Putting a lid on property exuberance

The efforts to stop “the mother of all housing booms” are intensifying. Australia’s biggest apartment builder and owner, Harry Triguboff, has seen a seven per cent rise in the price of Sydney apartments in recent months. He understands the dangers of an apartment price explosion in Sydney so he has decided to start selling part of his portfolio of more than 5,000 Meriton Sydney apartments.

Just how many he will sell is not known but it will curb the threatened Sydney apartment price explosion and of course, he is still building new apartments at full pace.

At the same time the big banks have been quietly told by the Reserve Bank that a dwelling price boom is the Reserve Bank’s greatest fear in the current climate because Australian dwelling prices are already high by most world standards. If a new housing price boom starts to break out then interest rates will have to rise.

Banks play a big role in maintaining the level of dwelling prices. They are currently fanning demand by encouraging people to buy dwellings, both privately and as investors, with generous credit and low rates. But on the supply side the banks reduce the supply of dwellings because they are reluctant to take risks in lending to developers because history has shown that almost all big bank losses have come via property development loans during booms. 

The developers are often being forced to seek other financiers including big institutions seeking higher returns. That boosts the costs and limits the supply.

Of course in the apartment market it is local councils and state government planners that multiply the supply squeeze caused by the reluctance of bankers to finance developers.

In Melbourne and Brisbane there is more supply of apartments than in Sydney although in Melbourne the apartment supply tends to be concentrated in inner city areas.

And in the case of some apartment block towers, the cartel style agreements between large commercial builders and the big building unions also boosts the price.

(If the Coalition wins the election it will join Victoria, NSW and Queensland in taking steps to eliminate the cartel style agreements in the large commercial building sector and government projects).

In most Australian capitals, but particularly Sydney and Melbourne, the demand for inner city suburban houses is white hot because there is a supply shortage. Investors are paying a big role in the demand. Auction clearance rates are high. If the inner suburban housing market starts to rise substantially then that’s where the boom will start although as prices rise yields will fall and demand will swing to apartments and outer suburban areas.

In terms of rental demand the greater intensity of dwelling occupancy (more people are now living in an apartment or house) plus the slowdown in salary rises virtually stopped apartment rent rises in Sydney. And in Melbourne some apartment owners are having problems finding tenants. This will help curb the spread of the inner city housing boom.

In outer suburban housing the chief executive of Stockland, Mark Steinert says in his KGB interview that he believes that there is capacity to satisfy the demand in Sydney and Melbourne and other capitals.

But if that inner suburban boom gets out of hand be ready to change the interest rate forecasts.