They say there are two certainties in life — death and taxes.
But in Australia — there’s a third.
Government support of the real estate industry.
You name it; they’ll go for it. Home buyer grants, stamp duty savings, tax incentives, fancy mortgage products, and home building programs.
These real estate grants pop up when the economy is tanking.
The government will do anything to keep property prices going upwards.
And that can only happen if there is an everlasting line of buyers willing to pay more than the last dude.
Revelations this week from the Reserve Bank show the extremes considered.
And that includes shutting the industry down altogether!
Just like they do with the stock market when it’s taking a nosedive.
At least that was the suggestion for ‘established homes’.
A ‘pause’ designed to hide any perception that prices were dropping.
Something that would induce mass panic in Australia’s large cohort of property owners.
Not to mention all the other industries choreographed around the FIRE (finance, insurance, and real estate) sectors.
And especially distressing for those that need to sell!
I mean, who wants to sell into a falling market?
But never mind that — who wants to buy in one?!
We hear a lot of moans about housing affordability.
But when prices tank — buyers flee to the hills.
Best to keep up the perception that ‘property prices always rise’.
Then we can kick the can until the next panic.
Of course, if they had done it — it would have caused a lot of pain for those that had already purchased in lieu of selling.
I can’t say there was much thought around it.
But also note that off-the-plan sales and new homes were excluded.
In the last 10 years we’ve had the biggest high-rise construction boom in Australian history.
Predominantly in the three biggest capitals — Melbourne, Sydney, and Brisbane.
Source: Macro Business
It started after the 2008 GFC slump — driven largely by investors — local and foreign.
Seven out of 10 investors own apartments.
A search for yield and store for cash.
Approaching the height of the boom in 2014, Chinese investors and newly-arrived immigrants had poured $24 billion into Australian property over a seven-year period.
14–18% of Melbourne’s and Sydney’s apartment market was being purchased by Chinese investors.
And yet many remained vacant.
We uncovered this in the Prosper Australia’s Speculative Vacancies reports.
Analysing vacant dwellings using water data usage statistics.
In 2015 a whopping 80,000-plus properties were identified as potentially vacant (for 12 months or more) in Greater Metropolitan Melbourne alone.
Not unexpectedly, most in suburbs that have large volumes of high-rise apartments.
It was a common adage in industry groups at that time that ‘we’ll run out of student renters, before we run out of apartments.’
And now in the ‘COVID Panic’ — that’s happening.
Our borders are closed and we’re running out of student renters.
Most developers rely on some form of intermediated financing to ensure projects progress through to the end of the construction phase.
A typical developer will seek bank finance for at least half of the total cost of construction, and they will possibly source mezzanine finance.
They need to sell a percentage off the plan before they can construct.
And buyers take a risk when they sign up to it.
Finance for off-the-plan purchases doesn’t get approved until valuation and that only happens when the project has been constructed — so if a different market or construction has altered (which it can with off the plan) it may not ‘val up’.
Developers inevitably go bust.
We saw that happen in record numbers in 2019 after the Banking Royal Commission.
It put a damper on construction and induced the biggest property downturn in 30 years. Leaving many projects unfinished nationwide.
And a report from BIS this week shows how much the industry is struggling.
In 2015–16, 69,600 apartments in towers of four storeys or more commenced.
By the end of this financial year, that figure will be down to around 34,000.
And between 2020 and 2021 just 21,500 apartments will be started.
If there are no off-the-plan buyers — there are no builders.
Population growth throughout the GFC was barely dented.
But latest ABS stats show this month’s overseas arrivals and departures figures have had a 99.7% drop compared to the same period last year.
The government weren’t slow to refuse support for international students and tell them to ‘go home’ when COVID hit. But now they are panicking.
Indeed — new plans to allow international students back into Australia has as much to do with propping up apartment prices, as it does about saving the universities.
At the start of this crisis we heard a lot of housing bears claiming that housing prices would tank by 20–30%.
It’s not played out in the housing sector.
In fact, in the March quarter house prices in Australia rose by 1.6%. That’s 7.4% above the level this time last year!
But not so for apartments.
Harry Triguboff’s Meriton Apartments, which builds around 1,500–2,000 apartments a year, has had to drop prices AND rents by 20% to attract any demand.
This is one reason why I’ve advised investors for years to steer clear of the apartment market!
Over a decade of research and experience show that new apartment prices invariably go backwards even in the best of times.
Industry players are now trying to persuade the government to ease restrictions on off-the-plan purchases.
‘The government has to get very serious,’ said one Melbourne developer this week.
Recommending the removal of punitive taxes for foreign buyers, and the broad reintroduction of stamp duty incentives for off-the-plan buyers.
At the moment, the COVID scare doesn’t look like it will be over until we’re well into 2021.
And if there is no stimulus to attract foreign investment, it means more pain for apartment investors who may see further falls.
To get any rise in prices at all — construction will need to remain low for an extended period so existing supply can be absorbed.
We need to see ‘more student renters than apartments.’
Considering the marked construction slowdown, that may eventually happen.
If so — the first sign will be an increase in rents.
For anyone who studies property cycles, this is also the first indication that a price rise will follow.
That would kick us off into a strong second half of the property cycle.
Ultimately, it’s going to lead to an inevitable boom.
I’m not advising anyone to rush out and buy an apartment.
But there are ways you can take advantage of the ‘safe as houses’ government-backed sector.
To read more — click this link.
PS: Learn why the property market is unlikely to crash until 2026 and how you can potentially capitalise on this trend. Download your free report now.