Melbourne and Sydney property developers face very different problems

The Reserve Bank may have lit the housing fuse, but how the drama plays out in the Melbourne and Sydney property markets will be very different.

Australia’s largest apartment developer and investor Harry Triguboff must have been smiling when the Reserve Bank lowered interest rates yesterday. Apartment rents in Sydney, after an extended period of stagnation, are starting to rise. The lower interest rates will enable those higher rents to be converted into higher property prices, particularly given negative gearing.

The Reserve Bank has lit the housing fuse because it wants to drive down the currency (The RBA has thrown the dollar under a bus, February 4). But in the inner-city dwelling markets of Sydney and Melbourne, the interest rate reduction is really a side issue to a strange set of circumstances which are affecting existing housing and apartment developments in both cities.

Values in both our major capitals are rising but there are now significant differences between how the two cities are developing.

Both markets are benefiting from heavy Chinese buying of existing properties but the Federal government has given an indication that it might look harder at the way the rules are being administered. What the Government does on this front will be more important than rates.

When it comes to new apartment developments, although getting approvals in Sydney is much easier than in was a year or two back, converting those approvals into finished apartments remains a very hazardous course.

Triguboff says the biggest factor enabling the current rate of Sydney apartment development is the courts. When faced with council and other regulatory hazards, Triguboff's Meriton and other developers go to the courts and they have had remarkable success. In some ways the courts have been a bigger factor in Sydney apartment development than Chinese investment.

Meanwhile Chinese developers entering the Sydney market will also face these problems and will need to learn how to use the legal system in New South Wales to overcome road blocks.

Inevitably, the difficulties in developing properties have held back the number of new apartments being built in Sydney, which is driving up the price of accommodation. That is why lower interest rates could really boost the Sydney market.

In Melbourne, for many years developers have wished for a smooth run to enable their apartment projects to get off the ground. The previous Napthine government gave developers close to what they wanted and the easy approval process came as the Chinese looked to pour vast sums into new development projects. Over the coming two or three years, the approvals given by the former Napthine government will be converted into apartments.

There are more apartments to be built in Melbourne compared to Sydney, based on the relative size of the cities. As a result, the rents in the southern capital are unlikely to be as strong as Sydney and there will be many apartments left vacant.

It is possible that the Chinese, even where they have obtained approval, will not go ahead with some of the developments. But the new Victorian government is taking a much tougher line with apartment approvals. Those that don’t go ahead with their current approvals may never get approved again.

The difference between accommodation costs in Melbourne and Sydney is likely to widen, although the Chinese may be happy to leave their apartments empty or make a drive for much greater migration.

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