Australia's high rise boom is weighing on apartment prices

Photo by Scott Barbour/Getty Images

Australia is in the midst of an unprecedented high rise residential construction boom.

The skylines of Sydney, Melbourne and Brisbane – the three main capitals along Australia’s eastern seaboard – are currently littered with cranes, particularly in inner city locations.

While residential construction is taking off, the increase in new apartments has lead to a slowdown in house price growth, particularly for higher density units.

Increased supply, coming at a time when demand is softening on the back of affordability constraints, slowing migration, record-low wages growth and a crackdown on lending to housing investors, is putting pressure on prices.

Supply is now potentially outstripping demand in some locations, leading to price declines in what were previously boom areas.

Prices in Melbourne, in particular, are showing signs of softening.

According to the Australian Financial Review, a study of nearly 2000 off-the-plan properties in Melbourne valued by WBP Property Group between 2014 and 2015 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. Most of the properties studied were purchased between late 2009 to late 2015, according to the AFR.

Only 1% of properties surveyed were deemed to be worth more than their original purchase price, with the remaining 49% now valued at the same price they were originally purchased at.

Given the valuations were likely in nominal terms, in real terms – factoring in inflation (let alone borrowing costs) – an even greater proportion have likely lost value.

Although only a small sample size from one city using estimates from only one valuer, the study comes in the wake of warnings – including from the RBA – that the surge in high residential construction in inner city areas of Melbourne could lead to a supply glut forming, and as a result softening prices.

In its half yearly financial stability review released in mid-October, the RBA stated that the influx of development “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, adding “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.”

To provide an indication of what “very high levels” of apartment approvals means, the chart below reveals the surge in residential building approvals in structures four storeys or higher over recent years.

While it is now slightly dated – coming from June this year – it demonstrates just how rapid growth in approved high rise developments has been in Sydney, Melbourne and Brisbane.

With prices now starting to soften in areas of inner city Melbourne and Brisbane, some are warning that further price weakness may lead to increasing numbers of approved developments never making it to the construction phase.

“As a result of slowing housing market conditions, an additional risk for policymakers is where a large number of dwellings approved for construction are postponed or withdrawn as developers face fewer presales or lose confidence in their ability to deliver a profitable project to market,” said Tim Lawless, CoreLogic RP Data head of research earlier this month.

Lawless suggested variable rate mortgage increases from banks independent of the RBA, along with tighter lending restrictions in lending to housing investors, were responsible for softening demand for housing.

While many off-the-plan apartments are now being sold to foreign investors – according to the NAB’s quarterly residential property survey released in late October foreign buyers accounted for 28.5% of all new apartments sold in Victoria – it’s clear that domestic demand is now far weaker than levels seen in recent years.

Auction clearance rates are falling and price growth is moderating, indicating that sentiment towards the housing market is cooling. Even with record-low interest rates, demand is softening just as supply is ramping up.

While some moderation in house prices would be welcomed by the vast majority of policymakers, it’s clear that risks of further price weakness, or declines, in high density housing is growing, and not just in inner city Melbourne.

This, in turn, may also have ramifications for the outlook for residential construction in the year ahead.

You can read more here.

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