If it’s going to hit the fan, Brisbane will be first.
Last week, I suggested that this was actually one of the quietest booms on record.
Part of the reason that we’re not hearing about it is the two-speed nature of the boom. So while some segments are pumping along, other segments are totally under the pump.
Take the high-rise apartment market. For a good 2 years now I’ve been warning about the growing over-supply in that segment – a call that has since been taken up by the major papers.
(Not that I’m saying they’re following my lead. The data can only slap you in the face for so long before you have to acknowledge it.)
But we’re quickly approaching crunch time.
And to be honest, when the high-rise crunch came, I was expecting we’d see it in Melbourne. Melbourne led Sydney into a major high-rise boom, and so I expected it would be the first city to feel the pain.
But it is actually looking like Brisbane might be the canary in the coal mine.
Brisbane hasn’t added the same volume of high-rise supply as Melbourne or Sydney, but only in terms of numbers.
In percentage terms (relative to the existing housing stock), and in terms of speed, it’s a good step or two ahead of the bigger capitals.
Take a look at the high-rise approvals chart.
That’s off the hook, right? In 2013 it just launched, effectively adding about 6 years of normal supply in just 18 months.
But the odd thing about it is that it has occurred exactly at the same time as population growth in Queensland began slowing – helped along by a cooling mining boom.
In this chart here, you can see that population growth and dwelling construction decoupled exactly at around the same time as the construction boom took off.
This makes Brisbane vulnerable. Supply is still ramping up, even as fundamental demand is slowing.
But what’s supporting the market if the population isn’t there?
Like Melbourne and Sydney, it was foreign buyers driving a good chunk of high-rise demand. Units were marketed straight off the plan directly to off-shore buyers.
So a lot of these projects only look viable so long as the foreign buyers are still in the game.
But we’re hearing more and more stories about Chinese buyers getting cold feet – or simply not getting the finance they need. Local banks are looking to contain their exposure to the sector, and Chinese authorities are clamping down on capital outflows: from the South China Morning Post:
Hundreds of suspected operators of underground banks have been arrested this year in a nationwide crackdown on the multibillion-yuan illegal cross-border money trade, China’s Ministry of Public Security said on Wednesday.
In all, 450 suspects from 192 illegal banks had been rounded up in relation to 200 billion yuan (HK$234 billion) in illicit transactions, the ministry’s newspaper, China Police Daily, reported.
The crackdown comes as the mainland faces strong capital outflow pressures, partly due to expectations of a weakening yuan. The country’s foreign exchange reserves have fallen by about US$450 billion in the last year despite signs of stabilisation in recent months.
So the high-rise sector is looking a lot less flush and liquid than people expected it would be – or it probably needs to be to avoid a wipe-out.
As a result, most property economists are expecting tough-times for the Brisbane apartment market, with forecasts ranging from gloomy to apocalyptic. From the AFR:
A senior Queensland academic says inner Brisbane apartment prices could fall as much as 25 per cent over the next 12 to 18 months as Asian buyers walk away from settlements.
Chris Eves, professor of property economics at the Queensland University of Technology, said overseas buyers who had purchased off-the-plan in the past six or seven months might not be able to settle final payments now that China has introduced measures to stem capital flow.
“Developers will have to put these apartments on the market and with the lack of demand they will have to discount their prices. Some developers will go out of business – this always happens in oversupply situations,” said Professor Eves who first warned of oversupply in March last year.
So there’s no question that there’s pain ahead.
So while single-bedroom units tailored to overseas investors are in massive over-supply, detached family homes suited to actual residents remain in tight supply. A crash in one could have no bearing in the other.
The transmission though is going to be through the banks. If the banks get caught short by developers going under, and need to rein-in lending, those tighter credit conditions could affect the overall market (though to a much less dramatic degree).
We’ll have to wait and see. But the Brisbane bump is coming, and it will probably give us a good indication of what’s going to happen to the broader market. If there’s going to be carnage, Brisbane will be first.
Not that there’s much we can do about it at a policy level. The time to put the brakes on over-building was 18 months ago.
The sh!t’s already in the air. The only question now is whether it hits the fan or not.
How is Brisbane looking to you?