Apartment market going flat

Developers are having to build for a different market: rich downsizers.

Construction cranes over Brisbane at sunrise, Bowen Hills. Picture: Liam Kidston

Across the city skylines, the plethora of cranes building high-rise apartments has peaked.

The number of apartment sales is falling, as are prices, as the boom changes direction and regulators continue to warn of pockets of oversupply.

It is not often one of Australia’s richest people — with a fortune stemming from more than 50 years of building apartments — calls a turning point. But Meriton founder Harry Triguboff has signalled the change.

“Soon it will be a good time to buy,” Triguboff tells The Australian, saying new apartment prices have fallen 10 per cent over the past six months.

And then there is the wave of investors and owner-occupiers who have already dived into the now cooling property boom.

“Australians could lose an enormous amount of wealth,” Triguboff says, warning that a rapid fall in apartment construction will hurt an economy that is still suffering from the resources downturn.

A rash of economic, regulatory and social factors are combining to deflate heated property markets and particularly high-rise apartments in Melbourne, Brisbane and Sydney, where a wave of supply is hitting the market.

Number of unconditional sales over the past 10 years.

Last week Reserve Bank of Australia governor Philip Lowe signalled Brisbane’s building boom was coming under close ­inspection.

“We are also watching the Brisbane property market carefully, particularly the effect on prices of the large increase in the supply of new apartments,” he told a dinner in Brisbane.

The comments come as the Brisbane apartment market has been softening under the weight of a wave of new towers.

Sales of off-the-plan apartments in inner Brisbane have dropped, from a peak of more than 1600 in the December quarter of 2014 to around 300 in the June quarter of this year.

CoreLogic head of research Tim Lawless says the inner-city Brisbane apartment market looks “quite problematic” given its supply, and puts Perth and Melbourne in the same category.

“Encouragingly, we have seen a peak in the construction pipeline for all those cities which suggests to me that we probably are getting close to the worst of the market conditions in those areas, but we still expect there to be some settlement risk,” Lawless says.

Number of cranes in use for residential construction.

Over the March quarter, 25 per cent of Brisbane apartments that resold changed hands at a loss, a proportion Lawless tips will rise.

The new supply has been affecting sentiment in the established market, where Brisbane unit values fell by 3.2 per cent over the year to the end of last month on CoreLogic figures.

“With supply levels being as high as they are in Brisbane, that’s affecting valuations but it’s also ­affecting confidence,” Lawless says.

“Buyers should be relatively cautious around inner Brisbane.”

Place Advisory director Lachlan Walker says the Brisbane apartment market has “softened considerably” over the past year but stabilised in the most recent quarter.

A regulatory clampdown on investment lending designed largely to cool the heated Sydney market has “put the handbrake on the Brisbane marketplace”, Walker says.

He forecasts a 12-month period where the extra supply will wash through the Brisbane market before the cycle restarts and the city comes back into undersupply.

And Sydney could be hit even harder, according to AMP Capital’s Shane Oliver.

In Brisbane, rental yields are likely to edge slightly lower but remain more ­attractive than in other states, Walker says, while taking a philosophical tone on prices.

“There could be a slight softening in price, but I don’t think there’s going to be significant changes in prices of apartments overall,” he says, adding it is “pretty hard” to deliver new apartments any more cheaply.

Shane Oliver is tipping a fall in apartment prices in Sydney and Melbourne of 15 to 20 per cent. Picture: Supplied

Average prices for new Brisbane apartments have even started to rise this year as the stock coming to market changes and developers go up-market, chasing wealthy downsizers and owner occupiers.

The weighted average sale price passed $725,000 in the June quarter, up from around $578,000 a year ago, according to Urbis.

The number of projects launched per quarter has slumped from 25 in the second quarter of 2016 to five a year later.

Urbis director Paul Riga says: “What we have seen over the past six to nine months is the projects that have gone to the market have been slightly more focused on an owner occupier.

“It’s not necessarily being driven by the number of sales that are being made, it’s more around the product that’s being sold.”

Banks are playing a role in the change, cutting back lending to investors in the wake of pressure from the regulator.

Meanwhile, after a significant increase in the number of investor-grade apartments over the past two to three years, commercial lenders are now more willing to look at product “that’s differentiated and offers a lower level of risk”, Riga says.

