Speaking at the BIS Shrapnel Forecasting Conference on Wednesday, Kim Hawtrey, associate director of building forecasting, said that Australia is facing “the greatest apartment boom of all time, possibly of any country, relatively speaking” and it could be “an event we’ll be talking about for years to come”.
According to the economist, Australia could be heading for a serious “hangover” as the consequences of rapid price growth, over-development and increasing settlement risks catch up with investors.
Mr Hawtrey said that although some cities such as Sydney are catching up after years of undersupply, when it comes to apartments “we’re getting way ahead of ourselves” – and ahead of underlying demand.
He said: “Use of sky acreage [in Australia] has gone beyond effervescent to positively humongous. Pumped up by investors, it’s theme park scary how many apartments we’re building.”
‘The pain will really be felt in 2017 and 2018’
According to BIS Shrapnel, the boom is being “driven by the highest population growth in the developed world, the lowest interest rates in history and the flight back to bricks and mortar by investors in the wake of the GFC”.
Despite these underlying drivers, he noted there is still significant cause for concern.
“You’ve got to be concerned when we’re getting such a glut of rental properties flooding into the market and getting so seriously ahead of ourselves”, Mr Hawtrey said.
“In the 2015-16 financial year, we built 116,000 attached dwellings – that includes medium density – [and] 70,000 of those were high density. It’s an unsuitable high. We’re sitting on a precipice and supply is outstripping demand.
“And it’s like an all-night drinking binge – we’re going to have a huge apartment hangover the morning after.”
Indeed, Robert Mellor, managing director at BIS Shrapnel said: “There will be oversupply in all cities except for Sydney. The pain will really be felt in 2017 and 2018.”
The group estimates that only about 150,000 to 165,000 dwellings would be needed as population growth falls, against a supply of 214,000 by 2017.
Mr Hawtrey said that developer risk was particularly increasing in Melbourne, due to the sheer size of the city’s apartment boom, which has seen “a variety of colourful players coming into the market” who have “what you might describe as varying balance sheet strength”.
“What we’re now starting to see in Melbourne is foreign developers who paid too much for the land, they bought too late in the cycle, maybe in the last 12 or 18 months. They paid too much and now they’re under pressure to sell that land, probably for less than they paid,” he explained.
“And the risk of that is those sort of small-scale, mini property developers can more easily start to get into financial trouble when the market starts to soften.
“We’re noticing that developers are starting to raise commissions to try and move their unsold units, for example.”
Settlement risk is also increasing in Brisbane, with Mr Hawtrey noting that investors who bought off-the-plan may find they get a “nasty surprise” in the next 12 months as lending becomes more expensive and interest-only loan arrangements exacerbate price discrepancies.
“Settlements are already taking longer to finalise and we may start to see, over the next 12 months, projects being shelved and banks pulling back on loan commitments and a reduction in foreign buyer interest in the market,” he said.
‘No denying that there is a social change going on’
During question time at the event, the property research group said that “there is no denying that there is a social change going on in Australia towards high-density living” and that the “affordability advantage of apartments, the growing shortage of land in a city like Sydney, and the change of attitudes amongst the younger generation will play a part in driving us towards apartment living”.
However, the group also suggested that the apartment boom will not necessarily stay at this level, and that despite the huge change now, in hindsight the boom could just be “a discrete event in history”.
Mr Mellor added that he was “somewhat concerned that the market is now in an investor-developer cycle, [and] that there are bigger cycles to come”.
“We are in a permanent change in home ownership,” he said.
“There will be declines of home ownership 20 years out.
“If investors only come into the market for capital growth, then there may be a significant reduction in off-the-plan apartments.”
He added: “It is critical how investors respond in a period of sustained price growth.”
[Related: On the Record: Robert Mellor, BIS Shrapnel]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.