Planning restrictions in Melbourne aimed at preserving the city’s “character” may hide a secret agenda.
Some very interesting developments at the end of last week, with the Victorian government closing the door to new super-high towers in the CBD.
It’s thrown a stone into a hornet’s nest, with the new restrictions coming in at midnight, with no consultation with the development industry.
The government’s saying their ‘shock and awe’ strategy was aimed at making sure they didn’t get flooded with applications between the announcement and the changes coming into effect.
Under the new restrictions, a developer who builds to the borders of their block will now be restricted to 24-floors. That’s barely up to the knees of some of the super-towers we’ve seen go up in recent times.
If they allow some space on the block, they can go higher.
So the restrictions should result in less height, more green space, or both.
Planning Minister Richard Wynne says it’s about ‘character’. Melbourne has gone a bit ballistic in recent years with high-rise development, and ‘risked losing it’s character’ if it wasn’t careful.
I’d have to think he’s right. The framework was never in place to deal with the boom of apartments we’ve had (in part driven by foreign investors). As a result, Melbourne’s super-towers are “higher (and more dense) than anything New York or Hong Kong is approving.” – says Roz Hansen – author of Plan Melbourne.
So the character of the city is changing. We’re jumping New York and Hong Kong into… what? What’s on the other side of those cities? Nothing. Just Melbourne and a super-developed CBD.
Of course the developers are fuming. If you paid a large sum of money on the assumption that you could build to the moon (of flog it on to a Chinese developer who would), then you’ve likely paid far too much.
But Wynne says he doesn’t have much sympathy for those developers looking to “max-out sites with little regard for the public realm.”
But when I’m reading this, I’m not hearing anything about what affect this will have on the property market.
And the move is framed in terms of “city character”, but I wonder if there’s a secret agenda here – something aimed at manipulating the market.
Because it is true that Melbourne has brought a huge volume of apartment stock on line in the past couple of years.
Recently we’ve been building about 60,000 apartments a year. That’s about twice the average level of the past ten years.
And it’s created a massive surge in housing stock.
But a lot of this explosion has not been driven to meet resident needs, but to fit into overseas investors portfolios.
The question of who would live in these places – many of them shoeboxes – seemed to be irrelevant. Get something that looked good on paper and flog it off sight-unseen at some bonanza day on the Chinese mainland.
The end result is a growing over-supply, verging on glut.
And that over-supply is going to squash rents and pummel prices.
BIS Shrapnel expect that the market will shift into oversupply sometime this year, but with so many super-towers already in train, the situation’s only going to get worse.
“This will get worse in 2017/2018 and towards the end of 2018, when investors will start to struggle to get sufficient numbers of tenants.”
“It’s possible we’ll see a 15 to 20 per cent correction any time over the next year to 2018/2019”.
A twenty percent correction might not sound like much if we’re talking share prices, but in property, that’s huge.
Buyers agency Wakelin Property Advisory director Paul Nugent also expects a drop in prices of “at least 10 per cent”.
“It’ll take a generation until things settle down to a point where the apartments have a genuine value.”
“Get out as soon as possible, otherwise it will take 10 to 15 years before you get your money back.”
That may be a touch gloomy, but it gives you a sense for the range of opinions out there.
And we could argue over the magnitude and timing of any movements, but you have to think the dynamic is there – we’ve created an over-supply of apartments and that’s going to have an impact on prices.
And a “funding trap” raises the possibility that any consolidation in prices could easily run into a rout.
CoreLogic reckon that there are 90,000 apartments being constructed in Australia that have been sold off the plan but not yet settled. The purchasers of about 20 per cent of these, or 18,000, have paid a deposit of just 10 per cent of the full purchase price.
A tighter credit environment is already making loans more expensive and difficult to get. What happens when rents are falling and valuations are coming in under the purchase price?
I wouldn’t be surprised if many investors just cut their losses and walked away.
But developers will need to sell, and so they’ll be putting those units back on the market – at discount prices, just as everybody rushes for the exits. That would hammer prices even more.
Foreign buyers who bought sight-unseen will probably get burnt, but that will probably mean that any fall-out will be contained to this sector. Still, it doesn’t take much. One lender who’s loaded up too much on apartments. A few big developers going under….
In a high-speed economy, any stumble can be deadly.
And so I wonder if this is the secret agenda here with these restrictions. It might be aimed at putting a brake on the over-supply of units, and the risk that it turns into a serious crash in a few years time.
You don’t want to have that kind of nonsense going on in you CBD.
What do you think? Did Wynne make the right call?