Nearly half of the new apartments sold in the once-booming Sydney and Melbourne markets were settled last month with valuations that were less than the buyer paid, as the unit glut comes to a head amid falling prices, tight lending and uncertainty around the approaching federal election.
Sydney and Melbourne will feel the effects of the apartment oversupply for the next two years despite approvals for new projects plummeting and developments being shelved, according to research undertaken for The Australian by CoreLogic.
“For units that were bought off the plan two years ago, so much has happened — there are fewer investors, fewer foreign investors and its harder to get finance,” said CoreLogic head of research Tim Lawless.
CoreLogic found that 45 per cent of new apartments in Sydney settled last month with valuations — undertaken for finance — that were below the off-the-plan purchase price, up from 18 per cent a year ago. In Melbourne, the figure was 46 per cent, compared with 23 per cent a year ago.
The falling apartment prices were causing a “finance shock” at settlement when a lower value was put on the property and the bank asked the buyer to top up their deposit, Mr Lawless said.
“Not a lot of people have spare $10,000 or $20,000 (to make up the difference),” Mr Lawless said.
“Considering the large number of units under construction in Sydney and Melbourne, as well as Canberra and Adelaide, we expect a peak in settlement activity will occur over the next two years as construction completes.”
Investment bank UBS said new apartment valuations could be 20 per cent below the purchase price.
“Apartments are increasingly out of the money — that’s where you get the settlement issues,” said UBS analyst James Druce, noting that private developers were seeing “significant issues” as apartment projects are finished and are ready to settle.
The bank’s economist Carlos Cacho said 100,000 units were under construction at the end of the September quarter last year — the most recent figures from the Australian Bureau of Statistics.
The peak in projects being completed would come later this year, Mr Cacho said. “We are making up for under-building.”
Mr Lawless said construction was at an unprecedented peak, driven by the surge in building in NSW and Victoria, and close to record highs in the ACT and South Australia.
Both UBS and CoreLogic expect the glut and settlement issues to be relatively condensed with January approval figures for new unit development half of those a year ago.
“We don’t think there is a long oversupply issue,” Mr Cacho said.
Both also point to Brisbane’s hard-hit unit market as a bellwether, noting its construction peak was around two years ahead of Sydney, with the market now showing signs of levelling out.
Mr Lawless said opportunistic buyers were moving into that market given unit values are 11 per cent below their 2010 peak.
Co-founder of developer The Stable Group, Ed Horton, is not dropping prices or advertising the handful of apartments that remain for sale in its 98-apartment The Burcham project on the old Wrigley’s factory site in Sydney’s inner Rosebery.
Mr Horton believes the apartment oversupply will be “short-lived” as new projects stall and are yet to be reflected in the ABS figures.
“Talk to any valuer who has their finger on the pulse and they will tell you the numbers are nowhere near the projections. I’ve never seen so many no-starts,” Mr Horton said.
Stable Group expects to buy sites later in the year as land prices fall, but says you cannot “throw a blanket over all of Sydney” when talking about the oversupply. It will avoid areas like Parramatta where there is a rash of new units.
“You would be barking mad to do a project where there are a lot of cranes in the sky,” he said.