01 Aug Prices set to fall due to oversupply – Angie Zigomanis
A major economic and construction forecasting agency is predicting that home prices across Australia will fall in real terms over the next three years. In its latest property market outlook, BIS Shrapnel has predicted real price falls of between 1 and 12 per cent across the capital cities by the end of 2018-19. BIS Shrapnel’s Angie Zigomanis explains more.
Kevin: I’m joined by Angie Zigomanis. Angie is a Senior Manager Residential Property at BIS Shrapnel.
Angie, thanks for your time.
Angie: No worries at all.
Kevin: The headlines this week are a little bit alarming, proclaiming that home prices are tipped to fall and that Australia will face an oversupply of housing by 2018. People are worried about this. Investors are talking, of course. Walk us through the findings and what should we be concerned about, Angie?
Angie: I guess as economists we take the classic Economics 101 approach of looking at demand and supply. On the demand side, we look at population growth, and we translate that population growth to the number of new dwellings that are needed. Then on the supply side, we look at the number of dwellings that are actually under construction and working their way through to completion.
I suppose over the last 12 months or so, we’ve seen a significant uptick on the construction side, particularly in the apartment sector. And that will continue to flow through over the next couple of years because for major apartment projects, it will take one to two years – if not longer – for it to work its way through from project commencement to project completion.
Based on those numbers, we think that particularly in the unit sector, new apartment supply will be running at much higher than what’s required by population growth, and in a nutshell, that means there won’t necessarily be enough tenants to occupy those apartments once completed.
Kevin: We’ve seen this in the past, haven’t we? It is a bit of a cycle where we see some of these figures projected on properties that aren’t even developed at this stage, that probably never will be developed. Is there a bit of over-exaggeration in some of the reactions here?
Angie: Potentially. We have seen cycles before, and the Brisbane, Melbourne, and Sydney markets have all gone through various cycles, and it’s just classical cyclical behavior. When the market’s strong, people pile in and often pile in when the market’s starting to turn, but that supply still has to work its way through.
It definitely happens. There are potential upsides if population growth comes through stronger than we expect, and on the supply side, there are also people who may not necessarily get the pre-sales off the ground for the project to proceed, or they might have the pre-sales but they might not be able to get the finance and so that pulls the project out of the market, as well.
Kevin: I’ll use Brisbane as an example, but markets like Brisbane follow very much behind Sydney and Melbourne, and we saw a huge mass of properties coming through. We’re now starting to see a bit of a decline as the banks tighten up in some of those areas. Is that likely to follow through into areas like Brisbane where we might see a lot of these developments just not come out of the ground?
Angie: Yes, definitely. We’ve already seen some sites that have been purchased in the last few years come back onto the market again because the developer hasn’t been able to proceed with it. We are probably seeing some projects that are pre-selling at the moment where sales rates probably aren’t necessarily strong enough for them to eventually breach whatever pre-sales hurdle that’s required by their financier.
Kevin: This oversupply that we’re talking about, is it right across the board in all markets around Australia?
Angie: No. There are two aspects to our measures of oversupply. One is where it is and two is what type of dwellings it’s in. In terms of aggregate measures, we probably expect two or three years out from now New South Wales will be the only state that’s in undersupply.
Then if you look more particularly at dwelling types, we’ve seen a big upturn in apartment construction, and that’s really where we expect most oversupply, particularly in Brisbane and Melbourne, to be concentrated. Both cities have seen a high level of apartment construction, particularly in the inner city areas, and probably disproportionately high relative to historical norms and likely to be relative to demand, as well. That’s where we expect vacancy rates to be highest and we expect rents to be most challenged.
Kevin: I guess for those people who are looking at buying some of these apartments in all of these capital cities we’re talking about, it’s very important that they make sure they’re going with a developer who’s actually going to complete the development, that it will come out of the ground, Angie.
Angie: Yes, exactly. If you’re looking at that project, definitely. One of the other things that we’re seeing coming through particularly in the Brisbane market is that construction costs are increasing pretty rapidly for new apartments, as well, and so I think there are instances now where a developer has sold apartments at a certain price – maybe one to two years ago at a lower price – and is all of a sudden, trying to lock in a construction contract and finding the building doesn’t necessarily stack up financially anymore because the costs have increased so much in the meantime.
Kevin: I talked to a number of developers, one in particular I was talking to this week is Pellicano who are very well known developers all around Australia. They’re doing a number of developments in Melbourne and they’ve done a lot in Brisbane, as well. They’re starting to come out of the ground. They’re the type of developer you could have some confidence in if you buy one of their developments because you can see it coming out of the ground now and you know it’s going to complete.
Angie: Yes, exactly. Any business that’s a reasonable size and has a big base behind it and that’s been in there for the long haul already, you know that it’s in their best interest just to proceed with the project to maintain their reputation.
Kevin: My guest is Angie Zigomanis, Senior Manager Residential Property at BIS Shrapnel.
Let’s talk about a couple of markets that are really finding it quite tough now – Perth and Darwin. Both places are already finding it really, really tough. Is there more pain for them, or is there a bit of light on the horizon?
Angie: I think for now there is more pain for them. Both markets are really driven by the resource sector and particularly investment in the resource sector. For example, when you’re expanding a mine, it may take a few thousand people to work on the construction side of it, but once it reaches the operational phase, it might only take a few hundred people to operate it. It’s really in the construction phase when all the jobs are created and when the economy benefits the most.
If you look at Perth, but really we’re looking at Western Australia and mostly at North West Shelf, I guess, a lot of the projects are now working their way through to completion and steadily moving into the operation phase. That will continue to take place and probably bottom out on our numbers in 2018.
Darwin is in a similar boat. They’re really being driven almost by one project, the big INPEX LNG project. That construction project also completes around 2018, as well. So there will continue to be a drag on both of those local economies of Perth and Darwin down through to 2018 when it bottoms out. Really, the light at the end of the tunnel will be after that.
Kevin: Looking a little bit broader around Australia, some fairly stark predictions over the next three years. What’s it likely to be like after that?
Angie; Beyond the next three years, I think we’ll probably see most markets bottoming out around 2018 and maybe 2019 and then the next cycle to come through. The strongest upturns to come through beyond there are probably in markets like Brisbane where it’s really missed the cycle here.
We saw Sydney and Melbourne take off but Brisbane lagged well behind, and on the assumption that the Queensland economy comes back pretty strongly, as well, we think there’ll be plenty of upside in the Brisbane market in that cycle. Even in places like Perth prices will have dropped back considerably, and by 2019, I think we measured in real terms that Perth prices will be down by over 20%. So that will position themselves well for the next round of price growth and the next cycle, as well.
It’s really in those cities that are doing it toughest now will probably be in the best position for the next cycle.
Kevin: Yes. You’ve probably already answered this next question, but there’s always some good news. What about the good news that’s coming out of all of this, some of the positives?
Angie: I think it provides a good way to set themselves up for the next cycle. No one will ring a bell and tell you, “Here’s when the market hits rock bottom and today’s the day you go out on the market and buy.” So you really, I guess, should be in the market when as a purchaser, you’re in a position where you can bargain, haggle, and negotiate yourself the best price and sit and work your way through until the next upturn comes through.
Kevin: Always good talking to you, Angie Zigomanis, Senior Manager Residential Property at BIS Shrapnel.
Thank you very much for your time, Angie.
Angie: No worries at all. Thanks, Kevin.