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Trouble Building from the Apartment Industry

Round the city skylines, the plethora of the largest cranes on hire building high-rise apartments has surfaced. The amount of flat sales is decreasing, as are costs, since the boom changes management and regulators continue to warn of pockets of oversupply. It’s not often one of Australia’s richest people – with a fortune stemming from over 50 years of building flats – calls a turning point. However, Meriton founder Harry Triguboff has made indications about the change.

Triguboff informs The Australian that it will soon be a good time to buy, stating new apartment prices have dropped 10 percent over the previous six months. And then there’s the wave of investors and owner-occupiers that have already dived to the heating property boom. He continues that Australians could eliminate an enormous quantity of wealth and warns that a rapid fall in apartment building will hurt an economy that’s still experiencing the resources downturn.

A rash of economic, regulatory and societal factors are combining to deflate heated land markets and especially high tech apartments in Melbourne, Brisbane and Sydney, where a wave of distribution is hitting the market. Last week Reserve Bank of Australia governor Philip Lowe indicated that Brisbane’s building boom was coming under close review. He stated that they were watching the Brisbane property market carefully in response, especially the effect on costs of the massive gain in the supply of new apartments that do not meet the demand for more ground-level homes built with engineered timber frames and products. The remarks come as the Brisbane apartment market has been softening under the burden of a tide of new towers.

Sales of off-the-plan flats in inner Brisbane have dropped, from a peak of over 1600 in the December quarter of 2014 to approximately 300 in the June quarter of the year. CoreLogic head of research Tim Lawless says the inner-city Brisbane apartment market appears quite problematic given its source, and places Perth and Melbourne in precisely the exact same category. Lawless says that they’ve observed a peak in the construction pipeline for all those cities which suggests that they probably nearing the worst of the market conditions in these areas, but still expect there to be some settlement risk.

There is a continuous stream of upsetting information coming in to the Australian flat market, which economists have long been warning is primed for a recession. Price falls in the aftermath of Brisbane’s flat construction-boom involving expensive drake low loader hire and frannas on long-term leases have claimed several victims this year, as flats purchased off the plan market for reductions of as much as 36 percent, based on a report in The Australian today. Queensland’s apartment market has been a rising concern, with heaps of building companies having collapsed already this year.

Now, it emerged ANZ had issued a comprehensive list of suburbs in and around Brisbane and Perth that will be subject to stricter lending requirements for borrowers. Under the bank’s tougher loan provisions for the distressed housing market, ANZ will apply a minimum deposit of at least 20%, according to a report from the AFR (tougher loan terms show that the bank is worried about risk exposure on the current settings). The current price falls are reflective of concerns which have been on the radar of policy makers for a while. Last October, the RBA flagged potential problems with the Brisbane and Melbourne apartment economies given the continuing wave of new supply in these locations.

The Australian reported that the majority of the flats in three towers built around five decades ago – located in Hamilton, Bowen Hills and Fortitude Valley – had sold at a loss this year. The purchase price drops include 5,300 flats finished in Brisbane this year and a further 11,000 under construction. While new flats with well-designed laminated architectural timbers continue to go up, numerous cracks have been emerging in Queensland’s building market. A report last month revealed that over 30 construction firms in Queensland have dropped this year, with over 400 additional builders in danger of failure.

Among the heaviest losses for flats sold this season, the biggest fall was to get a two-bedroom flat in Hamilton that was sold for $370,000 – $152,000 less than initial cost of $522,000. Meanwhile, ANZ has issued a list of postcodes in Brisbane and Perth in which it will impose stricter lending standards given the dangers around over-supply and decreasing prices. Together with the listing, the bank also issued a 10-page guide to mortgage brokers clarifying the minimum requirements and guiding principals that agents should abide by when organizing loan applications.

The move appears to be in reaction to a report two weeks ago by investment Bank UBS, which estimated that approximately $500 billion worth of Australian mortgage software contained factual inaccuracies. That analysis showed the number of incorrect software at ANZ was higher in a mathematically significant level compared to the 2017 sector average. Weekly preliminary Data from CoreLogic this morning revealed that auction clearance rates remained stable in Sydney and Melbourne last week, but remain lower than at this moment last year. The figures revealed that Brisbane and Perth had the cheapest preliminary clearance prices, at 51.5 percent and 36% respectively.

Scott Dean

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