Sydney's property dam is about to burst

More overseas-funded investment and an easing in planning constraints represent a significant reversal in the trends that drove Sydney and Melbourne property prices sky high.

New ingredients are emerging that look set to generate a surplus of apartments in Sydney in two or three years – the first time that has happened for a long time.

The two new ingredients are the emergence of Chinese developers and a looming change of attitude by local councils and planning authorities.

Those buying Sydney apartments in the current strong market and those commenting on the 2014 buoyant forces need to be aware of the looming trend reversal.

And, although the forces are slightly different, a similar situation is emerging in Melbourne.

I reached the Sydney conclusion after a conversation with Sydney’s largest apartment builder and owner Harry Triguboff, who explained to me that he is seeing new trends in Sydney, which, if they continue, will cause of surplus of apartments. However given strong demand he does not expect the market to collapse but the new ingredients will clearly affect price levels. And Triguboff does not expect the emerging over supply of apartments in Sydney to affect rents.

To understand the power of the new forces we have to quickly document what has been causing the shortages.

On the supply side, councils and planning authorities made it very difficult to get planning and development approval on economic terms. This limited the supply and pushed up prices, so contributing to the high cost of dwellings in Sydney. At the same time banks were reluctant to lend to apartment property developers and to take into account pre-sold apartments bought by people residing on the Chinese mainland.

So while supply was constrained, in recent times, banks have been happy to fund buyers – particularly investors – whose ranks have been boosted by lower interest rates. At the same time Westpac have been big funders of Chinese buyers who are also assisted by their own banks. This classic planning/banking squeeze on supply and the boost in demand created by banks and interest rates contributed to the Sydney dwelling shortages and boosted prices effectively taking first home buyers out of many markets. Although he has been a long-time critic of the councils, planning authorities and banks, in fact Harry Triguboff has been a major beneficiary of these trends because he has had the capital to fund both the planning delays and construction of new developments.

But dramatic changes are ahead.

Triguboff says that while the local councils and planning people are still tough “the dam walls are cracking” as these groups and the NSW government realise the damage that has been done to dwelling affordability in Sydney.

The Chinese have been significant buyers of Sydney (and Melbourne) apartments for a long time but their buying intensity is increasing and the Chinese are also buying apartments in many other countries. There has always been a strong desire by wealthy Chinese to have assets abroad as a safeguard against what might happen in China. But overseas investment is now being encouraged and the jailing of leading politician Bo Xilai has intensified the desire of many Chinese to have assets overseas.

In Sydney and Melbourne not only are the Chinese buying apartments from Australian developers like Harry Triguboff’s Meriton, but Chinese developers are now entering the market. Unlike smaller Australian developers the Chinese do not need to use Australian banks and are using their own banks to fund the developments. Accordingly, funding is now plentiful and the two pillars of supply constraint are crumbling.

In Melbourne there is no developer of the power of Triguboff/Meriton. Most of the new developments have been concentrated around the Docklands and Southbank area where permission has been relatively easy to get. But in other areas of the city the Sydney-style supply constraints exist leading to too many apartments being concentrated in the one geographical area (Southbank/Docklands). This is also changing. And the Chinese developers are entering the Melbourne market with a vengeance, out bidding many locals for key sites. Like Sydney the supply blockages are breaking down.

For a long time in Brisbane the Chinese were not buyers in the market and so prices were restrained but that is now changing.

In Sydney and Melbourne the Chinese are not buyers of developments in outer areas like Sydney’s Northern beaches so apartments are much cheaper than in the city. But much more travel is usually required by residents.

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