being felt at the higher end of the market.

To help cope with the oversupply, some agents are ”reloading” rental listings – erasing the ad of a property that has been sitting on the market and then relisting it as newly available with a lower price. Others are offering teasers such as a month’s free rent in a bid to get people to sign leases.

Fairfax-owned Australian Property Monitors reports the median asking rent for an apartment in Melbourne has held steady at $350 a week in the two years to December, one of the longest periods on record without a rise.

And some estate agents report landlords are now being forced to discount rents by 10 per cent or more as a result of the soaring number of units becoming available…

To soak up the large numbers of new units, it is estimated that more than a third of all new arrivals in Melbourne over the next two years would have to opt to live in an apartment.

The Australian Financial Review also ran an article on Friday claiming that many Melbourne purchasers of off-the-plan apartments are facing negative equity amid sharply falling prices across the CBD and inner suburbs:

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Thousands of investors in Melbourne’s booming off-the-plan apartment market are preparing to make final payments on properties that are worth less than their purchase price, triggering fears that some might not complete…

Eight out of 10 – or about 20,000 – off-the-plan apartment sales coming up for completion over the next 2½ years could be facing negative equity.

Apartment prices across Melbourne have fallen between 7 per cent and 11 per cent in the past 12 months. The Docklands development, in Melbourne’s former port precinct south of the ­central business district, has posted median falls of about 25 per cent, according to reports…

The potential problem for off-the-plan buyers arises because they might have to stump up more money than they planned to complete the deal. Banks, for example, typically agree to lend up to 90 per cent of the total value. For a $1 million apartment the bank would lend $900,000 and the buyer contribute $100,000.

If the property value fell 20 per cent to $800,000, the bank would only be prepared to lend $720,000.

The buyer is liable for bridging the gap – in this case, $180,000 on top of the initial $100,000 deposit.

“If you walk away, you lose your deposit,” warns specialist property lawyer Dan Flynn, a partner with TressCox Lawyers. “The vendor also has 12 months to decide to resell and sue the purchaser for any loss in sale price”…

Across the Melbourne metropolitan area, which extends about 25 kilometres from the CBD, there were about 10,250 apartment completions last year, 19,250 under construction and 16,300 being marketed but not under construction.

There are expected to be about 11,000 completions this year and potentially 16,000 next year, or 37,000 over three years, which is about 30 per cent above the long- term average.

With the Victorian economy looking fragile, and the Victorian planning minister vowing to position Melbourne as the tallest skyline in Australia, Melbourne apartment investors appear to be on a hiding to nothing.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.