Sydney apartment correction to deepen as oversupply bites

By Leith van Onselen

The epic boom in Sydney high-rise apartment construction:

Threatens to send apartments prices tumbling into next decade, according to several leading property analysts:

Sydney-based SQM Research director Louis Christopher said the city’s apartment prices were “nowhere near the bottom”.

“To what magnitude, we don’t know yet,” he said.

“But they’ll continue to fall.”

Mr Christopher said two likely scenarios would play out in the Sydney market — either a “sharp fall” or a longer “stagnant period” similar to what was seen in the Sydney market from 2004 to 2012.

“This downturn is more than a restriction of credit,” he said.

“It’s more becoming demand-related. Investors don’t want to catch a falling knife”…

The falls are being driven in-part by continued apartment construction in NSW, with Australian Bureau of Statistics figures released earlier this month showing more than 66,000 apartments are under construction across the state…

Cameron Kusher at real estate analyst firm CoreLogic also believed the falls would continue.

“The Sydney market on our data had been down for 12 months and there’s real stretched affordability out there,” he said.

“There’s tighter availability of credit and people don’t have the same borrowing capacity”…

“There’s a lot of stock (apartment) sitting there, and that would suggest rents and apartment prices will continue to fall”…

In a separate report out this week, BIS Oxford predicted New South Wales would see falls in apartment blocks of up to 26 per cent over the next two years.

The fall in Sydney apartment prices come despite the NSW State Government’s first home buyer stamp duty concessions, which were implemented from 1 July 2017, and have clearly supported the lower end of Sydney’s property market:

 

Without this artificial stimulus, Sydney apartment values would likely have fallen much further already.

Regardless, there are stiff headwinds facing Sydney property, which should heighten any downturn. These include:

  • The massive roll-over of interest-only mortgages into principle and interest (raising repayments by 35% to 50%);
  • Tightening lending standards arising from the banking Royal Commission;
  • Rising bank funding costs;
  • Labor’s negative gearing and capital gains tax reforms should it win the next election;
  • Weakening Chinese property demand, and
  • A looming offshore shock.

How far Sydney’s apartment prices plummet is anyone’s guess. But we are likely facing a long and protracted correction.

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Comments

  1. harry petropoulosMEMBER

    good to see that SQM have finally come to their senses………………6 months ago sqm were living in Disneyland with their optimistic views on Sydney

    • We are starting to see the first hints of what will become a ferocious campaign to get APRA to back-off its credit creation ‘guidance’. Gotti is champing at the bit to tell tales of the end of times that will descend on us if APRA does not get out of the way of nation builders like High Rise Harry.

      As APRA is a very secretive organisation and their fearless leader Wayne has already announced that APRA thinks they have already done all that needs to be done we can expect that APRA will allow the credit tap to open in the coming months and certainly as we approach the next federal election.

      https://theglass-pyramid.com/2017/09/05/apra-and-credit-creation-regulation-economic-secret-business/

      That “oversupply” is nothing – a few months of Peter Dutton’s population ponzi immigration will absorb that like a paper towel applied to a few drops of BBQ sauce.

      The rent seekers in FIRE have not even warmed up the engines of their bombers on the PR runway.

      They are just waiting (a bit like APRA and the RBA) for the irritating Royal Commission to fade from memory.

      • But in the medium term, APRA relaxing macro prudential will not matter. Just prolongs the mess and makes the blow up more spectacular and inevitable.

      • Bingo, If the mainstream is whispering it public then the lobbyists are screaming it behind close doors! relaxing credit and increasing migration may be on the nose in the current environment but it wont stop them trying.

        My 2 cents, they have to wait until the jobs and growth narrative is playable again. Wait for a few failed developments, the average joe noting the fall in there property value and a few poor high vis types selling that second range rover. Then you can go full propaganda on the need to ‘support local workers and families’ with construction and housing stimulus.

      • DominicMEMBER

        The issue is momentum. Once downside momentum gains sufficient pace it becomes very difficult to arrest. The time to act is early doors.

