Introduction – The Shift Critical in the Australian Property Market & the Need for Experts’ Insights
Australia’s housing industry is undergoing a major shift, which has caused investors, developers and professionals to scramble for solutions. A significant reduction in residential dwelling commencements combined with tighter lending conditions and weakening market sentiment has left many questioning the future direction of the property sector. This downturn in housing supply presents both risks and potential opportunities for property investors. It is important to understand the causes of this decline and its wider economic impact.
Expert insight and analysis are more important than ever in a market that is so volatile. Traditional property reports and data provide a snapshot of a market’s state but often fail to capture the subtle factors that influence long-term trends. Property investors and developers need to dig deeper into market drivers such as developer confidence, lending limitations, and supply/demand imbalances in order to make truly informed decisions.
RiskWise Property Research can help. Our mission as a leading provider of market analysis and in-depth property analyses is to equip investors and developers with all the information they need to navigate an ever-changing market. Our team of experts evaluates factors ranging from the housing market sentiment and financial conditions to enable investors to make more informed decisions.
This blog will examine the changes that are occurring in the Australian housing industry, focusing on the decrease in new dwelling construction. We will examine the key risks affecting the housing market, the wider economic implications and explain how RiskWise Property Research helps you to stay ahead of the changes in order to maximize your investment opportunities.
What is behind the decline in residential dwelling commencements?
The number of residential dwellings that have been started is a key metric to understand the housing supply. Commencements are the beginning of new construction, and a decrease in this number typically indicates a future slowdown. In the last few months, dwelling starts have been on a steady decline across Australia. This decline is most pronounced in the multiresidential sector such as apartment buildings, where developers struggle to meet pre-sale goals and tighten lending conditions.
A recent joint analysis by RiskWise Property Researchand Development Finance Partners shows that this decline is worse than originally forecasted. Projections for residential unit starts, in particular are worse than expected. This has far-reaching implications for the housing market as well as the wider economy.
Doron Peleg is the CEO of RiskWise Property Research. He stated that the data available does not reflect many of the important risk indicators which affect dwelling starts. Mr. Peleg said that the situation was much worse than the raw numbers indicated. Key risk indicators, such as the developer sentiment, tightening credit and failure to meet presales targets, point to a greater downturn than what is visible on the surface.
The ripple effect of these downward trends is already being felt across the entire property market. Understanding these dynamics will help investors and developers assess the risks as well as the opportunities of the market.
Key Market Risk Indicators & Their Impact on the Market
RiskWise Property Research has identified a number of key indicators that are highlighting the challenges faced by investors and developers. These indicators are more than simply market trends; they provide insight into the sustainability of the housing markets over the long term. Anyone involved in real estate investment or development must understand these risks. Here are the top risk factors.
1. Failure to meet pre-sales and sales targets
Developers often depend on pre-sales contracts to begin construction in today’s market. These pre-sales agreements are essential for obtaining funding from banks and other lending institutions, as they assure that the project is in demand. Many developers are struggling to reach their pre-sale goals. Failure to meet these pre-sale targets, especially in areas where there is an excess of stock, could lead to the cancellation or delay of construction projects.
Recent reports show that developers in Sydney, Melbourne and other cities have not met pre-sale goals for new apartment development. It is due in part to an oversupply of apartment buildings in certain areas and a weaker demand by both investors as well as owner-occupiers.
This trend is especially noticeable in high-density zones where apartments are the predominant type of development. In areas such as Inner-Brisbane, and in some parts of Melbourne, there are a lot of unsold apartments. This makes it difficult to secure pre-sales.
2. Declining Developer Confidence
The level of developer confidence is crucial in determining the housing market. Developers who are confident in the future and market are more likely start new projects. The latest DFP market sentiment survey data shows a decline in developer confidence. In 2017, 80% expressed confidence in the marketplace, but that figure fell to 63% in 2018
Many developers have adopted a more conservative approach to their project due to this decline in confidence. Many developers have switched their attention to low-risk projects, such as land-and-house packages, because they are easier to sell. Multi-residential developments, which are more expensive and have a higher risk of market volatility, are less appealing to developers.
This shift in sentiment has resulted in fewer new developments which has in turn contributed to the slowdown of dwelling starts.
