Are more units being built than the market can handle?

This month’s revelation by the Australian Bureau of Statistics (ABS) that a record number of dwellings are under construction around the nation raises a number of warning flags.

The figures show that while housing construction boomed in the March quarter, it is the number of new units being built that should attract attention.

New starts of apartments, units and semi-detached houses jumped 11 per cent in the first three months of the year to a record 31,261, the ABS figures show. The strong multi-unit numbers drove total housing starts to a new high of 59,684.

Quarterly number of dwellings under construction – houses vs. units

Quarterly number of dwellings under construction – houses vs. units
Sources: CoreLogic, ABS

Oversupply looms

The first issue this raises is the obvious one of potential oversupply, which also worries one of Australia’s leading analysts, BIS Shrapnel.

Its Residential Property Prospects, 2016–2019 report tips that the combination of more stock and lower population growth will cause most of the undersupplied markets to tip into oversupply in 2016 and 2017, while excess stock in other markets is likely to persist.

Apartment completions

“Although interest rates are expected to remain low, and even potentially fall further, the adverse demand/supply balance is likely to dampen price growth, with median house and unit prices in all capital city markets forecast to be lower in real terms by 2019,” the report states.

The potential to clear the oversupply is not being helped by the regulators and politicians.

The Australian Prudential Regulation Authority last year directed banks to restrict the growth of lending to property investors to 10 per cent a year and requested that lenders increase the amount of capital they hold against their residential mortgage exposures to between 25 per cent and 30 per cent, up from about 16 per cent.

The Australian Taxation Office put in its two cents’ worth by forcing foreign residents to pay a 10 per cent withholding tax on properties worth more than $2 million. The politicians topped up these restrictions with rules requiring proof of residency and citizenship to buy property in Sydney, and increasing stamp duty for foreign buyers in Victoria. The absentee owner land tax has also been bumped up to 1.5 per cent in Victoria.

To add a more sombre note, Chinese investors are finding it harder to get their money out of China.

Settlement risk

The large volume of new unit settlements due over the next two years is also a potential concern.

Housing loan approvals

Housing loan approvals
Sources: ABS, Reserve Bank of Australia

The clampdown on investment lending may catch out some people who signed up for off-the-plan units before the restrictions were announced, as they may have expected to borrow more than they now can.

Not only have lenders recently tightened mortgage criteria, they have also increased the mortgage rates for investors. Units are much more likely to be owned by investors.

In many regions, capital growth for units has been substantially lower than that for houses, and many off-the-plan unit buyers would have expected a level of capital growth between contract and settlement.

Many of the units coming up for settlement are in similar locations and will compete with existing stock. With so much stock appearing at once, there is an increasing concern as to whether settlement valuations will actually meet the contract price of these units.

To compound the situation, three of the four largest banks will no longer lend to foreign home buyers, which could result in a larger number of contracts not progressing through to settlement, considering a larger proportion of off-the-plan unit sales are to overseas buyers.

In all, it looks like the market for units is heading for a brick wall. The silver lining, of course, is that astute buyers may be able to pick up bargains from the wreckage.

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