        It is erroneously believed that the Fed brought the blood-letting in the stock market to a halt during the GFC, but the market largely ignored zero rates and QE. The critical moment came when FASB 157 was suspended, allowing the banks to escape insolvency. Obviously the liquidity has assisted all risk markets since but FASB 157 was the turning point.

      • Problem solved! Legalizing marijuana lifts house prices by 6%.Now that gain should soften the heart of the crustiest moral crusader.- enough to save the sorry skin of many property infestors.

        Abstract
        Does legalizing retail marijuana generate more benefits than costs? This paper provides a first step toward addressing that question by measuring the benefits and costs that are capitalized into housing values. We exploit the time‐series and cross‐sectional variations in the adoption of Colorado’s municipality retail marijuana laws (RMLs) and examine the effect on housing values with a difference‐in‐differences strategy. Our estimates show that the legalization leads to an average 6% increase in housing values, indicating that the capitalized benefits outweigh the costs. In addition, we find suggestive evidence that this relatively large housing value appreciation is likely due to RMLs inducing strong housing demand while having no discernible effect on housing supply. Finally, we show that the effect of RMLs is heterogeneous across locations and property types. (JEL K20, R28)

        https://onlinelibrary.wiley.com/doi/abs/10.1111/ecin.12556

  2. kiwikarynMEMBER

    This will have a big flow on effect. If you’re a FHB with an apartment that is falling in value, how do you upgrade to your next family home in the suburbs?

    • yep. I’ve heard multiple property “experts”, “economists” and AM radio presenters advising FHB to buy apartments and then work their way up the property ladder. Problem is that these boxes don’t increase in value meaning that you will be stuck paying mortgage on something you don’t really want and then if you do manage to afford something better in the future you’re slugged with stamp duty/agent fees etc when you realise this box is not appropriate for raising a family. Not to mention all the rates, owners corp fees etc you’ve had to pay along the way. Horrible advice.

      • McPaddyMEMBER

        Fortunately the demographic damage can be backfilled via imports of the less fussy.

    • darklydrawlMEMBER

      The other ‘trap’ with this approach is free standing homes generally increase in value (and fall less on the other side) than an apartment. I know of FHB who have made a motza in capital gains on their apartment, but are still $100K short on getting a house in the same suburb. They are now effectively trapped with a kid in a 2 bedroom apartment (or at least that is how they see it).

    • Don’t worry, there are only a few real FHBs in apartments. Apartment buyers consist of tree main groups:
      – Asians: they got money to burn from overseas so all good
      – People who went to investment seminars and renting them out – no risk no reward!
      – Fake left greens who think everyone should live in apartments- they deserve it.


  3. How far Sydney’s apartment prices plummet is anyone’s guess

    If they resemble the ones in Melbourne some of them will be so ill adapted to the market’s wants in 2018 that their only value is the unit’s 0.1% of the share of the value block of land the building sits on, minus the cost to remove the building and start again. I’d suggest that in some cases that will mean there will be units with negative value.

      • Easy to be an oversupply of inappropriate dwellings in a particular locale even in the absence of an overall oversupply. For example, easy to build too many dwellings not intended to be inhabited against a forecast of continually increasing demand for such from O/S investors only to discover there is no market for such if O/S investors leave the scene, even if there continues to be substantial demand for dwellings suitable for families of 4-5 people against anemic supply of dwelling suitable for 4-5 people.

  4. Bit of a worry that the 2016 correction in approvals was fairly minor and that they have resumed fairly steady growth. Will wait and see the result when all that 2015-2016 approved stock comes online this year and the next. We are just starting to see the completions ramp up on the north shore between Hornsby and MtColah. Anybody taken a drive up Pacific Highway recently?

    • Sure have, hating all the trucks on the roads. Upper North Shore have a lot of houses that haven’t sold and prices have started to come down. Will be interesting to see what happens when we have an influx of properties in spring

  5. I have been waiting for this one for some time. Here’s a snapshot of the Sydney rental market you will not read in Domain. We rented a one bedroom new apartment( we were the first occupants) in Newtown in Jan this year for 5 months between the sale of our home and purchase of a new one. Asking rent at the time was $720 per week but we managed to get a reduction to $670 per week. After our departure in early June, the place was listed at $670 but two further reductions in asking rent have now brought it down $575 per week and still, it remains vacant! I call that a 20% discount on the original listing rent in January.

