Towers of apartments made of straw are tipped to collapse as the big bad wolf of oversupply and APRA hits the Melbourne CBD and Southbank apartment market. There is however, the 'THREE LITTLE PIGS' of other circumstances, that has created a unique set of market conditions that will force apartment investors into financial duress as they attempt to get finance followed by the loan servicing anguish as their real estate investment remains vacant.
Chinese investors are putting out fires on the sharemarket and have lost confidence in Australia real estate or worse, with the falling RMB and heavy losses on the stock market, now do not have the funds available to finance off-the-plan apartments that settle in 2016. January 20, 2015 - By Scott O. Talbot
During the GFC, Victoria was building about 8000 to 9000 apartments a year. In 2015, Victoria's 38,208 approvals of new apartments accounted for nearly a third of the national total of 187,115 the highest for the first time in Australia’s history. Melbourne CBD approvals for 6 months of 2015 was an enormous 12,516. The scale of Melbourne’s high-rise boom currently includes 33 towers under construction and a further 39 yet to start construction according to [Skyscraper] [Activity Monitor] [UrbanMelbourne].
big bad wolf of the Melbourne apartment Collapse
Considering Australia has one of the lowest birth rates in the world (308,100 or 1.88 birth rate), immigration only increased (barely) by 1% between 2008-2009 when compared to 2013-2014, the old argument of supply and demand is become a weak justification for the number of apartment approvals in the Melbourne CBD.
In particular, many are speculating that the Melbourne CBD has reached critical over supply levels.
”The city is already heading for a glut of apartments”, which researcher BIS Shrapnel said. ”By June 2016 there will be a surplus of 15,000”. Are we heading towards a ghost city were there is so much stock under construction that they lay empty ?
In an article published by domain.com.au. “Get out as soon as possible [otherwise] it will take 10 to 15 years before you get your money back.”
Planning approvals are still coming through the pipeline and would keep adding to the apartment over supply.
The softening housing market has already started taking its toll on the valuations of new off-the-plan apartments.
Details of an Article published by AFR on December 31, 2015. Source: [AFR]
”In a sample size of nearly 2000 off-the-plan properties in Melbourne valued by WBP Property Group between 2014 and 2015, about half of the them are now worth less than what was paid for them.”
”There will be a number of people who are going to get caught out by the Australian Prudential Regulation Authority changing the goal post." With falling property values, many recent off-the-plan buyers might find themselves in a tight spot at settlement.
Melbourne City Council published a report that over 40% of the city CBD’S apartment developments are “poor” quality, contain design flaws such as cramped layouts.
These sub size apartments have been predominantly purchased by investors and most are from overseas. The report stated that overseas investors who buy 80%+ of apartments in the Melbourne CBD were not bothered as long as there was someone willing to rent the property, but this will not be the case for many investors as the rental market also hits oversupply levels.
“The Melbourne CBD apartment supply levels should be organic to the local market demand. The apartment levels have been falsely increased to cater to the spin masters selling CBD apartments to uninformed Asian investors and, property developers taking advantage of the false (none organic) market demand.”
PIGGY ONE - Mammoth rental over supply effecting occupancy and investor loan serviceability.
Melbourne’s rental market in 2009 was a modest 23,192 and in 2014 it increased to 34,612. With tens of thousands of apartments under construction, in 2016-17 this is predicted to increase to over 55,000.
If a very modest 50% of the new apartment constructions are purchased by investors (More likely 80%) and are released to the rental market, there will be an estimated flood of 20,000+ apartments to hit the Melbourne CBD market. Source: [Activity Monitor]
Source:   
House Hold Types - - 87% High-rise
Country of Birth - - - 66% Born Overseas
Ownership Type - - - 80% Rented
With 66% of Melbourne CBD residents born overseas, is the Melbourne CBD now a ghetto for overseas students and drifter residents ?
Immigrants from China and South East Asia combined represent the highest percentage of the municipality’s residential population and accounted for around one third (32%) of the overall growth.
With the broader Melbourne tenancy population opting to live outside the CBD, where they can shop for food, eat out, avoid the high density conditions and live in a quality built and designed rental home, the CBD lifestyle has lost its popularity in the broader rental market.
But the property investors troubles don't stop at getting finance and devastating valuations.
Rental vacancy levels in the CBD are set to SKY ROCKET and the purchasers that did managed to settle will be stuck with the 2nd wave of financial duress.
It could only be a matter of time until the banks forces the hand of some investors to repo apartments in default. Apartment owners will struggle to hold onto investment properties without tenants. Source: [Domain Empty Apartments]
PIGGY TWO - The prudential regulator, APRA, has introduced a variety of measures to help protect the banks from a housing downturn.
The APRA finance policy has reduced LVR’s (loan-to-value ratios) for overseas investors, down to a max of 70%. A Big surprise for many Asian investors, that now have to handover an additional 10% ++ more equity to get finance. The tighter LVR credit standards by APRA is a speed limit to deter property investors and, has the motive to prepare the banks for the housing downturn.
One-in-three off-the-plan investors are facing financial stress. Source: [Buyers in Trouble]
The 'Australian' news paper in September 2015, revealed that HSBC had quietly turned off the tap to new customers seeking loans for investment properties.
Chinese investors who have money tied up in the crashing stock market MAY NOT have the additional funds required by the mortgage brokers to top-up the APRA policy and lower valuations to mitigate the massive apartment oversupply. Source: [SMH STOCKS]
Many overseas off-the-plan investors have made the financial decision to purchased based on their ability to borrow. Purchasers made off-the-plan between 2012 - 2015, prior to the new APRA rules, are unaware that they will need a further 10% equity to obtain finance. Pair this with “Piggy Three” and Bank valuers reducing purchase prices by up to 20%. Tipping in a further 30%+++ equity will be impossible for some overseas investors.
PIGGY THREE - Bank valuers reducing purchase prices by up to 20%. The property valuers (the banks canneries) can already smell the gas.
Overseas purchasers will be devastated when their valuations prior to settlement come back between 5-20% lower than the purchase price. Traditionally a 5% valuation reduction is an acceptable buffer in normal market conditions. With oversupply and a market downturn, this is predicted to increase up to 20% for poorly designed and finished apartments.
Bank valuers are the oracles of the real estate market and so they should be, their own professional indemnity insurers are clamping down and warning their property valuer customers to be very cautious. Combine this market sentiment with the banks conservative approach to property values in the CBD and Southbank, valuation firms that wish to maintain their accreditation and avoid litigation with major banks, will be slashing property values.
Two thousand off-the-plan apartments valued by WBP Property Group between 2014 and 2015, half of the apartments are now worth less than what was paid for them by the overseas investor.
An estimated 15,000 > 16,000 apartments are currently under construction.
Property investors expect bank valuations to mirror the off-the-plan purchase price. The cold hard fact is that a bank valuation is an internal control tool, which reflects what a bank can reasonably expect to recoup should it need to repossess and sell the property in distressed circumstances.
When the Melbourne CBD and Southbank valuations fall under the weight of the oversupply conditions, investors can expect devastating news on how much their investment is actually worth.
The mistakes made by developers will be born by the individual investors when bank valuations sort out the risks with devastating low valuations.
15,000 ++ Apartments Currently Under Construction in 2016
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