Why aren't the prices of off-the-plan apartment falling, like the prices of mobile phones have fallen, when so many are under construction in Sydney?
Mobile phones were once like bricks made of gold - clunky and very expensive. But improved technology and design has made mobiles wafer thin style icons, and increased supply has made mobiles cheap to buy.
It's the same with new home units / apartments. Once they were boxy with tiny little balconies. Now they are sleek - designed for today's lifestyle. But why do prices remain so high with so many new apartments being built? It is common to pay $650,000 for a standard one bedroom apartment and $950,000 for a standard two bedroom apartment off-the-plan in inner Sydney.
For home buyers and property investors, the question is: do you buy a new apartment in Sydney now off-the-plan because you are afraid that apartment prices will keep rising due to increased demand; or do you wait until the increased supply of apartments under construction floods the market leads to falling prices?
As the economists say, will the new apartment market in Sydney continue to be a story of demand exceeding supply, or is this a speculative property price bubble which is about to burst as a glut of new apartments comes on stream?
If I told you that only 36% of the 27,276 apartments to be constructed in Green Square - which is an area between Alexandria and Moore Park in South Sydney - have been completed, would that not indicate a looming oversupply of apartments being constructed in Green Square? And when the remaining 17,450 apartments are completed, will that not flood the rental and re-sale markets and cause rents and prices to fall?
Green Square is the largest, but not the only cluster of high density high rise apartment building projects in Sydney under construction - there are projects in suburbs such as Turrella, Zetland, Waterloo and Mascot near the airport, and at Ryde (Putney Hill), Lane Cove, Chatswood, North Sydney, Central Park and Forest Lodge close to the Sydney CBD.
How do property developers and buyers of new apartments deal with risks?
Apartment buildings take about 18 months to construct. Once construction has commenced, it is not feasible to stop construction half way. This delay represents a risk for property developers.
Property developers (and their financiers) deal with this risk by locking in sale prices for their apartments by selling off-the-plan before they commence construction. This mitigates the risks that sale prices might be lower and of holding unsold stock if buying demand falls away, if they wait to sell when construction is completed,
Buyers pay a 10% deposit up front to secure the apartment and to fix the purchase price when they enter into the purchase contract. Buyers who look to borrow the remaining 90% take the risk of being able to borrow to complete. Lenders might issue an indicative approval (based on income) at the time of entry of the contract, but are not willing to issue an unconditional loan approval.
Buyers therefore take the risk that their income levels and the property value will be sufficient for a loan, up to two years after they enter into the purchase contract. Buyers also take their chances on levels of rentals and re-sale prices. Some developers address the rental risk by guaranteeing rents for a year or two - but what happens afterwards?
The quality of the purchase contract, and whether the representations made to induce the purchase are actionable as false and misleading become ‘live issues’ if buyers are unable to complete the contract because they cannot borrow sufficient funds. Some property developers will mitigate that risk of default by offering ‘top-up’ finance, which is a form of vendor finance. Others will terminate, forfeit the deposit, and re-sell.
How long will the current Sydney property boom last?
The large number of cranes on the Sydney skyline is proof positive that the construction of apartments is at boom-time levels and will continue that way in 2015 and into 2016. In other words, the supply is continuing and relentless because of the boom in construction is locked in - it cannot be stopped this year or the next.
The unknown is: how long the buying demand will continue? Sooner or later, the demand will fall away. What will trigger the fall in demand that bursts the property price bubble is anyone's guess.
The trigger could be a rise in unemployment, or a credit squeeze with high interest rates, or a financial crisis in China, Europe or the US, or an armed conflict overseas, or high vacancy rates because there are too many apartments and not enough tenants, or because loan valuations are below the contract price, or because banks decide to change their lending rules for buyers and lend only 65% of the price instead of 80% or 90%.
I saw the booms in home unit construction followed by the busts happen in 1971-1975 and again in 1987-1991. Both booms and busts followed mining booms and busts. The price falls in property are real when they come, just like the price falls in iron ore and coal are real.
The right time to start buying new apartments will be about 6 months after the bubble bursts. The buying opportunities will continue for two years or more. At that time, off-the-plan apartments are likely to be re-selling at price discounts of up to 30%.
This time, tracking the buying opportunities will be different because of technology. Buyers will be able to keep tabs on the property market on smartphones, and sms their offers to buy properties at a discount.