Sun, Jan 13, 2019 - Page 15 News List

The Australian Dream died in an apartment complex

By David Fickling  /  Bloomberg Opinion

For people in the US, the American Dream is a vision of broadly shared prosperity, freedom and opportunity. Chinese President Xi Jinping’s (習近平) “Chinese Dream” focuses on rising incomes and national renewal. Australians once had a simpler aspiration: Owning a detached suburban home on a 1,000m2 plot.

That vision died a while ago. Back in the 1980s, single-family detached homes comprised about three-quarters of building approvals in Australia, and even through the 1990s and 2000s the proportion was still about two-thirds.

Since then, it has plummeted to less than half, with high-rises taking up an increasing share of Australia’s traditionally single-story skylines.

In many ways, that splurge of building has been a boon for a country where housing construction has rarely kept up with population growth.

However, with Sydney’s property market falling 11.1 percent in its sharpest downturn since the 1980s — a trend mirrored nationwide — the shift toward high-rise apartments risks a further leg down in a real-estate crash that is starting to threaten the economy.

To see why, consider the differences in how houses and apartments are built and bought. A new house can be constructed in as little as six months, compared with as much as five years for major high-rises. Even before that stage, there is a process of seeking planning approvals, which tends to be longer with high-density developments. On top of that, getting the financing to build residential towers is normally contingent on pre-selling a certain share of the block, further delaying matters.

As a result, an apartment-heavy property market is a lot less nimble in responding to shifts in demand and credit conditions than one dominated by single-family homes. Towers planned five years ago when the market was red-hot might just be taking the scaffolding down now, at a time when things are looking dicey.

Making matters worse, developers of large apartment complexes inevitably hold a lot of inventory, so are strongly motivated to sell. If prices come in too low, they can wind up reducing the price of the whole block, as property is typically valued on the basis of comparable sales.

That is reason to think worse is to come for Australia’s housing market. So far, the lower-price brackets in which apartments dominate have been relatively unscathed by the current rout.

In Melbourne, for instance, the cheapest decile is down just 0.6 percent from its peak, compared with a 13.9 percent fall in the costliest decile, according to CoreLogic Inc, a real-estate data company.

The conditions probably reflect credit tightening by major lenders. As apartments are generally cheaper than houses, purchases are less dependent on the availability of mortgage financing.

However, the vast overhang of units nearing completion might change that dynamic.

In Melbourne, the number of newly completed high-rise apartments is to climb to 17,000 this year from 13,500, according to BIS Oxford Economics.

In Sydney, 26,300 new apartments are to hit the market, down only marginally from 28,000 last year, the consultancy said.

Dealing with this wave of inventory could turn messy.

Pre-sold apartments are increasingly coming in with valuations at completion lower than when they were sold off-the-plan, suggesting growing weakness in that end of the market, according to Cameron Kusher, research principal at CoreLogic.

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