We are sowing the seeds of the next property rise

Around Australia, particularly on the east coast, we’re seeing developments in apartment market never before encountered.

We are seeing new developments in the apartment market.

I returned home at the weekend to discover that around Australia, but particularly on the east coast, we are seeing developments in the apartment market never before encountered. Apartment buyers and developers will need to understand the new games.

These events are capable of causing a significant downturn but also, in a strange way, we are sowing the seeds of the next property rise albeit that it is not imminent.

What is happening in Sydney is no less surprising than Melbourne and Brisbane but we will start with the southern and northern capitals because they have a similarity.

Go down to Kangaroo Point in Brisbane, or Southbank, Docklands and similar areas in Melbourne and scratch below the surface and you will find countless unsold apartments. And, in Melbourne at least, the going market price for a small apartment is about 20 per cent less than the price that will be quoted to you by the agents when you first see them. There is a vast over supply of one bedroom and small two bedroom apartments.

But it seems that a big portion (but not all) of the overseas Chinese who were behind the development of these tiny apartments have settled their off the plan arrangements. Somehow they found the money despite the restraints on getting money out of China and the fact that Australian banks turned their backs on them.

The builder-developers of these apartments were in danger of being bankrupted but so far there has been no major collapse, but some will be struggling. Meanwhile a one or two bedroom inner city apartment with a quoted value of, say, $750,000, can be picked up for around $550,000 or $600,000. Sometimes in auctions it is less because buyers don’t turn up. Although some have building defects, the inner city apartments are incredible value for those that can use them because the next round of inner city apartments in Melbourne must be built under the new planning rules and so will be much more expensive.

But when it comes to larger apartments, particularly in areas just outside the glutted markets, the story is entirely different. There is very strong demand from locals, including local Chinese. Developers in Melbourne are excited. But there is a problem. The banks have tightened their lending requirements and will only loan about 55 per cent of the value of the development even assuming that most of the apartments are pre-sold to people who are not overseas Chinese.

But apartment supply keeps coming to satisfy the demand because non-banks are rushing to fill the gap. (They also played a key role in funding the June 30 settlement crisis in some areas).

Their interest rate is about two per cent higher than the banks but the non banks will loan 70 per cent of the value. This is enabling many developments to proceed but it means that banks are being by-passed.

If the private non-bank financiers were not in the market creating apartment supply to meet the demand then we would start to see major shortages develop which would be the beginning of the next boom. If Melbourne local demand continues strong, then it is questionable whether the non-banks can fund the demand. The seeds have been planted for the next rise, depending on interest rates. In Brisbane, from what I can tell the underlying demand for better units is not as strong as Melbourne.

Beware of conclusions over a weekend back from overseas but Sydney is more jittery than Melbourne. This is strange because, unlike Melbourne, Sydney does not gave a glut of apartments in any major market, but it seems harder to get non bank funding for new developments although HSBC is moving into the market.

The higher prices in Sydney which are artificially boosted by the local councils are causing buyer resistance because of the fear of higher interest rates and the fact that non public servant salaries are not rising.

The largest developer Harry Triguboff’s Meriton will be increasing supply in the next year or two because of developments started years ago but delayed by council and state government regulation.

To illustrate the nervousness of Sydney, Harry Triguboff made one of his rare mistakes. He thought that if he developed three bedroom larger apartments he would attract Sydney families with children into the apartments. He marketed them for around $1.4 million. The families did not come. Instead they preferred cheaper cottages in the outer suburbs. Some moved to Melbourne or Brisbane where outer suburban cottages are far cheaper than Sydney.

Rather than families, people who house three groups in the apartments have bought the three bedroom apartments. Families with children are baulking at the big prices of inner city apartments and overcall the city is experiencing an easing of prices in many areas.

Meanwhile rents keep rising in Sydney because of the fact there is no glut and supply is being restricted. If interest rates raise half to perhaps one per cent then in time that lack of supply will lift rents further.

But if interest rates rise by any more, then the whole edifice will come tumbling down, including Melbourne.