AUSTRALIAN banks have gone back to decade old conservative lending practices because of a lack of competition from offshore financiers, which is putting a cap on price growth in Melbourne’s apartment market, according a Knight Frank and the Australian Property Institute (Vic) study.
The Knight Frank – API (Vic) research study ‘Melbourne apartments where to now?’ found that the market avoided a major downturn during the global financial crisis, in fact the broader metro Melbourne has seen an increase, the lending climate has changed dramatically.
Knight Frank valuation managing director and API spokesman David Way said banks have gone back to more conservative approach to lending consistent with a decade ago when they did not have competition with offshore financiers, which flooded the local market prior to the GFC.
He added that developers and to a lessor extent apartment investors are struggling to get funding for certain apartments in secondary locations.
“The demand for apartments ‘off the plan’ has been buoyant over 2011 to date albeit substantially below 2009 and early to mid 2010 which provided the strongest rates of sale seen in eight years.
“A slowdown occurred around the federal election last year, coupled with a substantial November interest rate rise and a rally in the equities market, flattening demand for investment apartments through until Christmas,”
The study discovered that a patchy start to the equities market and a lift in confidence about the future of the Australian economy has seen good support for “off the plan” apartments over 2011 and we expect this to continue until mid year.
“About this time, the March 2011 residential vacancy rates will have been released and the trend of a rising vacancy rate will be potentially confirmed and thereby sound a warning to investors over the medium term,”
Knight Frank reports that vacancy rates of around 3% provides some equilibrium in the rental market and a rate in excess of this suggests over supply and the potential for a reduction in rentals which is likely to peak over 2012/2013.
“This is when the strong presales of 2010 are likely to provide, by our estimates, an injection in excess of 8,000 apartments within a 15km radius of the CBD on top of 5,700 apartments completed and likely to be completed in 2010/2011,”
Way adds that this scenario was last experienced in 2004 and 2005 when the “spruiker” glut hit the market and falls in value were experienced exacerbated by lenders withdrawing from the market when purchasers capacity to pay was quite correctly thrown into question.
“The 2012 and 2013 market is likely to be different in comparison by virtue of reduced degree of speculative purchasers as the majority of projects have been substantially sold down to local buyers prior to construction commencement compared to 30% to 50% presales in the early 2000’s market and a greater reliance on interstate and overseas purchasers.
“The 2004/2005 market was also impacted upon by faulty deposit bonds which have now been replaced by full 10% deposits secured in cash or bank guarantees.
“Accordingly, there is less reason for lenders to be nervous about purchasers capacity to pay compared to 2004 however, their full participation is required to ensure settlements can be funded. There is also likely to be less reason for investors to walk away from Contracts because a full 10% deposit is on the line, but this can change if a correction in excess of 15% is experienced in the market.
Way said many pundits are suggesting a substantial correction in the Melbourne residential market is inevitable.
“With an Australian economy with circa 5% unemployment, typical double income family demographic, strong interstate and overseas migration and the likelihood of growth in the current economic data does not suggest a correction.
“However, with European sovereign debt issues remaining, the Japan crisis and the suggestion China’s growth may stall, we are currently entering into a world of the unknown.
Way concluded that even if world economy stablises, the Melbourne apartment market will still show “limited growth for the short to medium term with wage and prosperity growth countered by a rising cost of living and increased interest rates.” He concluded.
Australian Property Journal
