Unit development approvals are at record highs and as a result, construction is booming.
Within the next 24months, a substantial volume of new unit stock will be delivered to the market.
So exactly what does this mean for our capital city property markets?
Here is a New Settlement Risk Report which looks at the number of units set to settle over the next 6, 12, 18 and 24 months.
Note: These are based on the expected completion of new developments coupled with the number of units being built in these developments.
The reports, and accompanying charts included herewith, highlight the number of unit sales over the 12 months to April 2016, the average number of annual unit sales over the five years to April 2016, and the anticipated number of unit completions over the 12 months to April 2017 and 24 months to April 2018.
The report identified that across the combined capital cities, there are 92,102 new units set for completion over the next 12 months with that figure expected to rise to 231,129 over the next 24 months.
Looking at new unit supply across our capitals, Sydney and Melbourne are predicted to have the greatest increases in stock over the next two years.
A comparison of the volume of stock set to settle over the next 12 and 24 months to the average number of unit sales annually over the past five years, shows as “a big disconnect”, particularly in the four largest capital cities.
The historic sales figures include sales of both existing and new units and remember new stock, usually accounts for a smaller slice of total sales than resales of existing stock.
The large volume of new stock, coupled with an ever-growing supply of existing stock means that historic high levels of unit settlements are due to occur over the next two years in most cities.
In fact, even a recurrence of the peak year for sales in Melbourne and Brisbane over the next two years wouldn’t represent enough demand to cater for all of the new units set to settle over the
coming 24 months.
The adjacent chart which shows the SA3 regions nationally have the highest number of anticipated unit settlements nationally over the next 24 months.
Given the much higher number of unit settlements in Sydney and Melbourne, these cities dominate this list with eight and 12 of the regions listed respectively.
In Queensland, there are three regions from Brisbane and one from the Gold Coast listed, while one Perth region is are also listed.
Within Melbourne, Brisbane and Perth, most of the stock due to settle is located within the inner city areas (within 10km radius of the city).
In Sydney, the new unit supply is more geographically diverse.
And while there are a lot of new units in inner city areas, there are plenty also in outer areas like Parramatta, Strathfield, Auburn and Kogarah-Rockdale.
In some respects this spreads some of the risk around the city rather than other cities where new supply is much more centralised.
- The large volume of new unit settlements over the next two years raises some potential concerns, namely: In many regions, capital growth for units has been substantially lower than that for houses. Many off-the-plan unit buyers would have expected a level of capital growth between contract and settlement.
- Mortgage lenders have recently tightened their lending criteria; subsequently some people who have committed to off-the-plan units may not be able to borrow as much as they could at the time of signing the contract.
- Units are much more likely to be owned by investors. Not only have lenders recently tightened mortgage criteria, they have also increased mortgage rates for investors.
- Many of the units are coming up for settlement in similar locations and will compete with existing unit stock. With so much stock coming online at once there is an increasing concern as to whether settlement valuations will actually meet the contract price of these units.
- To compound the situation, three of the four largest banks have announced they will no longer be lending to overseas home buyers which may result in a larger number of contracts not progressing through to settlement, considering a larger proportion of off the plan unit sales
are to overseas buyers.
- Settlement risk is something that we will be keeping a very close eye on over the coming months and years