He has noticed a rise in bond lodgements in inner Brisbane, showing tenants are moving into the new stock but many of those are moving out of established apartments nearby.

Across the country, there are pockets of concern as the apartment building boom tapers off.

Forecaster BIS Oxford Economics expects that by 2019 ­national building starts for high-density (above four-storey) apartment buildings will have halved from last year’s March quarter peak of just under 20,000 and could drop further the following year.

Managing director Robert Mellor says the fall in housing construction will have a “significant negative” impact on economic growth. “The RBA and Treasury are being a bit optimistic on the dent to GDP growth. We will not see economic growth at 3 per cent,” Mellor says.

BIS Oxford Economics has previously forecast median values for units in Sydney to fall 2 per cent in financial 2018 and 3 per cent in financial 2019.

And the forecaster in April said more than half the apartments bought off the plan since 2011 in Melbourne’s CBD, Docklands and Southbank resold at a loss or only broke even.

The Housing Industry Association, which represents the residential building industry, also forecasts a big drop in apartment building, but says its forecast of 70,900 unit starts in 2019-20 is still “quite high” by historic standards.

The fall comes amid a clampdown on investor activity including extra stamp duty for foreign investors levied by the NSW and Victorian governments and an increase in scrutiny by the Foreign Investment Review Board, says HIA senior economist Shane ­Garrett.

Chinese capital controls had also had an impact by making it more challenging for buyers to transfer funds out of China for Australian property purchases, he says.

Domestic investors had also taken a hit from the bank regulator’s introduction of limits on the growth, he says. On the supply side, the amount of infill development sites available in major cities is not as high as it has been.

In future, the largest reductions in new apartment construction are likely to take place in the cities, where the most significant increases in building have occurred, he says.

He singles out Melbourne, where the drop in new unit starts could be close to 45 per cent.

As the lift in apartment building in Brisbane has been “more measured”, the decline won’t be of the same magnitude as it has been in Melbourne, Garrett says.

Lawless says the apartment market around the country is “fragmented’’.

“The markets around pure-grade investor stock are probably going to be relatively weak simply because of high supply levels, lower investor demand and lower demand from buyers,’’ he says.

“But the outlook for more owner-occupier stock or more boutique style apartments, or even medium-density dwellings, I think is remarkably strong.’’

Baby Boomers have been looking to downsize, while first-home buyers are more willing to consider an apartment closer to their work, leisure and family — which is not typically high rise product.

Sydney may not be immune and could even be one of the hardest hit cities, according to AMP Capital chief economist Shane Oliver.

Despite the focus on Brisbane, Oliver is tipping a fall in apartment prices in Sydney and Melbourne of 15 to 20 per cent.

It could be a case of the bigger they are, the harder they fall.

Oliver points to crane count figures — quantifying the number of cranes over the nation’s capitals to paint a picture of the rise in construction — that show the number of cranes in use for residential construction rose to almost 300 in Sydney in the March quarter as the number in Brisbane fell to just north of 50.

“A massive surge in supply ... combined with tightening lending standards for investors and interest-only, combined with tightening for foreign buyers, will result in 15 to 20 per cent declines,” Oliver says. “It’s quite possibly already started.”

Population growth of around 2.4 per cent a year in Melbourne compared to 1.5 per cent in Sydney could make the southern capital more resilient as the new residents absorb demand, he says.

Although Brisbane prices might come off “a little bit”, Oliver tips the Queensland economy to start to improve, which will support the apartment market in the southeast of the state.

Australia’s major listed residential developers including Lendlease and Mirvac reported only a modest amount of defaults during company reporting season last month, says Sholto Maconochie, head of real estate in Australia for analyst CLSA.

Lendlease had only two defaults out of a couple of thousand sales, one of which was in London and resold for a premium, he says.

“Brisbane’s still tough. Sydney’s fine. Melbourne’s got a bit of oversupply down Docklands way (and in the) city, but again it’s OK.”

Offshore buyers will still come to Australia, given property prices here are cheaper than in Shanghai, for example, says Maconochie.

Highlighting the patchy performance of the market, this weekend Chinese developer Aqualand sold $200 million worth of apartments in its luxury Lavender Bay tower on Sydney Harbour in two hours, mostly to Sydney-based owner occupiers.

While Triguboff warns that a slowing apartment market could see Australians lose an “enormous amount of wealth”, at the same time, he points to one source of ­demand: “People want to live in big cities.”