Developers have traditionally been most active in the high-rise apartment arena when they can sense a dollar or two to be made. Hence, for this sub-sector of the market it never really rains, but either pours a torrential flood of stock from the construction pipeline or hits a complete dry spell.
In recent times, the forecast has been for some major flooding of high-density development, particularly in Melbourne, Brisbane and Sydney.
Experts warn this is the biggest apartment boom we’ve ever seen and that, unlike the overall real estate sector where people keep talking up a busting bubble that’s highly unlikely to eventuate, a price collapse for these tall towers is almost certain.
The big issue
They say ‘birds of a feather flock together’ and apparently the same rings true for apartment construction across our major CBD locations, with the majority of new dwellings concentrated in and around one or two postcodes.
This means it’s highly unlikely that all these new apartments will assist in levelling out affordability issues for young homebuyers by creating ‘much needed accommodation supply’, as some in the property industry have argued.
Rather, this stock saturation is more likely to create its own, entirely new set of problems, particularly for unsuspecting property investors who decided to hop aboard the ‘off the plan’ buying bandwagon.
In a recent commentary for Property Observer, director of Sydney’s Richardson Wrench Mosman and Neutral Bay Robert Simeon says, “these developments are congested into the same post codes and are not spread, so a cold can quickly turn to pneumonia.”
He says concurringly, the latest boom can be traced back to December 2008, “when the ratio of foreign buyers was moved from 50 per cent of new developments to 100 per cent. This ignited property developers and respective state and territory governments to move overnight without any analysis to high density.”
Essentially, there’s been little by way of actual due diligence or considered planning conducted around this latest groundswell of apartment construction.
Instead, it’s seemingly been driven by a handful of vested interests seeking a quick profit rather than concerned local, state and federal governments attempting to house young Australian homebuyers at a reasonable cost.
Reasons to be worried
While previous apartment booms have caused commotion among industry watchers, Simeon warns “property investor mayhem” is likely to ensue from this latest debacle that’s apparently been allowed to continue unchecked for the last eight years.
“It’s one big Ponzi scheme totally reliant on the good faith of foreign investors completing on their transactions,” he says.
“Again without analysis these developments have been contained into developing areas – so what if the foreign buyers decide not to proceed as the vast majority of these developments are yet to be completed.”
Sydney’s Green Square development, which is currently underway in the south of the city, will deliver 27,276 new dwellings. This represents about a third of the 88,013 new apartments planned for designated high-density development pockets of the Harbour City.
Simeon says while wishful thinking suggests purchasers will consist of at least 60 per cent owner occupiers, the reality is more like 80 per cent will be foreign investors.
The same could be said for the additional 123,622 apartments in the pipeline for Melbourne.
With state governments busy counting the millions of dollars in stamp duty and land tax revenue they stand to make off the back of the latest apartment boom, no one has considered a contingency plan should things go pear shaped.
Even though, according to Simeon, a collapse in this sector could see prices drop a minimum of 30 per cent overnight.
“So whilst housing affordability is directly a responsibility of government I, like many, are not feeling comfortable at how they plan to make it more affordable,” he says.
Interestingly, he notes that while Sydney and Melbourne are busy building “the lion’s share” of apartments, these cities are currently responsible for 41 per cent of Australia’s GDP.
“We may be building an apartment revolution but just like the share market we could be looking at the biggest ‘shorting’ in the property market we have ever seen before too. Very, very happy to be wrong on this.”
Here’s hoping he is! In the meantime…don’t say you haven’t been warned.