Australian new home sales are falling, just as construction hits record highs

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Australian new home sales fell for a third consecutive month in November, adding to signs that demand for property is cooling.

According to the HIA, sales fell by 2.7% over the month, taking sales back to levels last seen in late 2014. A large 15.1% drop in multi-unit sales was entirely responsible for the monthly decline, offsetting a 1.1% increase in detached housing sales.

Reflective of the broader trend, sales of multi-units in the three months to November slid 11.8%, overshadowing a smaller 4.1% drop in sales of detached housing.

Harley Dale, HIA chief economist, believes that a “confluence of factors” is behind the slowdown in new home sales.

“A confluence of factors is driving a decline in leading indicators of new home construction,” wrote Dale following the release of the November report.

“The lagged effect of slowing population growth, an uptick in variable mortgage costs, over-reach on the part of APRA’s credit controls, and an easing in property price growth in Sydney and Melbourne are all in play.”

Despite the continued slowdown, Dale believes the drop is sales could have been even greater due to these factors, describing the result as a “welcome sign for the short term residential outlook”.

While sales still remain at elevated levels, an increase in supply, expected to ramp up even further in the first half of 2016, suggests that property prices – already slowing – could decelerate even further over 2016, particularly for high density housing.

That’s a view supported by a couple of Bank of America Merrill Lynch’s Australian economists, Alex Joiner and Alexandra Veroude. This morning, they released a research paper highlighting 10 key themes for Australia in 2016, one of which was “the coming residential bust”.

And in its financial stability report released in October last year, the RBA warned that Australia’s high rise construction boom, primarily led by increased investor activity and foreign buyers, “could lead to an excessive increase in construction activity and future supply overhang.”

“Some geographic areas appear to be reaching that point, particularly the inner-city areas of Melbourne and Brisbane,” the bank noted.

“Apartment approvals remain at very high levels in these areas, even though these rental markets already look soft; apartment prices have been little changed in the past year, rental vacancy rates are relatively high and growth in rents is subdued.”

Bolstering this view, a recent study by WBP Property Group of nearly 2000 off-the-plan properties sold in Melbourne over the past two years found that half are now worth less than their original purchase price.

According to the study, the average loss was about $40,000, or about a 10%, from their original purchase cost.

While it was only one study looking at one particular city, on balance, it appears that similar risks for Sydney and Brisbane’s apartment markets – the other major centres where high density construction has boomed – are also growing.

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