The crisis in inner-city apartment construction is now starting to hurt-in Sydney, the number of cranes under construction has fallen by 1/3 and will be reduced by another 1/3.
Harry Triguboff`s Meriton, a big developer, has stopped buying Sydney`s land, land prices will fall in a free fall, bankers prepare for losses, and Meriton has curtailed its construction activities.
In Melbourne, the construction crisis has been delayed because developers are still working on it because the old construction permits they have obtained allow them to build their homes at a higher density than the new ones. If not, the opportunity will be lost. Another reason Melbourne`s housing supply industry is booming is that the state is investing in infrastructure as never before.
(photo source: Australian newspaper Chinese website)
In the eastern seaboard, tighter bank credit has led to a sharp reduction in first-time home buyers and investors in small apartments, but some Chinese are still buying them. State governments would be alarmed by this because it would actually mean that they would receive much lower revenues-they would tax the market to maximize revenue.
But some of the apartment market is still very strong. Wealthy baby boomers are deciding to move from their big houses to apartments that are usually closer to the city. But they don`t want the small apartments most developers are building-often encouraged by local councils that want to pay for the city-"baby boomers" want plenty of living space. So that they can maintain their current way of life.
Most of the established developers have not chosen the buyers, and the long delays in obtaining permission have locked them in to provide small apartments for students, tourists and young executives. It has been a good market for the past few years, but now it is oversupplied, limiting the rise in rents and the fact that apartment prices have been pushed up by government taxes and fees, preventing investors from earning enough.
If the number of Chinese students and tourists continues to rise (and there is "if" uncertainty about Chinese students), then over time there will be a shortage of apartments and a rise in rents. But rents will have to rise sharply to prove the need to increase supply. The government of New South Wales and Victoria will face an income drought, which is not part of their long-term budget considerations.
In addition, developers in the eastern coastal areas are deeply frustrated. Unlike Harry Triguboff`s Meriton, which provides loans to its buyers, other developers can`t treat their customers the way banks do, so they take the full brunt of the credit crunch imposed on banks by regulators.
I was contacted by a non-Sydney-based major developer involved in East Coast apartment and housing construction to explain how the bank credit crunch has affected his business. His story represents much of the real estate industry, so I quoted him as saying: "by May 2016, everything was going well. May 2016, The APRA (Australian prudential Authority) announced it blocked Australian banks from lending to overseas buyers of Australian apartments and homes.
"at the time, all Australian banks offered loans to high-rise homes, limiting the number of apartments sold overseas for each development project to 30 to 40 percent of the total, while the majority of overseas buyers came from China. There was no warning, no buffer time to settle existing contracts, so "suddenly"-no more funding for overseas buyers.
"many people lost their down payment as a result. The decision is the beginning of the current housing downturn in Australia, and things will get ugly.
"after APRA stopped lending to overseas buyers, they attacked OPS investors by reducing LVR (loan to price ratio) from 70 percent to 60 percent plus 10 percent liquidity (LVR actually reached 50 percent).
"once again, without warning, without buffer time, those investors have lost their down payments and are now out of the property market.
The APRA then attacked bank interest-paying loans by limiting the growth rate of investment in housing loans. Borrowers must review their loans and repay them with interest and principal.
"next, the Royal Banking Commission stressed that the household spending measure used to approve loans could be too low, with an annual income of A $80000 set at A $32000, which should be A $50, 000. This will reduce their loans from A $337000 to A $197000. There is no market for first-time buyers.
"excluding HEM, other changes have damaged the apartment market, which will take years to recover.
Australia`s record number of immigrants is driving demand for housing. And we have shut down supply. The impact of APRA`s decision will reduce the number of apartments built on the East Coast by 50000 ( one hundred and twenty thousand apartments started at peak hours). Each apartment purchased by local buyers contributed an average of A $160000 to the treasurer, meaning a $8 billion (50000 x A $160000) reduction in national taxes. At the same time, the states have increased stamp duty (from 4% to 8% in the new state), so APRA and the state government jointly killed the goose, which can lay golden eggs. "
Also keep in mind that the golden egg goose still has a whiff as some developers have turned to high-end apartments but the boom in the apartment market is over.
There are so many more depressed developers and worried bankers.
