JP Morgan is the latest to warn about the risks building in the high-rise apartment space, via The AFR:
“In areas like Melbourne CBD fringe and south Brisbane, the market is being flooded with product. Most of the product has sold but the supply has ensured minimal if any price growth. The banks are also concerned around their concentration risk to some of the apartment supply hot spots.”
The JPMorgan team had heard of situations where bank valuations of new apartments had come in at 10 per cent below purchase prices in and around the Melbourne CBD.
“We see the major risks for the property companies in 2017 being the Brisbane and Melbourne apartment settlements,” they wrote. “Sydney we believe will also have some challenges ahead but this is more a 2018 story given the strong price growth the Sydney apartment markets have experienced.”
Back in October, the RBA made similar observations, warning that the flood of new high-rise supply across the East Coast capitals could lead to falling apartment prices and possible defaults from buyers and developers, particularly in Melbourne and Brisbane:
The large number of new apartments recently completed and currently under construction in many capital cities raises the risk of a marked oversupply in some geographic areas…
Following the marked pick-up in apartment construction in recent years, inner-city Melbourne is forecast to have the largest number of completions (around 16 000) over the next two years, followed by Brisbane (12 000) and Sydney (10 000)…
In Brisbane and Melbourne these new apartments will represent a far larger increase in the dwelling stock than in Sydney.
… the available data suggest that around one-fifth of banks’ total residential development lending is to these areas. Development exposures are a little larger in Melbourne and Brisbane than in Sydney, due to the greater volume of apartment construction currently underway…
Developers face the risk that off-the-plan sales of apartments in these areas fail to settle due to tighter lending standards for buyers (particularly non-residents or those relying on foreign income) and valuations at settlement below the contract price…
The foreshadowed risk of oversupply in some apartment markets is nearing as a large volume of new apartments has started to come on line, and many more completions are expected in the coming two years. Risks appear greatest in Brisbane and Melbourne’s inner-city suburbs, where the pipeline of construction is large relative to the existing dwelling stock (Graph 2.5).
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Personally, I would advise anyone considering purchasing an off-the-plan apartment to reconsider.
Most of these properties have few redeeming qualities. They are generally small, bland, poorly built, and subject to expensive body corporate fees. There is also lots of similar product available and they are typically unsuitable for families, which limits the buyer pool to foreigners, young couples, empty-nesters and students.
Another problem with purchasing an off-the-plan apartment is that once it has been lived in, and becomes “used”, it no longer qualifies for first home buyer subsidies nor sale to foreign buyers, since these are generally restricted to newly constructed dwellings only. This effectively reduces their resale value.
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In short, steer well clear of these financial black holes.
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.
