THINKING ABOUT BUYING A APARTMENT IN AUSTRALIA, THINK AGAIN
The recent boom in unit construction has seen record-high levels of unit approvals and construction culminating in a substantial volume of new unit stock, much of which will settle over the next 24 months.
CoreLogic’s new settlement risk report looks at the number of units due to settle over the next 6, 12, 18 and 24 months. This is based on the expected completion of new developments coupled with the number of units being built in these developments.
The first table highlights 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 month to April 2017 and 24 months to April 2018. Across the combined capital cities there are 92,102 new units set for completion over the next 12 months with that figure rising to 231,129 over the next 24 months.
Looking at the expected new unit supply, Sydney and Melbourne predictably have the greatest increases in stock over the next two years. If you compare the volume of stock expected to settle over the next 12 and 24 months to the average number of unit sales annually over the past five years, you can see a big disconnect, particularly in the four largest capital cities. The historic sales figures include sales of both existing and new units keeping in mind that 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 which resells means that historic high levels of unit settlements are due to occur over the next two years in most cities. In fact, in Melbourne and Brisbane even a recurrence of the peak year for sales 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 second table highlights the SA3 regions nationally that have the highest number of anticipated unit settlements 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, three regions from Brisbane and one from the Gold Coast are listed while one Perth region is also listed.
If we compare the capital cities, it becomes evident that most of the stock in Melbourne, Brisbane and Perth is located in inner-city (within 10km radius of the city). Taking a look at Sydney, the new unit supply is more geographically diverse. Yes, there are a lot of new units in inner city areas but there are also plenty 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 does raise 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 and subsequently some people who have committed to purchasing 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 on-line 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 home buyers from overseas which could 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.
The above information has been provided by CoreLogic RP Data