(Bloomberg Opinion) -- For people in the U.S., the American Dream is a vision of broadly shared prosperity, freedom and opportunity. Xi Jinping’s Chinese Dream focuses on rising incomes and national renewal. Australians once had a simpler aspiration: owning a detached suburban home on a quarter-acre of land.
That vision died a while ago. Back in the 1980s, single-family detached homes comprised about three-quarters of building approvals, and even through the 1990s and 2000s the proportion was still around two-thirds. Since then, it’s 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. But with Sydney’s property market now 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’s 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’s 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 may 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, since property is typically valued on the basis of comparable sales.
That’s 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.
These conditions probably reflect credit tightening by major lenders. Since apartments are generally cheaper than houses, purchases are less dependent on the availability of mortgage financing. But the vast overhang of units nearing completion may change that dynamic.
In Melbourne, the number of newly completed high-rise apartments will climb to 17,000 this year from 13,500, according to BIS Oxford Economics. In Sydney, 26,300 new apartments will hit the market, down only marginally from 28,000 in 2018, the consultancy says.
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.
That can cause lenders to withdraw conditional offers of financing, meaning the developers have to find replacement buyers. If they want to avoid devaluing the whole building, they’ll have to find ways to offer those new customers unofficial discounts, such as by rebating land taxes or maintenance fees.
It’s little wonder that apartments are resold at a loss more commonly than houses in every Australian city: Nearly 30 percent of unit re-sales in Brisbane came in at a loss in the September quarter, according to CoreLogic.
Paradoxically, that means Friday’s weak construction-activity data, which saw apartment-building fall at the fastest pace since 2012, is good news for the property market, if not the wider economy.
Of course, a crash in property prices is arguably what this costly market needs — but with an oversupply of apartments, record-low interest rates, and Australia’s big four banks reluctant to lend aggressively in the run-up to a government inquiry into their business practices, the traditional brakes preventing a crash have worn out. We’re getting perilously close to the point where this housing correction turns disorderly. Fasten your seat belts.
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David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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