Uncertainty

From RP Data CoreLogic:

There’s a lot of uncertainty in the property market right now.

On the one hand property has boomed in Sydney and Melbourne triggering concerns of overvaluations and a property bubble.

On the other hand property has dropped in Brisbane (down 9.1% from its 2008 peak) and Perth (down 18.5% from its 2007 peak) because of a mining downturn.

Has the Brisbane new apartment crash started?

On 10 March, the AFR reported that there will be a "very messy end" to the apartment boom.  See AFR story here.  It says:

""In Melbourne the oversupply will be significant, in Brisbane it will be worse. It is an accident waiting to happen," said BIS-Shrapnel managing director Robert Mellor at the group's six-monthly Building Forecasting Conference."

Has the end already started?

Let's look at a recent apartment project in Brisbane, that recently completed -- The Milton at 55 Railway Terrace, Milton.  Some examples of the disaster there:

• Apartment 1302 is listed for sale for 10% below in the initial price, at $365,000.  For a one bedroom apartment, looking West, which has a 55 sqm internal floor space, and a main bedroom that is only 3m by 3m, and no car space, $365,000 is expensive.  Rent is estimated by the selling agent to be $450 to $460 per week unfurnished, which seems to be optimistic.
• Apartment 2901 - one bedroom, is not even listed at a price -- "make an offer"
• Apartment 2709, which is four bedrooms, if it sells at all, will sell for a huge amount less than the current owner has paid
• Apartment 2005 is listed at $1.1M, which is very high for a 3 bedroom apartment in Brisbane that is only 123 sqm -- you can buy luxury two bedroom apartments elsewhere that are this size and at a lower price, and it only has a narrow tandem carpark
• Apartment 2311, is not listed with a price
• Apt 2609 is two bedrooms, "bring me offers"
• Apartment 3008, a top floor two bedroom, 91 sqm in total, is listed unpriced
• Apartment 3009, also a top floor two bedroom, is listed for $849,000 -- are they dreaming?
• Apartment 2511, 2 bedrooms, listed at $659,000 is said to be under offer
• Apartment 2007, 1 bedroom, is listed at $490,000
• Apt 502, 2 bedroom, 74 sqm internal, is listed at $499,000
• The list goes on.

The onsite agents, Mint Residential, have a large number of apartments for rent.  And so do offsite agents.  The following are rent ranges, depending on floor, car parking etc:

• 3 bedrooms, from $650 per week to $800 per week
• 2 bedrooms, from $570 per week to $720 per week
• 1 bedrooms, from $370 per week to $490 per week
• A fully furnished two bedroom is listed at $640 per week
• Some apartments have 4 weeks free rent, which (for example) in effect reduces the rent per week of a $500 a week apartment to $460 a week over a yearly lease.

The Milton won my award for the wildest advertising claims of 2010.  See this prior post.  In that post, I said:  "They have a sheet of paper showing investment returns for a 2 bed, 1 bath apartment listed at $650,000. The prediction is that this apartment will be worth $807,500 on completion of the project in 2013, and will be worth over $1M by 2016. The predicted rent is over $720 a week in 2013."

As can be seen from the above, this was in fact wildly inaccurate.  

The Milton has a host of problems, not simply that it was sold for prices that are way above market price.  The development is on a train line, with half the apartments looking west and close to a brewery.  The river views are distant, and will be blocked by construction of apartments in front.  Body corporate for a 2 bedroom is about $4,800 a year.  See comments in prior posts.  It is very dangerous buying off the plan in Brisbane.

Compare the above to a 2 bedroom, 2 bathroom, 1 car apartment, 106 sqm, with direct river views, for $700,000.

If The Milton is representative, then we are in for a very rough ride.

What does the future hold for Brisbane apartments?

