Foreign speculators crushed as Melbourne’s land bubble bursts

By Leith van Onselen

I noted last month how Melbourne was threatening a re-run of the 1890s land bubble and bust.

This came after Melbourne’s median lot price per square metre had surged a whopping 29.3% in the year to March, with the typical median Melbourne lot value surging to $359,000, and the price of a new house-and-land package in Melbourne “pushed to well above $500,000 (despite smaller lots) making a new home unaffordable for many”.

It also came after Rich Lister, Nigel Satterley, last month stated that his Satterley Property Group would start offering Melbourne lots as small as 80 square metres less than a fifth of the size of a traditional lot to ensure house-and-land packages in its estates remained affordable to local residents.

Well, it’s all starting to come a cropper, with foreign speculators behind the surge in Melbourne lot values “panicking” as prices fall and settlement looms, From The AFR:

Speculators who hoped to get rich on a boom in Melbourne land prices are “panicking” as settlements loom and they can’t find developers to on-sell their sites to, according to Resi Ventures’s Khurram Saaed, who has been developing for 15 years…

“These are people who have been successful in other business, and who have just bought land with no due diligence in the hope of making a lot of money in three to four years’ time by flipping the site prior to settlement”… With the “music now stopping” and the banks unwilling to lend money to speculators who don’t have a development “resume”,..

He said many of the speculators were former real estate agents from the local Indian community, but in the past there had been a high proportion of Chinese speculators in the market…

Saaed concludes the situation will worsen in 2019 and 2020 as more settlements come due. Melbourne’s lot prices have also surged thanks to Chinese developers taking control of Melbourne’s land supply pipeline:

Chinese developers have taken a virtual stranglehold on the future supply of new housing in Melbourne’s outer suburbs after acquiring more than two-thirds of all big greenfield land parcels offered for sale in the past 18 months, in deals worth about $2 billion.

This surge of foreign capital has pushed broadacre land values above $1 million a hectare and contributed – along with planning and infrastructure delivery bottlenecks – to the cost of a standard 400 square metre lot rising 30 per cent in a year to a median of $323,000.

Figures from real estate group RPM show greenfield sales to foreign purchasers reached $1.2 billion last year, accounting for 67 per cent for all land sales above $10 million, up from 15 per cent in 2014.

But how long can that go on as the Chinese currency, the CNY, comes under more pressure and China tightens its capital account further?

It is salient to recall the last time Melbourne enjoyed a land bubble of this magnitude owing to booms in disintermediated credit, foreign capital flows and population was in the 1890s:

When it burst it took seventy years to recover prices.

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Comments

  1. Ultra-Rich Save Millions by Exploiting Hong Kong Home Loophole – Bloomberg

    https://www.bloomberg.com/news/articles/2018-08-15/ultra-rich-save-millions-by-exploiting-hong-kong-home-loophole

    When Pan Sutong, the billionaire chairman of Hong Kong investment conglomerate Goldin Group, splashed out a reported HK$2.5 billion ($318 million) for a home in the exclusive enclave of Deep Water Bay last year, he saved himself a cool HK$370 million in tax.

    How? The three-story mansion with swimming pool was held via a shell company, meaning the purchase incurred just 0.2 percent in stamp duty. Assuming Pan, a permanent Hong Kong resident, already owns property there, he would have paid a 15 percent levy in a regular transaction. … read more via hyperlink above …

    • A lot business men in nice suits smell like poop and fear instead of sex and beer lol please explain ?

    • Up 29% over a year and down 2% in two months seems like it would give people plenty of reason for panic if they bought close to the top- especially given it looks like the main reason it hasn’t fallen further is a lack of buyers at any price.

      • Not dreaming, just reading the first sentence of the piece –

        “Speculators who hoped to get rich on a boom in Melbourne land prices are “panicking” as settlements loom and they can’t find developers to on-sell their sites to”

        No doubt they will find buyers eventually, but it doesn’t look like it’s going to be at ‘peak price minus 2%’.

  2. The Indian Real Estate agents from Werribee have been running rampant in rural Little River and Lara. They’d often send a group of spotters to door knock. Put it down to cultural differences but they’d drive straight into your property and have a good drive around before coming to the door. Did it to us and a few neighbours – predictably they got told to f-off! A recent nearby sale went to an Indian agent representing a syndicate. They immediately went to the neighbours and offered to buy.
    These guys are the dumb money, the greatest fools and can carriers!

