Dramatic shifts herald a new era in residential property

There have been two sudden and dramatic shifts in the Sydney apartment market, which are set to spread to Melbourne, Brisbane and other markets.

It may herald a new era in Australian residential property.

The first shift is that the level of Chinese buying of Sydney apartments has fallen dramatically. The largest Sydney developer, Meriton’s Harry Triguboff, estimates that in the last month or so Chinese buying has halved.

The Chinese and other Asian buyers have been buying over 80 per cent of Sydney apartments in recent years so this is a huge and dangerous development.

But just as everyone began to prepare for the resulting calamity, a second dramatic shift has taken place in the last few weeks: There has been a surge in Australian buying of both existing and ‘off the plan’ apartments.

The increased buying has been so sudden that there has not been time to fully analyse the trend, but it seems that two forces are driving it.

First, the Coalition’s retrospective (see footnote) decimation of superannuation as a savings mechanism for up-and-coming executives and salary earners has turned Australians towards negative gearing as a savings mode.

And, secondly, this trend was accelerated by the fall in interest rates as well as the signal by the Reserve Bank that if inflation remains at current levels or moves lower, further interest rate cuts would be in the pipeline.

The latest surge in local buying includes first home buyers but increasingly young Australians are negatively gearing investment properties and either living at home or renting. Indeed, it has become the modern fashion for young people to be investors rather than first home buyers.

As we know, the ALP plans to confine negative gearing to new developments and reduce the capital gains tax. Australians who are suddenly buying apartments either don’t expect Bill Shorten to win the election and/or are setting up their negative gearing prior to a change in the legislation should Shorten win. An ALP win is now a real possibility. (Business should prepare for a Shorten win, May 11.)

Why have the Chinese stopped buying in Sydney? We don’t know the full answer but almost certainly it will be a combination of the fact that it is becoming increasingly difficult to transfer money out of China and Australian banks have withdrawn the welcome mat for overseas buyers.

Those who bought apartments ‘off the plan’ 18 months to two years ago are settling well because the higher values enable them to gain bank finance, but there is a fear that when more recent ‘off the plan’ purchases come up for settlement in 18 months to two years the funding to complete the purchase may not be available.

We are therefore set for a fall in apartment development and/or prices unless the local buying surge gathers momentum.

While Brisbane shows similar trends to Sydney, Chinese apartment buying in Brisbane has not been nearly as dominant as Sydney. In Melbourne, Asian buying has been at least equal to Sydney and may have been greater.

Whereas Meriton dominates Sydney, Melbourne is a far more complex market and on July 1 the state government is set to raise the levy on foreign purchases of apartments from 3 per cent to 7 per cent. That is causing a surge of apartment developments to be brought forward so there is intense marketing to foreign buyers suggesting they buy before the July 1 tax increase.

Melbourne’s foreign apartment buying is closely aligned with education and, unlike Sydney, there are far more properties that have been bought by the Chinese and left empty. (In Sydney, Meriton exerts great pressure on foreign buyers to rent and there are few empty apartments.)

Once the July 1 rush is out of the way Melbourne will almost certainly follow Sydney and see a decline in Chinese buying. Already in Melbourne older apartments are selling for lower prices than new apartments. This two-tier market is very dangerous and lowers the level of bank financing for new apartments.

The sudden fall in Chinese buying in Sydney is of great long-term significance to the nation. The Chinese buyers not only underpin the market values but have also enabled the nation to adjust to the fall in mining investment. They have been a key element in our prosperity. If it continues to be difficult for the Chinese to buy apartments it may also affect our tourism and education, which have been key export markets for Australia.

Meanwhile, Meriton reports that the rental market is strong in Sydney and the Gold Coast but Brisbane has dropped by 5 per cent because of a very big increase in units.

What about Harry Triguboff as Australia’s largest apartment owner? What is he doing?

“We in Meriton are well placed whatever takes place. We have pending sales for $1.5 billion, which will probably be mostly honoured by the banks. We sold a lot of our old stock, so we are debt free,” he says.

Footnote: There has been considerable debate about whether Scott Morrison’s budget changes to superannuation represent retrospective legislation. The first change, the $1.6 million asset level that triggers pension taxes, is debatable but if you declare it ‘retrospective legislation’ you must also declare the ALP’s superannuation changes retrospective. But there is no doubt whatsoever that the lifetime cap of $500,000 on non-concessional contributions which goes back to 2007 is retrospective legislation of the worst kind.