The largest influx of apartments ever will be completed in Sydney next year and that’s just the beginning of the story!
According to Deep End Services there are 25,000 apartments across 130 projects to be completed in the next five years in Sydney, with around 4,500 of these to be built in the Sydney CBD.
But with property values rising therefore making development projects more financially feasible, a new band of developers is entering the Sydney market gearing up for an apartment building boom.
According to Colliers International Chinese groups have bought more than $600 million worth of development sites in Sydney this year alone making way for another 5,000 or so apartments.
These overseas developers have different funding constraints placed on them allowing them to get projects out of the ground without many of the pre -sales restrictions that local developers face.
Add to this the combination of Chinese government limitations on domestic property investment, comparatively poor returns in equity markets and the appreciation of the yuan against other currencies and we’re likely to see more of this type on investment in the future.
Will this lead to an oversupply?
Nearly 3,000 apartments will be completed in Sydney this year and 6,000 will be finished next year, but this is just catching up after years of undersupply so currently there is no glut of apartments in the Harbour City.
However with almost 80% of these new apartments located south of the harbour this could cause a short term gush in some areas as supply exceeds demand.
But if history repeats itself as Sydney property prices explode over the next year or two, and all indications are they will, a further wave of apartment construction is likely to occur with developers keen to take advantage of the boom.
This means with the long lead times for apartment building construction – often 3 – 4 years from concept to completion – it is possible that Sydney will experience an oversupply in a few years time, just at the time this property cycle peaks.
Of course there is nothing unusual about this
Each property boom brings a whole new generation of investors into the market, driven by property seminars, the press, TV shows and the like.
Greed kicks in and much speculation occurs at this stage of the cycle and a gaggle of developers line up to provide shiny new apartment buildings for these investors to buy in.
[sam id=38 codes=’true’] With all the hype going on around them some potential investors who can’t really afford to buy property extend themselves and speculate. Many buy “off the plan” hoping to sell at a profit, expecting prices to keep rising while some never intend to settle because often they don’t have the means!
This is the stage of the cycle where banks often encourage investors with easy credit, sometimes lending them 80, 90 or even 100 per cent of the cost of their investment properties, causing some to over-commit themselves financially.
Fear also drives property booms as would be home owners and investors see property prices going up all around them. They are worried they may miss out on the profits the boom has delivered to others.
The cycle is brought to a halt when the Reserve Bank increases interest rates to slow down the property markets and the economy in general.
Are we there yet?
I know each property cycle peak is accompanied by a chorus of voices who deny the top is anywhere in sight, but I’m not buying into the current property bubble argument.
The way I see it our real estate markets have only just retraced their previous losses and are now entering the expansion phase of the new cycle which is likely to last a few more years fueled by strong population growth, low interest rates and a generally healthy economy.
It’s impossible to predict with any accuracy when the cycle will turn (not bust), however a peaking market is likely to have several of the following characteristics:
- Property values have risen strongly for a number of quarters
- High levels of credit growth have occurred because consumers are borrowing more
- Banks lending criteria have loosened allowing almost anyone to get a loan to buy property
- Builders and developers become over-confident and a high level of construction leads to an oversupply of properties and higher vacancy rates
- Housing affordability becomes stretched
- Speculation is rife with a new generation of investors getting involved in property hoping to “get rich quick”
- The RBA tries to dampen speculation by raising interest rates
- A credit crunch occurs and banks tighten their lending criteria.
The lessons for investors…
- Booms don’t last forever – so take advantage of our strong markets, but be prepared for the next phase of the property cycle. During the last cycle, most investors didn’t really have their downside covered or their upsides maximized.
- Don’t be enticed by the shiny new apartment complexes. Long is the list of investors who’ve been burned by buying off the plan.
- Only buy investment grade properties – by the way this is not what most investors buy. To me an investment grade property is one that would always be in strong demand by owner-occupiers because they’re the ones who push up property values.
That’s why I would avoid this new wave of large apartment buildings being built and instead buy an established property (apartment or house) in a suburb that has outperformed the market averages and is likely to do so in the future.