My advice to those considering buying in a high-rise apartment block in Brisbane -- don't buy off the plan and don't buy for two years.  Why -- prices are likely to fall.  My reasoning:

• There are a very large number of new apartments being built, which will settle in about two years.
• Interest rates are likely to increase by then.
• Rental vacancies will increase and rents will decrease as these new apartments come on to the market.
• Banks will make it hard to get a loan.  My guess is that they will only fund 70% of the valuation.
• The valuations are likely to be less than contract price.
• Many people will be unable to settle.
• Prices will therefore decrease, at least from the prices that new off-the-plan apartments are currently being sold for.
• Second tier second hand apartments will be impacted as a result.  Why buy a old apartment in Charlotte Towers or Festival Towers, that have few redeeming features, when you can buy a similar sized apartment with a similar view in a new building for a similar price?
• Apartments in some locations, and in some buildings (e.g., direct riverfront, larger apartments),  will suffer less negative impact.

Oversupply of Brisbane Units

There have been a number of articles this year regarding an oversupply of apartments in Brisbane, especially new high-rise in areas close to the city.  A large number of apartment buildings have completed recently, but there are many more on the way.  Most of the new apartments are being sold to foreign investors, and will be rented.

At present, a higher than usual number of apartments are available for rent in Brisbane.  Agents are reporting that it is taking a long time to rent apartments, and that rents are falling.  For example, a very nice riverfront apartment was without a tenant for 4 weeks, and finally rented for $50 a week below the asking rent.  Some owners are offering 4 weeks free rent.  For third-tier apartments, the rents have dropped dramatically.  The situation is not likely to improve any time soon.

When the foreign investors come to sell, they will not be able to sell to other foreigners.  So the pool of potential buyers will be much smaller.  This will cause significant price decreases for resales of apartments.  Currently, many apartments that are not being sold by developers (i.e., not new apartments that have FIRB approval) are taking a long time to sell in Brisbane.

Some articles of note:
Bubble Deflating
Warning on Brisbane apartment boom
Not pretty
High-rise Oversupply?
Prices Down Due to Oversupply
Areas to Avoid
Yield Compression
Mixed Outlook
Prices Plunge

Housing Boom No Big Economic Threat

From the AFR on Friday, 5 September 2014, p. 17:  "Rising housing prices in Australia require monitoring by regulators but the risk posed to the financial system, are nowhere near as great as in the UK, which is approaching bubble territory.  That's the view of Charles Dallara, who is chairman of the Americas region for the Partners Group.  ... The housing market in Australia is relatively self contained."

Interest Rates and Housing Bubble in Australia?

Interest rates for residential housing are at lifetime record lows.  Banks are awash in cheap cash that they want to lend.  Lending standards have deteriorated, and money is being loaned out willy nilly.  Good established properties in Brisbane are selling quickly at good prices.  Those wanting to invest are turning to off-the-plan apartment developments, where it is an easier process to sell and buy -- but at higher than market prices.  Is housing price growth solid and sustainable, or a bubble?

When buying, questions to consider:

• What will happen when quantitative easing ends in the USA?
• Will there be inflation?
• What is the risk of the Australian government removing negative gearing, and what impact will this have on property prices?
• What will happen if China property prices collapse?  What will happen if Chinese buyers stop buying in Australia?
• In a year, will all off-the-plan buyers be able to settle?
• Why are off-the-plan prices for apartments much higher than similar properties that the developers have sold, and the first owner is reselling?

An interesting article re the possible bubble is here.

China Impact

Four recent articles in the AFR are of interest in relation to the impact of China on Australian property.

"Spike in approvals for foreign investment in housing" (AFR, 12 June 2014, p. 36): The FIRB has approved a big jump in applications to buy Australian housing.  In dollar terms, the investment approved is up 67%.

"Chinese buyers key to market: Triguboff" (AFR, 12 June 2014, p. 36):  Meriton raised the issue of whether those who were allowed to buy homes because they were temporary residents, sold them when they ceased to be Australian residents.  In the 2012-13 year, 43.7% of FIRB approvals were for temporary residents to buy established dwellings, because foreign buyers who do not have permanent residency, can only buy new homes.  Meriton pointed out that the annual report of the FIRB did not report on compliance.

