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.
By 2016/17 there will be “significant excess,” says BIS Shrapnel Managing Director Robert Mellor.
But wait, there’s more.
“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?
hammerv2 says
Only time will tell if they made the right call. Have a look at what is happening in Darwin to get some idea of what happens when you build too many apartments…
http://www.ntnews.com.au/realestate/darwin-has-the-highest-vacancy-rate-of-any-australian-capital-city/comments-fnk4wt05-1227410490409
Jenny Kennedy says
Hi John
I thought the idea of the foreign investors was to increase the number of new houses (not apartments)?
KatM says
Perth just keeps on building even when the boom’s over. When the Lord Mayor here has her personal property interests in the CBD we get all manner of un-character ever-denser-higher-rise developments. With estate agents, different businesses, plus both state and local governments taking a cut from property, investors need to become more discerning in their specifications and purchases. Maybe allowing pets in apartments… I’m interested to know what portion of new developments allow tenants/owner- occupiers to keep a 4-legged companion in their unit. I know if you can afford to buy/live in a ~$1M Dawesville pad 1 hour south of Perth you can bring a pet!
Bill Lee says
can someone give me a frame of reference for apartment sizes – for example what sqm range constitutes a shoebox being sold offshore to chinese investors
Kathy says
Yes, Richard Wynne has definitely made the right call. I just wish someone with a spine in Brisbane would do the same. We have rampant development of blocks of flats everywhere, mostly in the inner city and immediate surrounds, but certain pockets of the inner ring have been earmarked for massive development, and it’s having a catastrophic effect on the existing housing there due to grossly insufficient and inadequate stormwater infrastructure and drainage systems. Brisbane City Council seems to think this excess water magically disappears.
Never mind oversupply of flats, which is already becoming a problem here, what about huge undersupply of the supporting infrastructure!
Hugh says
Living in an apartment, certainly not a high rise apartment, is not living – the slums of the future.
Jack says
I think I’ve remarked about this matter a number of times before.
My thoughts:
We Aussies have exported a number of our key manufacturing industries over the last decades, to the degree of hobbling our manufacturing economy.
Education is a big export industry right now. One could fairly think that this sector started the rush to build these properties. It’s certainly a driver now and the rush of overseas developers to develop for their own citizen’s investment and use, evidences this.
Mark this:
We will export our ability to educate, too. My own niece has just left for China for three years to teach a group to educate local students. That factor, and the very much higher relative cost to come here to be educated, will surely hobble this export industry too.
So:
We will probably see fewer (many fewer) arrivals to tenant these huge number of largely (to our standards) unlovable and unliveable dwellings. This factor will probably topple the critically specific, currently tenuous supply v demand ratios for these city apartments.
Ergo.
Rents will fall to attract other tenants…..
Yields will fall as the market takes notice….. IpsoFacto, prices will fall to attract investors in (fire sale) resales…..
But.
What hasn’t been factored is the knock-on ripple effect to property vacancies (and subsequent prices) in the surrounding inner and middle suburbs. There is also the dramatic localised effect surrounding the decentralised campuses in the suburbs and even to the regional campuses.
Education is a boom market.
Booms are generally followed by busts.
The ramifications of this bust will be huge.
Jack Henderson