In the massive Sydney apartment market a drama is taking place that will have a big effect on the fortunes of the new Turnbull government. And the same drama, albeit with different players, is set to take place in Melbourne.
At the moment, given the fall in mining investment and income, the apartment development market around the country is pivotal to the Australian economy. We are seeing a massive building boom that’s focused on Sydney and Melbourne and, to a lesser extent, Brisbane. The Chinese are pouring billions into those markets and without that Chinese money there is no doubt Australia would be in recession.
Apartments are set to be even more important in 2016 and 2017 when Joe Hockey’s disastrous decision to shut down the Australian motor industry begins to kick in.
So, that’s the scene; now, to the drama. It opens in China where a large amount of capital has been leaving the country bound for Australia through a variety of non-official channels. The processes were initially given tacit blessing by Beijing but in more recent times China has started to crack down on money leaving the country this way.
Sydney’s largest apartment developer and owner, Harry Triguboff, got wind that his main apartment buyers -- Asian investors are about three quarters of his market -- might find the going a bit tougher. In any area of business, when you gain a whiff of a change in your market you have to take action before your rivals.
So Triguboff took other Sydney apartment developers by surprise with a two-part move. First, he lowered his apartment prices by a small amount and, of course, the price has also fallen because of the devaluation of the Australian dollar. Lower real estate prices are viewed with horror in many parts of the Sydney dwelling market. But it was the second move that did the trick: Triguboff lifted the commission rates of agents.
Triguboff’s Meriton group has a sales budget and before he took those two actions it looked like it might not reach its target but in a short time sales have doubled budget.
Given the clamps being placed on money flowing out of China, the actual Chinese ability to buy dwellings in Australia is shrinking, which means Meriton has lifted market share. There are a lot of developers in Sydney who are building apartments that are now going to struggle.
In Melbourne, one player does not dominate the market as in Sydney, but the contraction of the Chinese pie will hit those developers who are over-extended -- particularly if China tightens further. And in Melbourne the rate of CBD apartment building funded by the Chinese is much greater than in Sydney.
The number of unoccupied new apartments is rising and the discount available to those buying used apartments is also edging up. Longer term, these trends will depend on population growth.
At this stage, we are looking at a softening in the Chinese markets not a dramatic fall but if the controls in China become tighter there are risks of greater danger.
Of course, here in Australia, we have clamped the banks’ ability to lend to Australian investors which means the locals cannot take up the slack.
In the second half of 2016 -- when the next Federal Election is due -- a vast number of Australian and Chinese investors will be called on to pay the remaining 90 per cent of the purchase price as the apartments they ordered on 10 per cent deposits will be completed.
Those investors using Australian banks have “assurances” from those banks that they will fund the purchases but no binding undertakings.
There is more action to come. When Turnbull realises the potential powder keg that is building up he might add apartments to his list of reasons to go to the polls early.