The credit squeeze being imposed by the Australian banks and the surprising changes in China are rewriting the rules in the Australian dwelling market — particularly in Sydney and Melbourne.
Suddenly the Chinese are back as investors, albeit on a much smaller scale. Outer Sydney home building rates have been slashed and the outer suburban Melbourne and Sydney land boom is looking very shaky.
A year ago the Chinese were having incredible trouble finding the money to settle apartments bought off the plan two or three years earlier. In Sydney Harry Triguboff’s Meriton advanced them money to settle and in Melbourne non-bank financing helped while sometimes the Chinese were given extended credit by developers.
But now Meriton reports that the vast majority of Chinese are settling their off-the-plan apartment purchases in full without the need for Meriton loans. Moreover these apartments, as “used” apartments, have fallen about 20 per cent in price and even though the Chinese know there is a big paper loss involved they are still settling.
Clearly there have been changes in China that make is a little easier to get the money out or borrow in Hong Kong.
In Sydney a major land developer, Dyldam, is looking to sell or partner a land portfolio once valued at $900 million and is hoping the Chinese will be among the buyers.
In Sydney inner city apartments the Chinese, including local Chinese, now dominate the buying, albeit on a much reduced scale.
The credit clamps on Australian dwelling purchases have pushed most young Australians out of the $1 million-plus inner apartment market in Sydney. Australians are buying one-bedroom apartments in places like Parramatta that are selling at around the $600,000 mark. So when it comes to inner city apartments in Sydney Australians are going to be renters and not owners unless there is an entirely different set of new banking rules and/or councils and regulators reduce their enormous charges.
In the outer suburbs of Sydney there has been a lot of land held up by councils and regulators who also appear to have a vested interest in increasing the cost of land development in their area.
As that outer Sydney land comes on the market the developers are facing a situation where, according to my builder mates, demand for new homes is down around 30 per cent and that will show up in the official figures later this year unless something happens. That is a big fall. What we are seeing is that young Australians simply can’t raise the money to build because their banks won’t lend it to them. As a result, they have begun a migration into regional New South Wales where the prices are more reasonable and they can get bank finance.
Like apartments this is a major cultural shift which is also happening in Melbourne. When we look back we will attribute this cultural shift to the change in bank credit rules caused by bank regulators and the royal commission and the boost in development costs imposed by council and regulators.
Meanwhile in Sydney, when the land now passing through the council/regulator jungle hits the market it will face a building industry where demand is much slower than when the raw land was originally purchased. Don’t be surprised if there are price falls, particularly as developers like Dyldam believe they need extra capital.
But at this stage that is not happening to a significant extent.
Some developers like Satterley are going to test the Sydney outer suburban market with lots of just 80 square metres. It worked in Perth.
There is no doubt that the incredible publicity in Sydney about the dangers of house price falls is a big contributor to the fall in building activity and the softness in the total residential market.
In Melbourne the price fall fear is not as intense so while the similar forces to Sydney are affecting outer suburban building rates, my Melbourne builder mates say are looking at around a 10 per cent fall in construction — not Sydney’s 30 per cent. Prices have been holding although, like Sydney, there is softness in the overall residential market in the wake of the bank clampdowns. Victoria is booming is in regional development helped by a $10,000 government allowance to help first home buyers in regional areas.
Geelong would go close to being Australia’s biggest boom town as people flock to the city with its education, health and major employment areas. Although Geelong has a separate culture development it is merging with Melbourne to create Australia’s largest city.
But most other Victorian regional areas are also going well. Apart from inner city apartments with flammable coating, the property market facing the greatest danger in Melbourne is outer suburban land in certain areas. A year or so back a large number of Melburnians who suddenly found they had substantial equity in their homes decided to buy blocks of land being developed on a five or ten per cent deposit, expecting to sell that land before settlement was required. Unfortunately the market is now quite different and land prices have at best stabilised. A great many buyers under the new banking rules will not be able to settle so they are trying to sell their land contracts on the Gumtree web site. The number of plots for sale on Gumtree is now being described as the “Gumtree Index” for future problems. The index is rising so watch this space.
Adelaide is not suffering the same problems as Melbourne and Sydney. When the major ship building facilities begin construction and operation they will require skilled labour. Almost certainly there will be a strong boom in parts of Adelaide.
Brisbane is holding its building rate but there are still scars from the big fall in apartment prices, which affected many locals.
Hobart and Launceston are performing strongly and Western Australia, having been decimated after the mineral boom, is continuing its recovery.
The big question is how long will the banks maintain the current tight lending? A number of builders and developers can’t wait for a bank change and believe they are going to need to work more closely with financiers, (possibly with non-banks if the banks are too tough) and help young first home buyers who don’t have parental help to purchase contracts in a way that bank or non-bank financiers will find favourable.
At the moment potential young borrowers who don’t fit the bank formulas are scrubbed even though they have strong incomes.
There will be more developments on this front and we all need to watch whether these early signs of China returning gather momentum.