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Robert Gottliebsen

Melbourne’s apartment bust escape route passes through Hong Kong

Robert Gottliebsen
Cranes over buildings in Melbourne’s Docklands. In 2017 and 2018 an avalanche of Melbourne apartments that were bought ‘off the plan’ will come up for settlement. Picture: Jay Town
Cranes over buildings in Melbourne’s Docklands. In 2017 and 2018 an avalanche of Melbourne apartments that were bought ‘off the plan’ will come up for settlement. Picture: Jay Town

Over the past two to three weeks, prices of “used” apartments in Melbourne dropped significantly as more supply hit the market.

This sets the stage for a significant downturn in Australia’s second-largest city which will almost certainly lead to an Australian recession.

But there is an alternative breathtaking scenario which would transform Melbourne.

Meanwhile, in Sydney, the recent rise we have seen in Australian buying of apartments is coming from investors not first homebuyers.

Young couples are buying a stake in a dwelling via the negative gearing advantages of the investment route. This is a significant social change (Dramatic shifts herald a new era in residential property, May 12).

The base Melbourne scenario has been well documented. Last November there were some 20,000 apartments under construction in the CBD and similar numbers in the suburbs. Another 20,000 CBD apartments had planning approvals and many of these have since been started.

There is another 40,000 plus apartments in the pipeline, although new planning rules have made development tougher.

The huge rise in apartment construction was driven by easier planning rules than Sydney, the fact that Melbourne’s population was rising rapidly, a big demand from the parents of Asian students and an avalanche of Asian investors (including those from mainland China) wanting a stake in Australian property. Asian investors can buy apartments being built but not “used” apartments.

The Asian investors paid a 10 per cent deposit in off-the-plan deals and planned to raise another 20 per cent from their own capital. They would borrow the remaining 70 per cent locally or raise the money in China. They received comfort but no binding deal from Australian banks.

It is now much harder to get money out of China and the Australian banks have effectively shut the door to most foreign investors.

In 2017 and 2018 there will be an avalanche of Melbourne apartments that have been bought off the plan and come up for settlement when building is completed.

Under the crisis scenario which is now feared by the market, the Asian investors walk away from their contracts leaving mountains of unsold apartments. The developers collapse and there are big losses for their financiers led by second mortgage lenders and banks.

As always happens in these situations, many contractors will be bankrupted. Many of the yet to be completed apartment developments may stop halfway because of the industry disaster.

We all know what happens because we have experienced property glut disasters many times in our history.

Fearing that disaster, many people who believe they want to sell in the future, are bringing their sales forward. The market for used apartments has been at a discount to off-the-plan for some time but that discount increased further in the last two or three weeks and the number of apartments coming in the market is rising.

We are now looking at 30 or sometimes 40 per cent discounts, particularly for one-bedroom apartments. With interest rates low, this represents an amazing opportunity for first homebuyers but the cultural change we are seeing in Sydney towards negative gearing extends to Melbourne.

However, fear that there is worse to come also holds people back from buying now, plus many of the one-bedroom apartments are far too small for families.

The decline in Melbourne apartment prices this month shows that the disaster scenario is the outcome the market expects and that outcome will devastate both the Victorian and Federal budgets.

The fear of this scenario has been deepened by a 50 per cent fall in sales of apartments to Asian investors in Sydney. There is a similar downward trend taking place in Melbourne.

But there is a second scenario that some in the Victorian apartment industry are working on.

In Hong Kong there is a deep underlying nervousness because the Mainland Chinese don’t want a democratic Hong Kong, as we understand it, in their midst.

There was an avalanche of Chinese who left Hong Kong just before the handover in 1997. There is now a similar nervousness in the city, although it has not erupted into an exodus which is confirmed by the current fall in Chinese demand.

Nevertheless, the fall in Australian dollar has made Melbourne apartments look very cheap by Hong Kong standards. The fact that there is a “used” apartment market some 30 per cent below the off-the-plan level is irrelevant when you are talking about personal security and long-term family wellbeing.

One bedroom apartments represents an affordable ‘security’ entry point for middle class Hong Kong residents.

Many Hong Kong residents are now pondering whether to take advantage of what will be a once in a lifetime opportunity to acquire a significant stake in a major city at a low price.

In simple terms, they would buy the contracts from those Asian investors who did not want to settle or could not settle. It is far easier to get money out of Hong Kong than mainland China.

The city of Melbourne and Australia would be transformed.

There would be no big slump and building would continue.

I am afraid my sense of the market follows the first scenario but I have seen just how massive Hong Kong capital exoduses can be.

If Victoria is smart enough to put out the Hong Kong welcome mat, the crisis could be averted.

Robert Gottliebsen
Robert GottliebsenBusiness Columnist

Robert Gottliebsen has spent more than 50 years writing and commentating about business and investment in Australia. He has won the Walkley award and Australian Journalist of the Year award. He has a place in the Australian Media Hall of Fame and in 2018 was awarded a Lifetime achievement award by the Melbourne Press Club. He received an Order of Australia Medal in 2018 for services to journalism and educational governance. He is a regular commentator for The Australian.

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Original URL: https://www.theaustralian.com.au/business/opinion/robert-gottliebsen/melbournes-apartment-bust-escape-route-passes-through-hong-kong/news-story/77619efe0a4e69ae89ca8cb89cb6f8c1