Apartment bust gathers pace

Via New Daily:

An apartment glut in Brisbane, Melbourne and Sydney will mean better deals for renters, but more pain for developers and investors for the next one to two years.

Pete Wargent, co-founder of property investment advisory firm Allen Wargent, told The New Daily that the current oversupply of apartments in parts of Australia’s major cities had made it much harder for landlords to find tenants and, consequently, had led to a drop in rents.

He said that while Brisbane was “coming out the other side” of its glut, a steady stream of new apartments flowing into Sydney and Melbourne was putting downward pressure on rents across the board, and prices of new units.

“It will have less of an impact on the [sale] price of established apartments, because there aren’t many listed on the market at the moment, so there’s quite a lot of competition there,” Mr Wargent said.

“But for newer apartments and the rental market, the oversupply is probably going to take another 12 months to wash through.

“It has already led to a drop in rents in North Sydney and units near the Pacific Highway. And that has had a knock-on impact on established rentals, too, because people start thinking, ‘Well, if I can rent a brand-new apartment for however much per week, why would I rent an established one that has a bit of wear and tear?’”

However, Mr Wargent said that the shrinking pipeline of future projects and Australia’s rapid population growth suggested any negative effects resulting from the oversupply of apartments would be short-lived.

“It’s not like we’ve got a massive structural oversupply of dwellings. It’s just a temporary glut – a lot of very similar properties hitting the rental market at the same time,” he said.

He added, though, that some developers with limited liquidity would likely go insolvent at this stage of the property cycle, which inevitably lowers prices.

“When that happens, you quite often find whole blocks of apartments hitting the market – either finished or not quite finished. They hit the market at a lower price, so that can have an impact on prices,” he said.

“Some markets, like Ryde and Epping, are already well down from where they were – maybe down 20 to 25 per cent from 18 months ago.”

Riskwise Property Research said the number of units in the pipeline is down 38 per cent from 2017 levels in New South Wales and Victoria, and down 29 per cent in Queensland.

Ask Australia 108 if it is getting worse, at the AFR:

Amid falling valuations, buyers have walked away or defaulted on more than 100 completed apartments bought off-the-plan at Melbourne super skyscraper Australia 108, new figures show.

In its latest update, the tower’s listed Singaporean developer World Class Global said it had sold 88 per cent (or 971) of the 1103 apartments in the 101-level tower currently under construction in Southbank.

This compares to a near sell-out figure of 98 per cent or 1081 apartment sales reported by World Class Global for the September 2017 quarter, indicating a high cancellation rate of more than 10 per cent.

There is no doubt what banks and pollies are trying to achieve. They hope that force feeding people into these cities will drive up rents and, so, at least some of the valuation adjustment underway will be absorbed by higher investor returns rather than falling prices.

This is precisely what happened in the post-2003 Sydney property bust.

This time around the strategy faces two big problems. First, rents can’t outpace income growth which is terrible. Sydney income growth from 2003-08 was huge.

Second, Chinese numbers will keep falling as the trade war forces the yuan lower and Chinese the capital account is tightened even more, meaning fewer people can get money out. This will probably be exacerbated by falling student numbers.

There’ll be some offset in Indian and other migrants but they do not tend towards buying apartments and, when they rent, like to crush load themselves rather than land bank the property.

That is not to say that authorities won’t succeed in forcing young renters to wear the apartment adjustment in some measure but it will be slower and more difficult and, so, therefore, will be any turn in prices and construction.

Get ready for a lot more people living together in smaller spaces. That is, falling living standards.

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