    • Yes Hask and another shiteload of ’em is on the way as we speak. All them overleveraged speculators will have no other choice but to dump them on a falling and illiquid market and accept any price they can get.
      WHAT COULD POSSIBLY GO WRONG, BUDDY?

    • Hopefully that translates to Melbourne as well. Just renewed the lease and first time no rental increase in the last five years.

    • two further reductions in asking rent have now brought it down $575 per week
      If it is a one-bedroom then it might be suitable shelter for a single pensioner.

      Can anyone tell me what the single pension is these days?

      • Basic rate = $430 per week.
        30% of income is a figure often given for affordable rent = $129
        Let it go up to 50% of income, because this pensioner doesn’t do very much or eat anything much and you get to $215 per week as the price it’s got to fall to to match the single pensioner market.

  6. ErmingtonPlumbingMEMBER

    The worse the situation is in this area,…the more resistance we will see, from Government of any stripe, to actually reducing immigration numbers,…inspite of what ever utterances to the contrary are made.

    • What is your take on the Hello Melrose development at Bartlett Park? Did they manage to flog most of the OTP units off to the bus loads of ‘international guests’ a few months back?

  7. Living in Perth and seeing the number of apartments that are springing up here, which seems like a lot to me. Then looking at that graph seeing the difference between Perth and Sydney leads me to think it must be insane over there. What makes me scratch my head is all these immigrants wanted to leave their highrise rat races only to come here and turn this country into one.

    • They don’t. They are being exploited like a live cattle industry going in the other direction. The LNP, ALP and The Greens think this is a moral form of economy that the elite will regulate – not the electorate.

      The Australian public are not allowed to determine how big their own country will get. That’s up to the CFMEU, High Rise Harry, Anus Bollox, screeching social justice warriors (Liz Allen) and the banks. It is they who will plan the slums of the 21st century and full them up so that Australian cities becomes like Asian cities. And it is they who should be held accountable. Don’t be angry at the immigrants – direct your anger at the morons who are directing this catastrophe.

      The party system is a protection racket that prevents the Australian people from determining their own destiny. Elites have decided to F*** Australia – and you are a racist if you don’t follow along blindly.

      Vote for anyone but the big 3 parties in the senate – anyone with a pulse. Vote for people who are committed to stop the destruction of our society via mass immigration. Ideally not one ALP, LNP or Greens senator should be given a seat in the Senate unless they have a policy to return to a 70k immigration intake. Drain the upper house swamp at the next election and give these pricks a taste of democracy they will never forget. It is the only way to reform our parliament.

    • FeknameMEMBER

      Immigrants will do what we all do when we’re young- keep your head down, work, and try to break through into something better. Maybe a bigger (well designed) apartment, maybe a detached. How is anyone to make an informed decision when all the leaders and commentators say the same thing? “Everything is fine”.

    • The migrants that are getting crammed into the place aren’t helping their cause when the don’t demonstrate common courtesies – such as not being pushy on public transport, not talking loudly in a foreign language on a crowded train / tram / bus, not sprawling themselves and their extended family on busy footpaths, and not spitting in public.

      • Yeah, but you’re a racist if you expect that your social conventions and public values should be respected. You have to respect everyone else you see. Just ask Dr Liz Allen. Get used to it and take your medicine. This is to pay you back for your white privilege and patriarchy and for having a higher standard of living than other people – which is racist. You need to have your standard of living dragged down to make Dr Liz Allen happy. It just so happens that that makes the Scottish immigrant Anus Bollox happy and Russian Immigrant and Zionist ‘High Rise Harry’ ecstatic. Funny that.

        Get used to the smell of stale urine in the elevator and people snotting in the sink of public bathrooms. Join in and get with the program. Yell back to people in public transport at night by the light of flammable cladding. Soooo romantic. Enjoy the diversity as you are crammed in. You’re racist if you don’t.

        Or live at Potts Pt or Toorak where you don’t need to experience it at all.