3. Financing and Lending Challenges
In recent years, the Australian lending landscape has undergone a dramatic change. Lenders have tightened up their credit assessment following the Royal Commission on banking practices. The banks have tightened their lending criteria. This includes higher loan-to value ratios and stricter pre-sale conditions. Developers are having a harder time obtaining financing for their new projects.
Blacklisting by banks is also increasing, meaning that developers are unable to access funding for projects in certain regions. This has led to delays and even cancellations in many cases. Many lenders require that developers secure a higher percentage of pre-sales, sometimes as high as 90%, before they approve a loan for construction.
These tightening conditions have a significant impact. Developers who depend on funding to fund their project are forced to look at alternative financing options such as joint ventures or non-bank lenders. These alternative sources of financing are often more expensive and carry greater risk, which makes them less appealing to developers.
4. Housing Stocks are Shrinking
The pipeline of new housing has shrunk due to the combination of a reduction in residential building starts and increased developer caution. This decrease in housing supply, especially in urban centers such as Sydney and Melbourne, may exacerbate affordability and cause property prices to rise.
The latest data indicates that over 255,000 housing units are planned to be built in Australia over the next 24 month. The current housing stock is approximately 9,8%, but demand has not caught up. Developers are hesitant to move forward with projects in over-supplied areas, leaving a large gap between the planned number of dwellings and actual demand.
5. Market saturation in high-density areas
Market saturation is a growing problem in certain high-density regions, notably Sydney and Melbourne. Over the last few years, developers have inundated these areas with new apartment stock. However, demand has not kept up.
According to a report by the property advisory group urbis only 46 apartments in Sydney were sold during the three months prior to September. This represents just 13% the stock available. Melbourne is experiencing a similar situation, with just 330 units being sold in the same time period. This represents only 17% of all available units.
In some areas, the oversupply in apartments can lead to price stagnation or even a decline. This is especially true for high-density apartment buildings. Developers are left with unsold units as demand falls, further complicating their ability to proceed with new projects.
The wider economic implications: How housing market trends impact the Australian economy
The housing market slump is not only a concern for investors and developers, but it has also had significant effects on the Australian economy as a whole. Construction is a major economic driver, contributing billions to the GDP every year. Construction activity is affected by a slowdown in the number of new homes being built. This in turn impacts employment, consumer spending and economic growth.
Australian Bureau of Statistics recently released data that showed a sharp drop in the approvals of new homes, especially in October 2018. This decrease in approvals indicates a possible slowdown in construction, which is likely to contribute to an economic slowdown over the next few months. The construction industry could be affected by the reduction in home building, resulting in job losses and a decrease in consumer spending.
Additionally, the rising cost of housing–particularly in urban centers–could have a negative impact on household budgets. Renters and first time homebuyers may face greater affordability issues as property prices rise due to a limited supply.
RiskWise: Property Research to Help You Make Smarter Investments
At RiskWise Property Research we know that understanding risks and managing them is the key to a successful investment. Our team of housing experts monitors the market constantly, assessing key factors such as developer confidence and lending conditions to give our clients accurate and current insights.
We work closely with Development Finance Partners in order to provide an extensive analysis of the real estate market. We help investors and developers make informed decisions by leveraging real-world data and market insights. You may be an investor who wants to identify the best investment opportunities, or a developer looking for a new project.
Our team will provide you with the support and guidance that you need.
By staying informed and pro-active, we believe investors can protect their assets as well as identify new opportunities that could arise due to changing market conditions. Our detailed market research, expert insights and detailed forecasts give our clients the information they need to make more informed, strategic investments.
Conclusion: Positioning yourself for long-term success in a volatile market
The Australian property market has undergone a major transformation. The road ahead may appear uncertain for investors and developers due to the reduced number of residential dwelling starts, tightened lending conditions and declining developer confidence. This period of volatility in the market presents many opportunities to those with the knowledge and insight.
You can benefit from expert analysis and strategic advice by partnering with . Our team strives to deliver accurate, timely and actionable market information, empowering investors to make informed decisions.
It’s important to remain ahead of the curve in these uncertain times. With the right tools and assistance, you can set yourself up for success on an evolving market. We can create a path to long-term success, regardless of market conditions.
