Property prices are tipped to plunge significantly due to a massive oversupply of apartments, as developers continue to secure funding despite the banks pulling back on lending.
Speaking on ABC’s The Business last week, fund manager Roger Montgomery was asked to comment on a report released by Capital Economics that claims house prices in Australia will fall by about 10 per cent over 2019 and 2020.
“I wish that it was possible to be that precise. I think it’s going to be a whole lot worse than that,” he said.
“I know that in the short run things like price-to-income ratios, debt-to-income ratios, inflation and unemployment – these things will affect property prices.
“But in the long run, it’s supply that’s the issue and this time it will be supply that will be the catalyst for lower prices for dwellings in Australia.”
While many banks have stopped lending to developers and even made it harder for Australians to obtain mortgages for new homes, Mr Montgomery said the oversupply will continue as new alternative funding lines are opened.
“We know that [developers] are still securing finance from high-net-worth individuals through mezzanine finance,” he said.
“They’re continuing to construct; they’re continuing to oversupply.”
Mr Montgomery pointed to ABS data that shows Australia is producing apartments at a rate of about 225,000 a year – 50 per cent more than what we require.
“That’s been going for about two or three years, and we’d end up with about 12 months of oversupply, which, by the way, is roughly what the United States had just before their crash,” he said.
Mr Montgomery conceded the US market crash was driven by different forces – namely irresponsible lending – but said the catalyst for the predicted Australian price fall would be an oversupply of apartments.
This will cause problems for investors, he added.
“They are not going to be able to sell these apartments at full price; they’ll have to discount them, and that means a lower return to everyone.”
Meanwhile, Mark Mendel, CEO of online property agency iBuyNew, said talk of the apartment oversupply is “overstated” as a number of proposed developments will “never eventuate”, with many developers unable to obtain finance.
“While there is a lot of discussion about banks toughening their lending policies for buyers, they are even tougher on developers,” he said.
“Developers with no track record are getting a blanket ‘no’ from lenders across the board, while those with a limited track record are also finding it extremely tough.”
Macquarie Bank has already curbed high-rise and high-density apartment lending amid growing concerns about falling demand and oversupply.
The lender now requires a maximum loan-to-value ratio of 70 per cent, which means buyers will need an additional 10 per cent deposit on their selected apartments.
The bank also revealed the suburbs that will be affected by the new policy, including Sydney’s The Rocks, Haymarket, Millers Point and southern suburbs, Melbourne’s Docklands and South Wharf, and more than 40 postcodes spread throughout Queensland, including the Gold Coast and Brisbane’s CBD.