The RBA’s Financial Stability Review had an unusual warning for investors in the inner-city…
Just because I'm a property bull, doesn't mean I'm stupid. Here's a property class that I've never bought and never will… and now it seems I've got friends in high places who think exactly the same.
Welcome to the inner circle.
You know s#*t’s getting real when the RBA starts issuing warnings on the property market.
The RBA boffins go out of their way to be as boring as possible. When the markets hang on every word you say, watching for the slightest change in tone or wording, you need to watch what you say.
One little mis-step, some slightly colourful language, and markets could freak out.
Nobody wants that.
So it’s very interesting then that the RBA has chosen its semi-annual Financial Stability Review (FSR) to raise some concerns about the inner-city apartment market.
I’ve been banging on about it for a couple of years now, but you know, the markets are not hanging on every word I say.
That the RBA has also started making a bit of noise about it tells us that things are getting serious.
This is what they said in the FSR:
The near-term risks for residential property developers have increased, with a mismatch between a growing supply of geographically concentrated apartments on the east coast and concerns about softening demand for these apartments in some areas (given the rebalancing of housing demand and strengthened lending standards).
Geez. Could you make that any harder to read? We’re building too many apartments in some areas at the same time as demand is softening thanks to “rebalancing” (whatever the f- that means) and the APRA restrictions.
As the supply of new apartments has continued to come on line, price growth has slowed over the past six months and rental growth has been modest (Graph 2.8 and Graph 2.9).
I found this chart interesting. We’ve been hearing some tough stories out of Melbourne and Perth, but it looks like Brisbane is struggling too, with prices and rents already falling. According to the RBA’s walk and talks:
Industry liaison suggests that developers in Brisbane are having increasing difficulty securing pre-sales, leading to wider use of rental guarantees and other buyer incentives, project delays and, in some cases, sales of development sites. Conditions in Perth have also deteriorated, as the new supply of apartments is being sold into a weaker local economy.
The RBA also reckons that a knock-on effect of all these apartments going up at the same time is that it pushes costs up…
Industry contacts report that the large volume of new apartments still planned and under construction in the major capital cities has also put pressure on developers’ finances by driving up developer site and construction costs.
While the prices of off-the-plan apartments have been supported by ongoing strong interest from foreign buyers, particularly in Sydney and Melbourne, it is unclear how these buyers would respond to a downturn in their own economy or the Australian property market…
I’m not so sure about this point. As the RBA points out, a lot of the demand for inner-city apartments is coming from China. The Chinese tend to have a different motivation set to Aussie buyers – one of the big ones being they’re afraid of their money getting trapped in China, especially if the economy stumbles.
If that happens, and the government starts nationalising private wealth, we could well see a rush of money heading our way. We could see more, not less. The buying boom could actually get bigger.
Still, it’s hard to know how it will play out. We hear all sorts of stories out of China. It’s hard to know what to believe…
For now, the RBA’s concerns remain with the developers (and the banks who are financing them):
Whatever the cause, a downturn in apartment markets could weigh on developers’ financial health through a number of channels. Values of sites and incomplete developments would be likely to fall the most, and the value of apartments held on developers’ books would also decline.
Falling apartment prices also increase the risk that off-the-plan purchases fail to settle, although liaison suggests that settlement failures have, to date, remained uncommon and are generally expected to increase significantly only if housing prices fall substantially. At present, listed developers’ balance sheets generally appear healthy…
So no need to panic just yet.
Still the RBA is flagging it as a potential hot spot of financial instability. And the FSR is only talking about how strong the financial system is overall. There’s not a lot of comfort here for individual buyers.
For my money, inner city apartments are still too much of a gamble. Everything could be sweet. There is a huge amount of supply coming on-line, but maybe Chinese buyers will swoop in and keep the market afloat.
But maybe not.
And given how hard it would be to differentiate your property and re-sell it for any thing more than what you paid for it, AND given the wealth of opportunities all over the country outside the CBD, I don’t see why you would take that gamble…
Speaking of the RBA, a Freedom of Information request recently dug up a document where the RBA was recommending three speed limits on investor mortgage growth – the limits that came into effect in the middle of last year.
The three limits they modelled were 4.5%, 6%, and 7%.
In the end, APRA went with 10%.
Seems we might have got off lucky there. 10% had a discernable impact on the market. Anything tighter than that could have been pretty brutal.
4.5% would have been nuts.
Lucky for us APRA got the last word on that one.
What's your view on new apartments?
Have you bought off the plan and settled ok?
Lost money? Made money?