Did someone say prices in Sydney never fall?? Apartment market...

Did someone say prices in Sydney never fall??

Apartment market is sinking fast -- Australia's richest man Harry Triguboff has warned that apartment prices are already starting to fall.

The Australian
September 15, 2016

Look out from Sydney’s tower restaurant or Melbourne’s Eureka Tower and you see a large number of cranes completing apartment developments across the skyline. There are fewer cranes now than six months ago but the numbers are still substantial.
But on the ground, underneath most of those cranes, a drama is taking place because there has truly been a substantial change in the Sydney and Melbourne markets.

The NSW, Victorian and Federal governments, the Reserve Bank, APRA, the chiefs to the top four banks and the general public don’t yet fully appreciate what these dramas will means for the NSW, Victorian and national economies. But they’ll soon learn.
Nor do they fully understand that their separate actions are set to change the Australian economy. But they will.
These who read this commentary may understand what is happening but the others will have to wait until well into 2017 before the full affects become apparent.
For months Triguboff has been warning that there is a severe crunch looming. Now he tells me that it is really happening.
Read what is taking place in Sydney and then at least double that impact to determine what is taking place in Melbourne, where more apartments are being built.

Just one month ago, Triguboff says, he took 105 deposits on a new project. Today he would not be able get 50 and he adds: “We are sinking fast”.

Yet the actual apartment investment proposition, if anything, is better than a month ago because Sydney rents are rising and the interest rates are at an all-time low. But the market is tough.

“I had 20 settlements lined up last week (with Chinese buyers) and only 10 settled,” Triguboff says.
Sometimes others take their place but often those replacement sales take place at a lower price, although, because the 10 per cent deposit has been forfeited, Merton is usually not out of pocket. But, as a result, the prices of apartments are starting to fall.

Triguboff says that until six or seven months ago the market was constantly rising. Six months ago it stopped rising but did not fall either. Then the banking regulator came in and frightened the banks who began asking the Chinese off-the-plan buyers seeking a loan to complete the transaction for information the Chinese could not provide. Almost automatically, the loans were rejected.
My comment (Not Triguboff’s) is that what the banks are doing in 2016 is a modern version of the White Australia policy’s language test of the 1950s where coloured migrants were asked to pass a test in any of some 80 world languages.

If we did not want the person as a migrant we simply chose a language that they could not speak so they had to fail. The banks have adapted a version of that ‘language test’ technique for Chinese borrowers knowing full well that most can’t pass.
Triguboff says that the Chinese have paid a 10 per cent deposit and one way or another most can get another 20 per cent out of China so they have a 30 per cent equity. But most can’t extract the remaining 70 per cent from China.
And because they can’t pass the banks’ “language test” they fail to raise the 70 per cent balance.

Second mortgage rates are about 10 per cent and, with apartment prices falling, that is simply not economic.
When banks apply new lending requirements on the Chinese whose off-the-plan purchase agreements created an enormous building boom, then those banks must realise that the consequent mass forfeitures will have major economic ramifications.
Bank shares are falling partly because the market is starting to understand the disaster the banks and APRA are bringing on themselves and the rest of the community.

To make matters worse, the NSW and Victorian governments have increased their charges on Chinese buyers.
In NSW there is now an application fee of $10,000 and stamp duty on foreign buyers has been raised from four to eight per cent and a land tax of 0.75 per cent will commence in 2017. Local councils are also chipping in with extra charges.
In Victoria, the situation is made worse by the secondary market in apartments which sees apartments selling well below the off-the-plan price. And the Victorian government has decided to stop new all new apartment development by imposing new rules that add at least $100,000 to the cost of an apartment (Naive Victorian apartment rules shoot economy in the foot, August 31).
Thanks to the government’s action in effectively stopping all new developments, except where government land is used and is priced at very low levels, the Melbourne glut will pass more quickly but it will devastate the economy.
In Sydney, Triguboff has slashed his purchasing of land and will only keep building enough projects to keep his building workers employed

He can afford to hold the apartments because Meriton has built up a substantial serviced apartment business. Melbourne does not have a Triguboff.

Can first home buyers save the day?
Most have been priced out of the market and the apartment prices would have to fall a long way to allow them to re-enter the market.