    • +1 I mentioned a guy I know at work (of Indian background) going balls deep in $1.6M worth of mortgage debt (interest only) because he thinks everyone will come here and land “there not making any more of you know!”.. *sigh*

      • Sorry plenty of idiots, but those idiots are short on change. 😀 No debt for these plebs..

      • This is precisely why I believe an awful lot of our foreign friends will end up bailing on this country when the proverbial hits the fan.

        They have two choices: stay and pay down a massive debt on an asset that’s worth half what you paid for it OR buy a one-way ticket back to wherever you came from and be debt free.

        (Okay, the 3rd is declare personal bankruptcy, but that’s hardly a painless option either)

      • kiwikarynMEMBER

        #4 option. Abandon your negative equity property here and move somewhere prices are still going up. Like the US or Canada. Or Europe. Probably plenty of places still taking “skilled” migrants.

  3. dissonanceMEMBER

    Don’t disagree that land prices are at record and ridiculous high levels historically. Don’t disagree that there will certainly be some retrace of the recent huge price rise. Not a fan of RE as an investment class at these levels.

    However, Oz and the world are navigating the brave new world of negative interest rates, QE, potentially unlimited gov debt and fiscal stimulus (so long as current account doesn’t get too out of whack), mass immigration from wealthy rather than refugee countries with no end in sight with financial inter-mediation and government interference in the free market that provides a Put to all leveraged property owners. All this some 40 years into the post gold standard monetary fiat experiment of which the impossible and remarkable post 2008 GFC seems to have re-written the laws of possibility.

    Were people wrong to jump on the rising trend of property wealth and home security in a world of inflating wealth but deflating costs of basic necessities? Will the government allow a collapse of the property market and thus the economy? I suspect that a long period of ‘a soft landing’ is much more likely than the crash many here wish for. The gains may be over but the rationale and desire to park cheap money/debt into property in an inflating world of volatile other asset classes remains firmly indoctrinated into the upwardly mobile world over.

    The Oz government hasn’t even started pulling out the big tricks yet to support the property market. I have just returned from 5 years flipping US properties from the GFC lows and AUD highs in Kansas City USA. Mostly middle to lower end properties (selling $110-$150k) and mostly to “FHA” buyers. These buyers put down 3% deposit on a loan that is backed by Freddie Mac or Fannie May (Gov owned lending institutions). The lenders make the loan risk free as the borrower pays “insurance” against default to Freddie/Fannie of about 3%. The seller, me, is then asked to pay “buyer loan costs to about 3%” which essentially covers the 3% insurance. End result is that people can buy houses with almost no money down, mortgaged to banks that lend risk free guaranteed by the government at interest rates locked in for 30 years at 3.5%. Inflation is running 2.5% and the Fed Reserve has maintaining moderate long run inflation as one of it’s core tasks.

    Again, I do not recommend buying RE at these levels but neither would I bet on a property crash. We have seen the property crash movie 10 years ago overseas and no government around the world wants to see it again. Very slow melt much more likely, supported by immigration, tax incentives, FHB incentives, negative real interest rates etc etc.

    • harry petropoulosMEMBER

      have to agree with you that prices will be gradually decreasing as opposed to crashing overnight…………..but the result is exactly the same…………..whether they crash by 30% in 12 months or it takes it 5 years to decrease by 30%,,,,,,,,,,essentially what is the difference?????
      Lets just face facts that property prices went crazy and now we have to face reality…………what bothers me is that interest rates are so low and yet we have a problem that cant be resolved

      • If property price crashes 30% in 5 years than it is slow melt down that will not effect the employment, production, retail, etc as much. But if it goes down by 30% in 12 months than there will lots of jobs loses, cries, retail sales falls, etc.

    • MediocritasMEMBER

      @dissonance: Couldn’t have said it better myself. The most likely outcome IMHO is a replication of events overseas. There may be something of a sudden shock, but it will be dealt with as it was in the USA. The RBA will end up with an inflated balance sheet and Megabank will play the get-out-of-jail-free card. As in the USA, a central bank can play a very long game with no risk of default when it comes to slowly offloading assets.

      Individual speculators would get burned in that scenario, but not to the point of despair and revolution. They’ll be offered the same financial safety nets that were provided in the USA. What awaits us therefore is a future like Japan’s, Europe’s and America’s, “lost decades” and an extended period of political malaise that will cause continual churn of elected officials, but but nothing so severe as to cause people to wake up and challenge the true money powers.

      Many call for a hard collapse followed by wise restructuring and a phoenix like resurrection, but I really don’t see this as a highly probable outcome.

