Those who invested in apartments off the plan in Melbourne’s Sheraton Hotel throughout 2010 and 2011 might well have thought they were onto a good thing.
With a great position right at near the ‘Paris end’ of Collins Street, this hotel offered great views, luxury design and was right next to the Bar Lourinhã.
Yet for the investor who forked out $2.195 million for unit 3001 in November 2010, things did not look so good after their investment was liquidated for $1.565 million in August last year, according to a report in the Australian Financial Review.
According to that same report, the purchaser of room 504 at 108 Flinders did little better – their $690,000 off the plan investment made back in 2010 netting them just $645,000 upon resale in May last year.
Such experiences have not been the norm. Between calendar 2012 and 2015, average prices for units and apartments within the Sydney CBD postcode jumped from $561,000 to $838,000. Between 2011 and 2014, median prices within the CBDs of Melbourne and Brisbane rose from $390,000 to $461,000 and from $451,000 to $500,000 respectively. Across all eight capitals, data from the ABS indicates that weighted average capital city dwelling price growth for ‘attached dwellings’ is up over the three years to March by 21.7 per cent.
Now, however, things appear to be changing. Compared with their peak in September last year, apartment prices in the Brisbane CBD have fallen by five per cent. Those in Sydney have dropped by 3.4 per cent since January, whilst Melbourne prices have been stagnant and appear if anything to be dropping back. Thanks largely to an oversupply originating out of the mining boom, values in Perth have tanked.
Moreover, clouds on the horizon are gathering. Even as lending activity to finance the construction of new investment properties has actually been running quite hot over the early months of this year, funds lent to investors to buy existing stock has dropped right back over the past six months or so amid a tightening of credit availability. Foreign investor activity from China is obviously largely dependent upon economic developments in that country. Whilst the number of apartments sitting empty remains at around normal levels in Sydney and Melbourne, vacancy rates in Brisbane have ballooned out to 4.7 per cent – well above the 2.5 per cent mark where markets are typically considered to be balanced.
All this is coming as the market is set for an avalanche of new stock. In a recent update, RP Data Corelogic suggested a whopping 231,129 new units were set to be completed over the next two years. This amount exceeds not only the historical purchase activity of new stock but indeed exceeds the historical purchase activity of new and existing stock combined.
That, along with the aforementioned pull back in pricing and tightening of finance conditions, could lead to a rise in the number of settlement defaults as investors discover that the value of their apartment upon settlement was not what it might have been when they made the purchase decision and that simultaneously, their banks were now demanding being more stringent in terms of loan to value ratios. That in turn, could further depress prices as developers are left with additional units of stock needing to be sold.
So, are we set for a crash? According to BIS Shrapnel senior manager – residential property Angie Zigomanis, that depends on how one defines the term. Zigomanis says a number of investors in places like Melbourne and Brisbane are already taking a substantial hit on the resale value of properties, many of which had been purchased at a premium to enable investors to take advantage of tax benefits related to depreciation and (in the case of Melbourne), stamp duty concessions for off the plan purchases.
“I would say that it isn’t a good short term investment at the moment,” Zigomanis said, referring to inner urban apartments.
“In terms of whether or not we are set for a crash, that depends upon how you define a crash – are we talking about a 10 per cent decline or a 30 per cent decline or a 50 per cent decline? I would say that a 10 per cent decline is not out of the question, a 30 per cent decline has the potential to happen but is not likely. In terms of a 50 per cent decline, I don’t think so.”
In terms of current demand/supply balance, Zigomanis says the market in Sydney is reasonably balanced, whilst that in Melbourne is leaning toward oversupply in inner areas, and Brisbane was also in oversupply. Moreover, thanks to massive volumes of work in construction, markets in Melbourne and Brisbane will be challenged by a pipeline of completions which more than likely will exceed what the market can be expected to absorb in terms of population growth and demand requirements.
Fortunately, whilst this may ordinarily have led to a hard landing in times of higher interest rates, Zigomanis says this may not be the case in the current environment as the relatively smaller differential between rental returns and interest repayments allows investors a significant number of investors to hunker down and ride out any short-term softness in valuations.
Zigomanis is not alone in suggesting that some warning signs are present. Speaking particularly of the settlement situation, RP Data senior research analyst Cameron Kusher recently said risks emanated from a combination of the size of the supply pipeline, the fading of growth in capital values, questions about whether or not some properties were in fact overpriced to begin with and the phenomenon whereby investors who previously may have been able to borrow up to 90 per cent of the value of the house are now able to borrow only 80 to 85 per cent.
In terms of the consequences of any major fallback in prices, from a developer’s point of view, both Kusher and Zigomanis say any increase in settlement defaults could leave some with apartments on their hands which they are potentially forced to incur holding costs on and sell at a discounted price – thus potentially wiping out part or all of their project margin on the overall project in question. Investors, meanwhile, face the prospect of forfeiting their deposit if they fail to settle or having the loan from their apartment secured against the equity in their own home.
Australia’s apartment market faces significant challenges ahead.
The question of how far prices could potentially fall is anyone’s guess.