Is the apartment construction boom going to wipe out the market?
A few people have been asking me if I think that apartment construction boom going on in the capitals is going to hurt the Australian property market overall.
The logic works like this. Prices are determined by supply and demand. Right now, a huge amount of supply is coming on line. That gives buyers more options to chose from, sellers start competing on price, and prices fall.
Nothing wrong with that logic, but the real question here is whether this new apartment stock can be seen to be increasing supply in the property market overall, or whether it is just increasing the supply of an isolated segment.
Let me walk you through it.
First up, the stats on how many apartments are coming on line over the next couple of years are a little eye-popping. Consultancy firm Charter Keck Cramer predicts 42,220 apartments will go up in Melbourne between 2015 and 2019.
Back in 2004 when people in Melbourne were freaking out about the Docklands over-supply, Melbourne added 6,000.
So 40,000 apartments, in the scheme of things, is a lot of supply.
And this is just in Melbourne. Value Investor Roger Montgomerey reckons that by the end of 2016, Australia will have an oversupply of 200,000 homes. That equates to 18 months worth of supply. He reckons that just prior to the GFC, the US had just 12-months worth of supply.
However you cut it up, there’s a lot of supply coming to the market, and normally you’d expect this to give prices a solid whack.
But there’s a few reasons why this might not happen.
First of all, a lot of these off-the-plan apartments are being marketed directly to Asian buyers, and we do know that a lot of Asian buyers like to keep their apartments empty.
I still don’t fully understand the logic of this. Maybe they like to preserve that new apartment feel. Maybe they don’t want any foreign income alerting authorities at home to wealth they’ve got stashed away in Australia.
Whatever the case, a lot of these apartments are left empty.
But that means they’re not really supply. They do nothing to the demand / supply balance – either for renters or buyers. It that sense, for all the impact on prices, they may as well not exist at all.
Secondly, a lot of these apartments seem to be tailored to the higher end.
The median price of a new 3-bedroom apartment in Melbourne’s CBD is $960,000 – $240K more than the median house price. The cheapest 3-bed room highrise apartments are in North Melbourne – but you’re still looking at price point around $800K.
And even if you think you can squeeze into a one bedroom apartment, that’s still going to cost you $400-$500K.
None of these numbers are saying ‘entry level’ to me.
But entry-level housing is what the Melbourne and Australian markets need. New households are formed by people setting out on their own, or couples looking to form a family.
But even if that young family was willing to give up a back yard for the kids and go into an apartment, they’re not going to be looking to spend just shy of a million dollars on it.
What’s more, these apartments are even out of baby-boomer range.
There been a lot of talk about how downsizing baby-boomers were going to open up family homes for younger cohorts, and help the property market transition.
It sounded good in theory, but we haven’t seen much of it in practice.
And one of the reasons is the price.
Let’s say you sell a median house in Melbourne. You’re not going to see much change after you purchase a new high rise unit, if any. It releases no equity, so why bother? Unless you think that living in an 80-story apartment complex is better than living in a detached home in a leafy, established suburb somewhere.
So it looks to me like we’ve got a fundamental mismatch between supply and demand – between what is being produced and what people want.
Young families want something affordable and family friendly. Baby-boomers want something compact and convenient, but they also want to be able to release equity for retirement.
But the supply coming on line right now is just not meeting that need. And it doesn’t matter how much of it is being built, it just doesn’t meet where the market is at.
So it seems we have two distinct property markets emerging in Australia. There is the high-rise unit market tailored to the demands of foreign investors. And there is the detached housing and unit market we’ve traditionally produced in Australia.
There’s not a lot of cross-over, so we’re going to see two completely different stories play out.
In the high-rise unit market, there is a tonne of supply coming on line. That’s true. You’d expect that to crush prices, but then that really depends on what happens to demand. Will foreign investors want to keep building and buying apartments that no one lives in?
Maybe… Who knows. It’s a strange market. I wouldn’t touch it with a barge pole, but it’s hard for me to see the world through a Chinese investor’s eyes.
And detached housing? Well, that market’s been crowded out by all this high-rise development. One of the factors driving prices over the years has been a persistent shortage of housing.
Finally, politicians and planners were patting themselves on the back for bringing new supply to the market. But turns out that supply is totally disconnected from what people want.
What’s worse, it’s pushed up building costs and made the little building activity that was going on, more expensive.
So regardless of what happens in high-rises, the shortage remains and prices just get pushed higher and higher.
So tell me then, which market do you want to be in?
No prizes for the answer to today’s question.
Is this unit supply meeting the market? Would you live in one?