Property market can “self-correct," experts say

by Miklos Bolza12 Oct 2016
Real estate investment management firm Qualitas has said the unique dynamics of the Australian property market make it capable of avoiding a crash.
“We are already seeing a slowdown in terms of new housing starts, however, the Australian market – unlike its foreign counterparts – has certain qualities that allow it to self-correct and adjust through a potential period of oversupply,” said the company’s group managing director, Andrew Schwartz,
Vacancy rates for residential property in Australia are remaining stable around 3%, he said.
“However, we do see some warnings on the horizon for the short-term. This includes increased supply coming into specific precincts across Australia, rising site values, rising construction costs, lower levels of available construction finance and curbs on loans to foreign purchasers.”
While cities in Australia – along with those in Asia, Europe and the US – are enjoying substantial levels of new residential construction activity, the difference with Australia is how these developments are being financed.
The key contributing factor is the need to secure presales worth at least 100% of the construction loan raised before construction could commence, he said.
“This presale coverage ratio has been required by Australian banks for decades and has created a very prudent standard of lending. It reduces the risks of oversupply, thanks to the non-speculative nature of the sales commitment upfront. Moreover, the buyers need to be diversified, as the banks limit any one buyer from purchasing multiple apartments.”
The banks have also been prudent with foreign buyers, Schwartz said, by insisting that a maximum of 30% of total sales can be made to foreign purchases.
“In addition, we know from our own experience that approximately one-third of all foreign buyers settle using their own cash resources. So, even assuming all the remaining foreign purchasers fail to settle – which seems a very harsh assumption – the banks will still have very comfortable levels of security.”
The combination of factors such as a high level of required pre-sales, dominance of local buyers and the conservative lending nature of the banks means that there will not be a rush of bank liquidation sales for apartments, he added.
“There could be a short period where there is some market excess, but overall, we continue to see the absorption rates being strong, as evidenced by continuing sales across well-designed projects.”