An apartment glut in some of Australia’s biggest cities has led oversupply and the risk of a sharp price fall. This will lead to a price fall of up to 15 per cent, leading economists warn. Despite the clear risks of a sharp downturn, interest rates continue to be at record lows, lulling the unwary into unwise purchases and increasing settlement risk. Further, when apartment prices do drop, there is likely to be a contagion effect that will see prices crashing across the entire property market. In a worst-case scenario, this will lead to recession.
Apartment construction booming
Apartment building has boomed in recent years, particularly on Australia’s east coast. One metric that highlights this fact is the biannual crane count survey by property and construction consultants Rider Levett Bucknall. They found that in the last three years, the number of cranes working on residential construction sites has soared over 300% in Brisbane, Sydney and Melbourne.
According to one of Australia’s leading economists, Stephen Walters, Australia’s apartment glut will see a price fall of between 10 and 15 per cent in the near future. He says it will get “ugly”, particularly for buy-to-let investors who are relying on capital gains. One reason for this dire forecast is the stagnation and fall in rents – a pretty good indicator of a weakening market.
As the supply increases, settlement risk – when off-the-plan buyers pull out of a purchase – is a growing concern for both developers and lenders. The risk increases when property values and rental yields stagnate, which we’re already seeing in some areas. With 160,000 constructions due for completion in 2017, the risk is high.
Interest rates remain low despite apartment glut
The Reserve Bank’s policy of continually slashing interest rates has been adding fuel to an already hot market. The two cuts this year have brought the property market to the very edge of stability, and possibly beyond.
According to international banking giant, Citi, with risks to the property market increasing, typical policy would see the reins being pulled in. However, we continue to see borrowing rates remain at record lows.
Apartment price fall to have contagion effect
When the value of apartments does drop, the rest of the property market is likely to follow. Even the Reserve Bank acknowledges that it is not possible to have a breakdown in one part of the market without other sectors being adversely affected.
What’s more, as the property market reels the rest of the economy is likely to follow. In a worst-case scenario, painted by CLSA analysts, all dwelling prices will fall eventually leading to a nation-wide recession.
With this in mind, now may be the time to sit tight and wait out what could be a very tumultuous period in Australian real estate.
You might also want to look at eradicating unnecessary spending – one easy way to achieve this is to cut out your strata manager and look after your body corporate needs yourself. It’s easy, fair and and will save you money.