After such a prolonged period of strength, it should come as no shock that the Australian housing market has entered a well overdue period of cooling.
This slowdown has created deafening whispers across Australia, a country notorious for its obsession with property, that the current jitters could quickly turn into something much more sinister – a slump.
While the outlook isn’t as grim as every fear-mongering media headline suggests, there are certainly a few talking points that everyone in the off-the-plan industry needs to be aware of in order to strategise their next moves and safeguard themselves moving forward.
Firstly, it’s important to note that this downturn isn’t anything the Australian property market hasn’t experienced before. In fact, there have been six national price downturns of 5 per cent or more in the past 45 years, including two in the past decade alone.
For a country with a housing market valued at a touch under $7 trillion, ebbs and flows in the price cycle are signs of a healthy market.
In the majority of cases, price pullbacks such as the one currently impacting Australia can actually be beneficial in the long run as they reduce the odds of a boom-bust cycle, a long period of uninterrupted gains followed by an equally as large crash.
Despite a downward trending property market, the general consensus amongst those in the off-the-plan industry regarding business over the next 12 months is one of optimism.
In fact, many agents – such as Steven Chen, executive director of The Agency Projects – are actually expecting their sales to increase in the 2019 financial year.
“The Agency Projects has $800 million worth of projects in the pipeline over the course of the next year and a half in Sydney, Melbourne and the Gold Coast,” says Chen.
As the country navigates its way through the scathing Royal Commission into Misconduct in the Banking, Superannuation and Financial services industry, the standout issue amongst the off-the-plan sector is bank lending.
Australian Prudential Regulation Authority (APRA), the banking regulator, recently advised major lenders to be wary of letting investors borrow at “very high debt-to-income levels”, which they described as any mortgage more than six times their income.
While APRA didn’t specifically ban loans six times higher than a borrower’s income, it certainly seems banks and credit unions have taken the hint.
This means that a person on a $60,000 salary will struggle to borrow more than $360,000 while a couple with a combined income of $100,000 will find it hard to borrow more than $600,000.
With household debt to disposable income hovering at a record-high of just under 190 per cent, it certainly raises the debate of just how much more debt families can take on to funnel into property.
In terms of foreign investment, China expectedly still remains the largest source of Australia’s foreign real estate investment, although tough new laws introduced by both state and federal governments as well as China’s capital controls saw investment figures drop by 65.2 per cent in the 2017/18 financial year.
Chinese buyers currently turned off the Australian property market have been replaced by an influx of investors from Singapore – a country 13,770 times smaller and with a billion less people than China – with Singaporean investment into Australia soaring 64 per cent to $4.48 billion.
While these figures alone suggest Singaporeans will be the next big wave of buyers to firmly entrench themselves in the Australian property market, demand from India, Vietnam and Indonesia is also expected to rise sharply in 2019 with an influx of developments on the horizon.
According to BIS Oxford Economics, construction of off-the-plan developments is the highest it’s ever been with estimated completions for apartment blocks of four storeys or more set to peak in 2019 with 27,500 projects in Sydney, 15,000 in Melbourne and 7,000 in Brisbane.
Rob Burgess, national director of research and strategy at Charter Keck Cramer, while acknowledging the current pitfalls of the downturning property market, believes factors such as population growth and shifting preferences – particularly relevant to younger or first-time buyers – will strengthen the apartment market in the country’s major cities.
Younger generations, in particular those living in Sydney and Melbourne, face different challenges and have totally different lifestyles compared to their baby-boomer parents, with many giving up on their dream of owning a house as young as their early 20s.
“As Sydney and Melbourne head towards becoming cities of seven to eight million people over the coming decades, entering the housing market by way of an apartment purchase is an attractive and sensible thing to do,” says Burgess.
Following Australia’s population recently ticking past 25 million people, a recent Deloitte media release reported that Australia is adding population equal to the size of Canberra (~400,000) every single year.
Chris Richardson from Deloitte Access Economics echos Burgess’ sentiment that such a strong population growth will “put a floor under weaknesses in the apartment market,” driven by tighter credit and nervous investors.
Australia is arguably the greatest country in the world to live, learn and work. Melbourne and Sydney both feature in the top 5 of the Economist Intelligence Unit’s 2018 ranking of the world’s most liveable cities, while Canberra topped the world rankings for the highest quality of living in the numbeo.com ‘quality of life’ index.
It’s these fundamentals that will continue to attract a large number of migrants to our shores every year who will all need somewhere to live.
We’re not going to mince our words – the current downturn has been tough on everyone in the property market and has already resulted in a few casualties in the off the plan industry, with more expected over the next 12 months.
But as times get tough and it’s harder from a business perspective to make ends meet, remember this isn’t the first time Australia has found itself in such a precarious position, nor is it the worst instance.
Project developers who have prior solid framework in place, invest in the right avenues of their business and are willing to show flexibility in their strategy going forward will be the first ones to see the light at the end of what seems like a never ending tunnel, with a great deal of profit to be made when the market, one day, again enters an upswing.