According to research firm BIS Shrapnel, residential building activity in Australia is going to slow down. But it won’t slow down as sharply as population growth will.
This means that in some parts of Australia, you could see an oversupply of properties. And that means prices could either stay steady or fall slightly.
BIS’s model says that the residential building boom peaked in 2014–2015 and that it will begin to decline in the coming years.
Dr Kim Hawtrey is an associate director with BIS Shrapnel. He explained when (and where) the building activity downturn will happen. ‘After recording strong growth over the past few years, we estimate that total dwelling starts reached just over 210,000 in 2014/15, an all-time record high… From this level, national activity is then forecast to begin trending down over the following three years, with the currently high-flying apartments sector leading the way down.’
On the face of it, that sounds good for property investors. Fewer new properties coming on to the market would generally help boost house prices and rents. Unfortunately, the number of people competing for those properties may also drop. Hawtrey said that ‘as population growth slows while construction activity remains strong, new supply will begin to outpace demand… This will see the national deficiency of dwellings gradually eroded and some key markets will begin to display signs of oversupply.’
Of course, this won’t affect all types of properties — or all parts of the country — equally. Upon releasing the report this morning, BIS said that ‘Victoria has been over-building relative to demand and is estimated to see areas of the Melbourne market move into oversupply.’
In particular, they’re talking about Melbourne’s inner city apartments.
More inner city apartments are being approved than ever before. According to a recent report by Victoria’s planning minister, ‘For the first time, approvals for multi-storey apartment construction in the Melbourne’s inner and middle suburbs now exceed those for traditional detached houses in outer suburban growth areas.’ Once those houses and apartments get built, the balance of supply will shift firmly to small inner city dwellings. And that’s a recipe for disaster in terms of prices.
Correcting, not crashing
If unit prices do stabilise or go down in Melbourne, it wouldn’t be a crash. It would just be a correction. If you look at long term unit price growth, we’re actually way off the trend that’s been set most of the years that the ABS has been recording the median price of attached dwellings in Melbourne.
Keep in mind, this isn’t even counting the difference between the price of apartments and terrace houses. There would likely be an even more dramatic upward curve if it were just looking at apartment prices.
Data source: ABS
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That’s what Hawtrey says anyway. This morning, he said that ‘Compared with total growth in households, they’ve built enough… They’re going into oversupply. They built too many apartments in one location, which is inner Melbourne.’
That’s the critical factor — household size.
The average household in Australia is 2.6 people. Yet most of the apartments that are being built in inner Melbourne have one or two bedrooms. Some are just lofts or studios — hardly suitable for a couple with a statistical average 0.6 of a child.
Australia would have to have a major cultural change before high apartment building activity would have a real impact on overall demand. In many parts of the world — European cities especially spring to mind — it’s normal for even a large family to live in an apartment, rather than a separated house. But in Australia, it’s still very much the norm for families with young children to live (or aspire to live) in houses. Preferably with big back yards for the kids (and statistically, a few pets) to run around. It’s all part of the great Australian dream.
It’s clear that many of these Melbourne inner city apartments are marketed towards singles and child-free couples. Some may be for wealthy individuals migrating to Australia for work or business. But just how many of these well-off singles and couples can there really be? According to the ABS, there aren’t many left to sell apartments to. Most either already own a home with a mortgage, own a home outright, or probably can’t afford a mortgage on an expensive inner city apartment on their current income.
Source: ABS
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So then it would be down to migration. But according to the ABS, net migration is going down. Less than 30% of net migration is with a permanent visa — i.e. people who are likely to stay long enough to buy a home. In the last year on record, there were fewer than 67,000 net new permanent migrants. Yet Aussie developers built tens of thousands of new apartments in capital cities.
Source: ABS
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That’s why BIS is right about a building slowdown having the greatest effect on apartments in inner city areas.
A growing group of analysts predicting Melbourne apartment oversupply
Over the past couple of months, more and more analysts have chimed in saying that apartments in Melbourne are at the greatest risk of a price correction. The time frames vary — most say it will happen in 2017 or 2018 — but they all agree that it will happen.
Last week, investment banking firm UBS put out a research paper saying that apartment completions would double in 2017. The analysts said this could lead to an oversupply in both Melbourne and Brisbane, where population dynamics aren’t as strong as Sydney. Earlier in July, a UBS senior economist said that in general, a correction for Australian house prices should start in 2016 or 2017.
In late June, LF Economics said that there is a housing crash coming, and Melbourne will be the worst affected. They predicted an oversupply of 123,000 dwellings. ‘Melbourne is primed to become the epicentre of a legendary housing market crash due to the combination of a staggering boom in real housing prices,’ said report authors Lindsay David and Philip Soos. They cited a frenzy of inner city apartment building, though their model did not discern apartments from houses.
In early June, Wakelin Property Advisory warned of a massive oversupply of apartments in Melbourne. Director Paul Nugent said that ‘Those who are invested in high-rise apartments should definitely be concerned. Their future is one of struggling to find and keep tenants, flatlining or falling rents, and negative capital growth.’
Investors with properties in Melbourne may face some tough decisions in the next three years. On the other hand, holding on in the long term may pay off. For most, it will be a matter of why they’ve bought in to the Melbourne apartment market. Those who wanted a nest egg in retirement might be OK. Those who were hoping to flip an apartment for a quick buck may be bitterly disappointed.
Eva Mellors
Contributor, Money Morning
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