Losses on a wave of new apartments are starting to mount in Melbourne and Brisbane.
A hefty 60% of units purchased off-the-plan in inner Melbourne since 2011 breaking even at best or reselling at a loss, while inner Brisbane saw 40% of resales lose money, according to new research from BIS Oxford Economics.
Sydney has yet to feel any significant fallout from the unit-building boom, with only 4% of resales made at the purchase price or below.
The results come amid warnings from regulators, politicians, and economists over the astronomical house price growth in Sydney and Melbourne, mixed with expectations that investors will face tougher times ahead as lending criteria continue to tighten and investor mortgage rates increase.
In the Queensland capital, property veteran Kevin Seymour’s company, Seymour Group, examined pockets of the inner city ahead of undertaking new building projects.
He discovered that 90% of the new units in selected larger projects in Fortitude Valley, which are mostly targeted at investors, had resold at a loss over the past two years.
In total, Seymour Group examined 24 projects in two inner suburbs, Fortitude Valley/Bowen Hills and Newstead, where a total of 83 units had been sold.
In contrast, boutique projects at Newstead with larger apartments have generally seen values rise, according to Seymour Group.
Seymour said the review had been undertaken to identify the soft spots and pockets of strength in the inner-Brisbane market.
“It’s no good building in the face of what is a disaster for resales,” he told The Australian.
He noted that investors would face “fiercer headwinds” as banks are increasing their investor lending rates.
NAB’s investor loans increased from 5.55% to 5.80%, whereas Westpac’s interest rates for property-investor customers were hiked 23 basis points to 5.79% for principal and investor loans, and 28 basis points to 5.96% for landlords paying off interest costs only.
Smaller developers are finding it increasingly challenging to get traditional funding, though new tiers of non-bank lending are emerging, backed by high net worth investors and second tier lenders, according to Seymour.
Angie Zigomanis, analyst at BIS Oxford Economics, expects the Brisbane market to perform more poorly than the southeastern capitals given its smaller size and narrower pool of tenants.
“There is a smaller working population in the city and there are other affordable housing options,” he said of Brisbane’s unit market.
New high-rise unit completions would peak in Sydney in 2018 at 25,800 units, compared with 16,210 completions last year.
Melbourne’s building cycle will peak this year at 18,350, compared with 13,453 last year.
Brisbane will see 10,350 units finished this year, double last year’s 5,435 high-rise completions.