Be it Sydney, Melbourne or Brisbane, all you need to do is look up to get an understanding of the epic apartment construction boom currently underway across Australia’s eastern seaboard.
There are cranes littering the skylines of Australia’s largest cities, particularly in inner city areas. It seems apartments are being built here, there and everywhere.
The hard data backs up that view. According to CoreLogic, citing March quarter building activity figures released by the Australian Bureau of Statistics (ABS) earlier this month, there are currently record-high numbers of apartments under construction in New South Wales, Victoria and Queensland, underscoring the magnitude of the current high-rise construction boom.
The chart below, supplied by CoreLogic, tells the story. In the first three months of 2016, approximately 29,987 apartments commenced construction, overshadowing the 25,122 figure registered for houses. This was the first time ever that the number of apartments commencing construction outnumbered those for houses in any single quarter.
Epic. Building upwards, not outwards, as was the case for many decades.
Given the larger lag time that it takes to complete an apartment complex, the large quarterly increase in apartment commencements took the total number of apartments currently under construction to a record-high level of 152,449, nearly 2.5 times more than the number of houses being built at 63,414.
The word “parabolic” comes to mind when looking at the red line in the chart below, supplied again by CoreLogic, showing the number of apartments currently under construction across Australia.
And, based on the number of apartments that have been approved but have not started construction, that red line looks set to get even higher. According to CoreLogic, as at the end of March 2016, there were 24,175 apartments which had been approved for construction but not yet commenced, again dwarfing the figure for houses at 8,817 houses.
Cameron Kusher, a research analyst at CoreLogic, believes the enormous surge in high density housing supply not only raises risks of oversupply in some areas, but also the prospect that some projects will never be built.
“There are though concerns of ‘over-building’ in some areas, especially considering in certain locations much of the new unit supply is targeted at investors rather than the owner occupier market,” says Kusher. “Given the challenges in securing enough pre-sales to trigger the commencement of some projects, over the coming quarters, we’re expecting that some projects will not begin construction.”
Of course, with so much supply hitting the market, there are also risks that many apartments purchased off the plan may not be worth what they were initially purchased for, leading to settlement risks and the prospect of negative equity for some buyers.
In a research note released in May this year, Kusher suggested that tighter restrictions on Australian housing investors and overseas buyers from Australian banks as two factors that could amplify settlement risks over these properties in the years ahead.
“Many of the units are coming up for settlement in similar locations and will compete with existing unit stock,” said Kusher.
“With so much stock coming online at once there is an increasing concern as to whether settlement valuations will actually meet the contract price of these units.”
These risks could be further amplified by a slowdown in buying interest, as witnessed by some unusual methods being implemented by property developers in Melbourne recently to bring forward potential demand.
According to the Australian Financial Review, developers are offering trips to Europe and luxury Asian resorts to off-the-plan buyers of Melbourne apartments as rising supply and falling demand increases pressure on developers.
DealCorp managing director David Kobritz, the developer offering the incentives, said the offer was an alternative to usual promotion packages such as rent guarantees, window furnishings, furniture or technology packages.
“We just felt it was something different,” he told the AFR. “It has been a long, cold, wet winter and we thought it might just help persuade someone on the verge of buying.”
While offering incentives to potential buyers is nothing new, and this is only one developer, it provides further anecdotal evidence of the tempering in demand in some specific property markets, particularly compared to recent years.
You can read more here.