"We are part of the Chinese market.  The buyers compare me [Meriton] with the prices in Shanghai and Beijing.  If the price falls in China, that will affect us," Mr Triguboff said.

"China's housing vacancies signal property bubble" (AFR, 12 June 2014, p. 10): A report estimates that there are 49 million vacant homes in China, resulting in a vacancy rate of 22.4%.  "Once expectations change, the high vacancy rate will puts lots of pressure on prices and we could see them collapse."

"President targets naked civil servants" (AFR, 11 June 2014, p. 14): A group of Chinese bureaucrats, dubbed the luoguan or naked officials have become the latest target of President Xi Jinping.  They move their families and money to foreign countries.  "No one know how much this new approach will affect universities and real estate markets in favoured destinations like Australia as the numbers are hard to pin down.  But they are not small."  There are estimated to be about 1.2 million naked officials at the end of 2012.

"House prices second highest in the world" (AFR, 12 June 2014, p. 5): Australia may have the world's second-most expensive housing market behind Belgium, according to the IMF.

The Brisbane Market

There is a lot of talk about how well the Sydney property market is doing, and also the property market in general.  But this does not appear to apply to Brisbane.  From what I can tell, the Brisbane market is holding steady, and not rising, and definitely not booming.  Have a look at the charts here, and the information below.  Despite what is happening in Sydney, there is no property boom in Brisbane.

LA property prices in dramatic increase

I was recently looking a property in the LA area of California.  When a house I was looking at was listed for sale, about 20 written offers were received.  I was amazed.
Recent stories in the LA Times state that there is a property boom (or property undersupply) in parts of LA.
See:  Low Inventory and 28% Increase.
There was also a jump in the median sales price in San Francisco.

A soaring apartment market in Toronto ignites fears of a crash

An interesting recent article in the NY Times about apartments in Toronto: A Dizzying Condo Market in Toronto.  How similar is this to Brisbane?  An extract:

"Median condo prices have risen 25 percent since 2009. Two-bedroom condos of about 850 to 900 square feet in Liberty Village sell for about $500,000.  For Toronto, this is crazy.

“There is no question that the housing market in Canada is overshooting,” said Benjamin Tal, deputy chief economist of CIBC World Markets. “Now the cocktail party conversation in Canada is: ‘Will this lead to a U.S. style crash?"

Warning on Aussie Bank Bubble

From the NZ Herald News.

"However, following the significant leveraging of Australian and New Zealand households over the last 30 years they are now low growth and remain heavily exposed to housing, funding markets and unemployment risk."

Not Back to Boom Time

"AMP Capital’s head of investment strategy, Shane Oliver, also predicts “a year or two” of house price gains but “not a lot”.  “It’s not back to boom time,” he says. “House prices are high relative to income, lending is constrained and borrowers are cautious.

“Everyone knows the story of housing in the US, the UK and Spain. I think Australians are well aware that prices can go down. That realisation was not there pre-GFC.”

The global crisis has changed the psyche in other ways. No longer is buying and renovating a home the No. 1 ambition.

“We are a long way from the time when the The Block was the most popular show on TV,” Oliver says.

Of course, if mortgage rates fall much further, all bets are off. If the cash rate drops to 2 per cent, as one lead strategist predicts, the lure of cheap money and rising property prices will be hard to resist.  But it is unlikely. Most analysts predict one or two more cuts to the cash rate and some competitive offers on mortgages."

See AFR - Preparing for lift-off

RP Data Reports

Information from RP Data

Bubble Trouble?

"In conclusion, the data presented should provide more than enough evidence to suggest that Australia’s residential property market (specifically land market) is vastly overvalued, driven by debt-financed speculation and the relative non-taxation of land rent. While land bubbles have been a continual feature of the Australian economy, what separates this cycle is the relative enormity of the boom in both land values and private debt. A smaller private debt to GDP ratio during the 1880s and 1920s was enough to produce two devastating depressions, including a number of recessions during the mid-1970s, early 1980s and early 1990s."