    • All debt fueled speculative manias explode. Name one that didn’t? I can name some that haven’t as yet but none that were and then went on to stand the test of time to be fine. Happy to hear examples if there are any.

      Seriously, the U.S. gov threw the kitchen sink at its popping bubble and failed, what credible evidence do you have to say the Aust gov would do any better? Sure they can juice things going up but standing infont of the mass wave of panic as all hell breaks loose? No doubt the railroad mania, south seas bubble or any other historical bubble had vested gov interest but the all failed.

      The only way this is not going to end badly is if it’s not really a bubble. In which case bad luck if you’re not part of the landed gentry .

      But if it is a bubble, why waste all this effort hypothesising nonsense with no historical evidence. If it really is a good ‘ol speculative mania (which I do believe it is) just sit back, relax and enjoy it get crushed inevitably under its own weight. If it is truly unsustainable it will / must crash.

      • “The only way this is not going to end badly is if it’s not really a bubble. In which case bad luck if you’re not part of the landed gentry .”

        This is pretty much exactly what has happened

        It was a one-off (relative) wealth transfer.
        The ladder was quickly pulled up and away, and people jumped as high as they could to get on it.

        But the ladder isn’t coming back down

    • Superannuation !!

      The government will allow access to the Trillion $$$ superannuation nest egg/savings; problem fixed !

      She’ll be right mate !

  4. The Horrible Scott Morrison MP

    You need to have some gentle sideways relaxation so that the next phase of wealth accumulation for ordinary people can start again. Anti-Australian crashists will miss out big time.

  5. To be fair, there were 2 world wars in that 70 year period, plus the currency was on a gold standard etc, etc. But yeah, it will probably take a few decades to get prices back to the previous highs and a lot can happen in that time, especially now that things in general happen at an ever increasing pace.

    Property investors who are just getting into the market now, or did so over the last couple of years are really picking up pennies in front of a steamroller, though.

    • The other way of looking at it is that it took a once in several generations baby boom combined with the post-war surge in immigration to finally get house prices back to pre-bust levels.

      • Hill Billy 55MEMBER

        And we’ve had the immigration surge already. To top it off, just look at how impotent the Chinese government has been in trying to kick start their baby boom to replace the one child policy.

        As Gough may have said, “Well may we sing ‘God save the Queen’, because nothing will save the property speculators”

    • How about your average mum and dad who regularly refinances to release equity on the back of value growth, just to cover living costs? How do you reckon they might go? This has been driving consumption for years. The Home ATM. Without capital growth it looks sick. Would love to see some refinancing data to see how much of the mortgage book is refinanced annually and whether this has changed much in number and value in recent times. No one seems to be paying much attention to it.

      • darklydrawlMEMBER

        Yes.. Totally agree. Everyone keeps banging on about “She’ll be right, even with significant falls because most folks have a stack of equity built up over the years”. Seriously? Whilst I don’t have hard data on this, I know plenty of those people who have dipped into that equity multiple times over those years for new kitchens / renos, overseas holidays and the ubiquitous new motor vehicle (or two) and some highly leveraged IPs – not to mention some who just wanted some extra cash…

        That pool is a lot shallower than many people realise.

      • SoMPLSBoyMEMBER

        Spot on!
        Built this way by design.
        Can’t afford to live in Straya?
        Well, we have a loan to fix that!

      • Jimbo, I agree with you but you cannot protect some people from their own stupidity.

        People should try living within their means.

        Your comment,”How about your average mum and dad who regularly refinances to release equity on the back of value growth, just to cover living costs?”

        Response, “Stupidity must be punished !”

    • Even if he gets a fool with $1.3mil to piss up against the wall, he’ll still lose stamp duty, legals, sales commission and holding/improvements costs, i.e., 100 grand minimum.

      • Plenty of similar blocks in Reservoir for $800-$900k. Maybe not quite 1000sqm but at least 800-900sqm.

        Asking $1.5m is absurd and deserves to lose their shirt.

  6. Reports from the coal face, big drop in sales over the last 3 months in Melbourne land estates. Only estates where developers are looking to move stock quickly by undercutting the competition are holding sales volumes up to a half reasonable level. Chinese still buying, but not as much.

  7. It’s interesting that last chart is only up to 2006 and is already insanely high. How much worse does it look today?

  8. Spoke to Sydney high rise developer today. Asked how sales are going. Not good at all was the answer.
    Very tough times are coming.
    The bad news anecdotes are not even close to being in the statistics yet.
    It appears to me that we are very close to entering if not just inside the doom loop
    Buyers will continue to strike because being patient will allow them to buy for less tomorrow, or the next day or,….