RBA raises a flag on Brisbane apartments

I’d be assessing my options if I was exposed to Brisbane high-rises right now.

It was interesting to see that the RBA singled out he Brisbane apartment market in their latest Financial Stability Review (FSR).

I’ve been saying it for, what, like almost three years now, but I’m not going to claim bragging rights over the RBA.

They don’t have the luxury of throwing big calls all over the place like I do. If I’m wrong (which I’m not. Ever.), no one really cares. I’m just another pundit spouting off.

But if the RBA makes a big call, and they get it wrong, then there’s serious consequences. There’s consequences for the people who followed their mistaken lead, and there’s consequences for the RBA’s reputation as the last-word in all things economic.

So the fact that they’ve come to the party (more like a wake) around Brisbane apartments speaks volumes about the truth of that situation. No glossing over it now.

And if you’ve been following my advice you wouldn’t have bought off-the-plan into these high-rise developments in recent years, but if you did, well I’d really be taking stock of your options. Things look like they’re going to get worse before they get better.

And if you listen to the RBA, they’re surprisingly punchy.

There continue to be concerns about an oversupply of apartments in pockets of Melbourne and in parts of Brisbane, where apartment prices have declined in recent months, rental growth has been soft and the vacancy rate has trended higher.

This chart should raise some eyebrows. This is the six-month annualised price growth. That is, they take the previous six months, and say, if that rate was continued over a full 12 months, what would the year on year change be – which is what we’re used to talking about.

You can see Sydney and Melbourne are holding up, but Brisbane apartments are heading south, and really aren’t all that much better than Perth right now.

At least Perth has an excuse, with the ongoing unwind of the mining boom. But Brisbane should be doing better. And given that detached housing prices are holding up, this suggests that it’s really an over-supply story.

Which is what the RBA reckons too…

The construction of new apartments and other higher-density housing has increased substantially over recent years, reaching historically high levels. In 2016, higher-density dwellings accounted for around half of all residential building approvals (Graph 2.6).

As would be expected, much of this activity has occurred in the most populous cities of Sydney, Melbourne and Brisbane. In Sydney, construction activity has been spread across the inner and middle suburbs, and the increase in new supply relative to the existing stock of apartments is relatively modest (Graph 2.7).

However, in Melbourne and Brisbane, where apartments have historically accounted for a much smaller share of the dwelling stock, activity has been concentrated within the central business districts and in a few surrounding inner suburbs.

Moreover, in Brisbane the overall increase in the supply of apartments in inner to middle-ring suburbs is much larger than that of Sydney and Melbourne as a share of the current stock, and population growth in Queensland has slowed in recent years.

This large number of new apartments recently completed and currently under construction raises the risk of localised pockets of oversupply. As discussed earlier, apartment prices have fallen in Brisbane…

No kidding! Look at that chart. Brisbane has been pumping out the high-rises like there’s no tomorrow. Not only that, there’s plenty still left in the pipeline, with large surges of supply coming through til late 2018.

If we’re already at a stage where over-supply is putting downward pressure on prices, where will be in 18 months?

And if we look at the vacancy rate data, we can see the pick-up in Brisbane vacancy rates that has people worried.

Right now, it’s not all that hectic. We’ve seen worse in recent memory. But as I said, there’s still a lot of supply working its way through the system. You’d have to think the trend increase we’ve seen in recent years would have to continue.

They key swing factor here is interstate migration, with net population outflows out of Queensland making things all the worse lately. That could turn around. If the commodity boom continues, and price differentials between Brisbane and the other capitals continue to widen, Queensland might become a net population importer again.

That would help.

But it’s not likely to swing the dial or swing the dial quickly. This is going to get worse before it gets better.

As the RBA notes, this raises the prospect of settlement risk, which will put pressure on the big developers.

While liaison with industry suggests that settlement failure rates remain low, developers are continuing to report delays in settlement for some purchasers… Liaison also indicates that valuations at settlement are sometimes coming in below what buyers had anticipated and, in some cases, below contracted purchase prices, reducing the amount banks will lend.

For investors buying these new apartments, declines in apartment prices raise the likelihood that they fall into negative equity at settlement. The potential for rents to fall and vacancy rates to rise also raises the risk that investors may find it more difficult to subsequently service their mortgages.

Geez. They’re not pussy-footing around there.

If you invested in these things in the past few years, expect to take a bath. Developers hold on to your hats.

Nothing lasts forever, and you’ll be back in the money eventually. But it could be a long, and bumpy, ride.

Know anyone who got into Brisbane apartments recently. How are they faring?