See The History of Australian Property Values

A response to this is on Property Observer, plus a debate here.

Lang Walker's View - No risk of housing bubble

From the AFR on 17 October, page 43:  A story about property developer and investor, Lang Walker.

"I saw that one of the guys from the Reserve Bank came out and was worried about a bubble.  He mustn't get out of his office.  We're definitely not at any risk of a bubble.  It's almost the opposition."

On page 23, it was reported that Bank of Queensland, which lends to many Queenslanders, increased its bad and doubtful debt write-offs.  An Deutsche Bank analyst is reported as saying: "It is clear that conditions in SE Qld remain challenging and we believe that the bad debt environment for the banks over the next 12-24 months is likely to deteriorate."

Brisbane or Spain?

"Mar de Canet’s 308 units were sold in less than 30 days last spring, mostly gobbled up by eager Spaniards finally getting a deal they could not resist: choice holiday homes for less than half the price of similar properties on the market. ...

So many people showed up on the first day the Canet apartments went on sale here that Jesús Martínez and his wife, who were at work and planning to look the next day, called their parents to rush over and lay a claim for them. The couple bought a two-bedroom unit with a terrace and a parking place for $92,000."

See Spaniards Grab Deals in Bank Sell-off of Homes

Harry Dent says Brisbane is Biggest Bubble

"The greatest bubble in developed-country cities starts with Brisbane, Australia at 210% followed by 180% in Miami, 170% in L.A. and 165% in Vancouver. There are many cities that could see real estate drop 70% to 85%!"

See Forbes

Brisbane Apartments Prices to Fall

"The Brisbane inner-city apartment market is heading into a downswing due to the large numbers of off-the-plan projects currently being marketed in the Brisbane CBD and surrounding suburbs, according to property investment adviser Michael Yardney.

Yardney, the director of Metropole Property Investment Strategists, places the Brisbane unit market at two o'clock on the property clock – 12 o’clock indicates the property market has peaked while 3pm indicates the market is in a downswing.

Yardney expects there to be an oversupply of inner-CBD and near-CBD apartments in Brisbane for the next few years, causing prices to fall slightly.

Most recent data put out by the Real Estate Institute of Queensland has unit and townhouse prices in Brisbane up 3.8% over the June quarter to a median of $402,500 – but down 1.5% year-on-year.

Yardney says many of the Brisbane projects being currently marketed will remain unsold and this oversupply of properties will put downward pressure on prices and rentals.

“Many of the apartments that have been sold off the plan are coming on stream in the next few years and have been purchased by investors.  Some will have difficulty getting finance and settling their purchase. Others will be disappointed to see the end value of their properties is less than their purchase price,” he says.

Yardney assesses the Brisbane detached house market to be between four o’clock and five o’clock – still in a downturn but on the way to bottoming out.

“House prices have dropped for the last two years in Brisbane.  Brisbane buyers are lacking confidence to re-enter the market and are sitting on the sidelines waiting for signs that the market has bottomed before they make a purchase. Many were waiting for the resources boom to reignite their property market, but recent negative media has again dampened confidence,” says Yardney.

According to Yardney there are signs that the inner and middle-ring Brisbane home market is picking up, with more buyers returning and many properties now selling under a multi-offer scenario.

“Brisbane is entering the stabilisation phase of its property cycle, but prices are unlikely to start rising until 2013.”

Full Story on Property Observer

Recession on the way?

Housing Market Slumpy?

There are many negative stories at present about the housing market.  For example, "Gloom Returns to Housing Market" (but is Queensland the only bright spot?) and "no housing shortage".

Many pundits say employment growth drives property growth, and unemployment causes property prices to fall.  If that is the case, then Brisbane is heading for a property slump, due to massive Queensland government lay-offs.

Talking to taxi drivers and shopkeepers in Brisbane, in a very unscientific survey, it seems that business is very bad, and when good, is patchy.

It will be interesting to see what happens in September.