The Reserve Bank of Australia issued a dire warning of the possible effects of the rapidly growing high-rise apartments in certain metros to the country’s real estate industry, according to Australian Broker. RBA said in its Monetary Policy Statement earlier this month that the increased concentrations of apartments in cities like Brisbane and Melbourne could lead to oversupply. If this surplus were to take place, the local area prices would be greatly affected. It could significantly reduce the costs of an apartment, which would lead developers incurring heavy losses. RBA also cautioned that the existing general oversupply could be exacerbated as developers may be unable to adjust to the diminishing demands due to the long processes involved when developing an apartment. It takes a year and a half to complete one apartment, a duration that is three times longer than building detached houses and twice as long as putting up a townhouse. It also stressed that the situation of the overall housing supply would become more unpredictable because of the long gap between decision-making and actual completion of a high-density apartment.
Meanwhile, in a report by Property Observer, the central bank emphasized that residential building approvals soared by 50% in their long-term average over the last two years. However, a slowdown has been noticed in recent months. Despite that notable fall, the nation will continue to see a high level of dwelling investment thanks to a large amount of projects that are already in the pipeline.
Sydney Also At Risk
Although RBA did not mention Sydney, its real estate sector is still at risk particularly those in some of its inner city suburbs. Valuation firm, Herron Todd White or HTW, revealed in its latest update that some valuations for brand new units did not meet the plan prices upon settlement. These were noted in suburbs with concentrated new developments, which also presented a huge gap in terms of prices with older style units.
HTW added that this scenario was particularly common within some second tier suburbs in western Sydney and certain areas in the northern suburbs. It also cited Wentworth Point, Carlingford, Epping, Olympic Park, Macquarie Park, and Parramatta as at risk of oversupply.
Economists Echo Similar Sentiments
Even economists expect an oversupply of apartment buildings in three of the country’s three biggest capitals. In a survey conducted by comparison website Finder, 26 housing experts and economists believed that such a condition exists in Melbourne and Brisbane. Of which, three-quarters claimed that the former has been swamped by such residential spaces. Despite these concerns, Melbourne is expected to build and complete 140,000 apartments between 2016 and 2018.
Meanwhile, 70% of the industry professionals who were surveyed believed that Brisbane already faces oversupply while 40% believed that Sydney has too many apartments. Because of these, they expect prices to plunge by as much as 20% in certain suburbs two years from now, in 2019. The price drop would mean a loss of $140,000 from the median price of an apartment in Sydney, $90,000 in Melbourne, and around $70,000 in Brisbane.