Tick. Tick. Tick.
That’s the sound of the inner-city apartment market.
There are 15,000 brand-spanking-new apartments due to settle before 30 June this year.
Many of these apartments won’t settle … because the buyers can’t come up with the balance of their money, after paying a deposit.
A couple of years ago I wrote a click-baity story:
“2018: The Year First Home Buyers Get Their Revenge!” (Not bad eh?)
I was writing about the opportunity for first homebuyers to buy a brand new inner-city apartment — at fire sale prices. Much, much cheaper than they were selling for at the time.
Here’s what I wrote: “In three years’ time there will be an oversupply of inner-city apartments in many parts across the country. It’s actually not hard to forecast today, because we can see what’s coming down the property pipeline in a few years’ time: apartment towers take years of planning and regulations to get approved. When the market is hot, like it is now, lots of developments spring up to feed the demand … but there’s a lag.”
Basically, I argued that too many investors had put down too little a deposit, and when payment was due they’d struggle to come up with the dough — causing them to either default with the developer, or sell at a massive loss.
Today I want to revisit that topic, to see how we’re faring.
Blood in the Streets
The housing boom has been fuelled by property investors, and in inner-city apartment markets it’s been driven by Chinese investors buying up big.
So this week I caught up with Li Ming, a co-director of Aussiehome, who specialises in selling Aussie property to Chinese investors.
Ming: “The Melbourne off-the-plan apartment market is the worst I have seen in the last 10 years.”
Barefoot: “How long have you been in the market?”
Ming: “5 years.”
Ming believes that around 80% of Chinese buyers won’t be able to settle on their Australian apartments.
So what’s happening?
Well, Chinese investors are caught in a ‘pincer grip’.
Here’s a real-life example of one of Ming’s clients:
Three years ago his client bought a yet-to-be-built, off-the-plan, two-bedroom apartment in Melbourne’s Southbank for $750,000.
They put down a $75,000 deposit (10%) and planned to organise a loan for $675,000 (90 per cent) in three years’ time when the apartment was built.
Now, at the time his client was flipping through the glossy apartment brochure Melbourne prices had soared 35% in the three years prior … so there was a chance the investor could turn around and sell the apartment for more than $1 million by the time the apartment finished.
Let’s get back to the present day.
The Pincer Property Grip
Because of the oversupply of inner-city apartments, the Aussie banks are now being cautious about how much they’ll lend (and they’re also charging investors a higher interest rate for their loans). They told Ming’s client they wouldn’t stump up 90% of the purchase price — only 80%.
Remember, Ming’s client was still contractually bound to pay $750,000 to the developer.
Bottom line: he was $75,000 out of pocket.
So where does he find the extra money?
Well, that’s the second part of the pincer grip: the Chinese Government.
For the past year, the Chinese Government has been clamping down on investors taking money out of this communist country. Investors used to be able to take out $US50,000 per person per year … yet now many state-owned banks are lowering the amount, or outright blocking the money going overseas.
“So what did your clients do?” I asked Ming.
“They had no choice. They walked away … and lost their $75,000 deposit.”
Ming told me he has other clients who flat-out couldn’t get finance from the banks.
“They managed to negotiate to flip their apartment for a 7% loss … but even that is getting harder to do. Everyone is getting desperate”, he said.
60 Minutes Says …
Australia’s ‘flagship’ current affairs program, 60 Minutes, did a story last week on housing affordability. They interviewed two of our biggest inner-city apartment developers about the issue.
However they didn’t press them on the fate of Chinese investors. They didn’t ask what effect the banks repeatedly jacking up interest rates on investors was having on demand. And they certainly didn’t ask why the Reserve Bank has openly stated this week that it’s worried about the inner-city apartment market … along with flat-as-a-pancake wages growth, heavily indebted households, and sluggish growth.
Instead, they simply walked around in hard hats, grinned, and pointed at skyscrapers. And, in turn, the two rich white dudes gave two bits of incredibly condescending advice to young first homebuyers:
“Suck it up” and …
“Let us build more apartments.”
Seriously, that’s what they said.
Angry Millennials took to Twitter to vent their frustration about being labelled unrealistic, coffee-swilling, avocado-eaters.
Don’t get angry … get even. Falling prices are coming, and right on cue.
Tread Your Own Path!