Investorist Panel: Property after the Pandemic

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IT COULD be a bad year for housing prices if building approvals are  anything to go by. With the housing market teetering on the edge of a  serious downturn, apartment developers seem to be having a “last blast”.

Building approvals data released last week shows a serious uptick in  the number of homes that were approved. November building approvals were  up 0.9 per cent compared to October, and are 8.1 per cent higher than  November 2016. The source of the lift is mainly apartments, which rose  from already high levels.

The timing of this big push is fascinating because November is  exactly when Australian capital city housing prices started falling.  Corelogic shows prices fell by 0.1 per cent in that month as Sydney took  a sharp downturn. The developers didn’t know in advance that was going  to happen, but they might have sensed it. After all, what could drive  such a big uptick in building approvals is the sense that it is now or  never.

Builders who have just got their approvals will be racing to get  their apartment blocks and new developments done before everyone else.  Those who finish early can hope to get in before prices really slump.  Any who have delays will be worried they’ll end up selling into a soggy,  lifeless market.

TIMING IS EVERYTHING 

Markets are supposed to co-ordinate supply and demand. But that’s a  hard job when supply takes a long time to come online. If you’re halfway  through building a big development when the market falls by 10 per  cent, you’re in a bind. The losses involved in finishing the properties  and selling them for less than they cost to build will almost certainly  be smaller than the losses involved in abandoning the project, so you  have to push on to get at least some money back. This is the essence of  the boom and bust cycle that characterises property.

Some very large developers might finish properties and then sit on them,  hoping the market improves over time, but that’s also a risk. Markets  can take a very long time to recover. 

The really interesting thing about the November building approvals  data is where it was focused. All the increase was focused on Victoria.  The average number of building approvals in New South Wales, Queensland  and South Australia was actually lower than in the previous month, by 2  to 3 per cent. But Victoria saw a whopping 27 per cent rise.

That anomaly becomes especially curious when you consider that  Victoria was the market that actually went on to see price appreciation  in November (0.5 per cent growth in prices, according to Corelogic).  Could it be that developers, sensing Victoria is the only market with  price growth left in it, are focusing their attentions there?

Another explanation for such a massive jump would be if a single  large project came through the pipeline in the month of November. A  giant apartment development somewhere in Melbourne, for example. For  now, it’s not clear if that’s the case. Whether it is one project or  many, the impact on housing markets of a big rush of supply is largely  the same — extra supply generally makes prices lower than they would  otherwise be.

QUIT WHILE YOU’RE WINNING 

Some smart developers have already got out of the property  development game, telling the financial press they are sitting out until  the market repairs itself. The so-called “pipeline” of new building had  been shrinking. The November building approval data shows a different  picture. It suggests the pipeline might get fatter again for a little  while and there could be one more flurry of cranes going up. The one  caveat is this — builders can pay to get a building approval and then  not use it. That might be the best case scenario.

The big question hanging over Australia’s high housing prices is  whether a housing downturn can happen without also crashing the economy.  A gentle and controlled downturn might be a positive — young people can  afford to get into the market more, but people don’t feel like the sky  is falling.

But a severe sharp downturn could be different. A giant backlog of  supply that could be released into an already weakened market is a  concern because it could accelerate a modest slide into a hard one.