Australia’s home boom crumbles as buyers hold back
After a long pause, the auctioneer commissioned to sell a northern Sydney beach-side apartment in excess of A$800,000 ($614,391) puts his gavel away, unable to entice a single bid.
Across town, in the city’s trendy inner western suburbs, the owner of a warehouse converted into a three-level home drops his reserve price for the property’s sale. There are just two potential buyers at the auction, and they have declined to enter the kind of bidding war that has caused home prices in Australia’s two biggest cities, Sydney and Melbourne, to double since 2009.
The auction stand-offs may indicate that the Sydney market, which has been defined by researcher Demographia as the second most unaffordable in the world after Hong Kong, has finally hit a peak. As the buyers have drifted off, the sellers have also started to back away and the number of home listings is down 25 per cent from a year ago, according to CoreLogic RP Data.
This is all yet to show up in a decline in prices in Australia. In the nation’s eight biggest cities, home prices surged a further 0.7 per cent in January even as the volume of transactions was lower. But some real estate experts and hedge fund investors say that it may be only a matter of time before prices also start to crumble.
A sharp correction would heap stress on those who have paid a high price to enter the big east coast property markets, while damaging the country’s financial institutions as home loans account for up to 60 per cent of the major banks’ total loan books. The property sector is also a major employer and generator of demand.
Chinese tour numbers halve
One big concern is the drop off in the number of Chinese buyers, following a crackdown by Beijing on capital outflows and Australia’s tightened restrictions on lending to foreigners. Individuals taking the maximum $50,000 a year out of China now have to commit to not spending it on real estate and risk being investigated by the Chinese authorities if they break that pledge.
And the impact isn’t only being felt in Australia. In Canada’s Vancouver, which has been a big target market for Chinese buyers for some years, the number of transactions dropped 40 percent last month, compared to the same month a year earlier.
A sudden increase in the number of sales agents splitting off from the big realtors to set up their own firms, and the arrival of new online players, is being seen by some in the industry as a contrarian signal of an overheated market.
“It’s that classic top-of-the-market mindset,” said property valuer Gavin Hegney, from Gavin Hegney Property. “’I’m making money hand over fist, I could do this myself.’”
Hong Kong-based hedge fund manager Apt Capital Management has shorted Australian banks because of their exposure to a property market it believes is out of step with Australia’s economic strength. It is forecasting a severe correction.
Apt Capital strategist Amy Reynolds said interest rate rises or a drying up of foreign investment were the most likely triggers for a future downturn in prices.
“Our models indicate that house prices would need to fall by around 30 pct to come back into line with Australia’s economic fundamentals and their own longterm averages,” Reynolds said.
Esther Yong, director at Chinese language property portal AC Advertising, said the curbs on lending to foreigners and Beijing’s restrictions had quelled interest, leaving only the most committed buyers.
“It’s been very slow for the last two to three months,” Yong told Reuters. She said numbers on Chinese property tours are half what they were a year ago.
Australia’s foreign investment rules guide overseas investors to buy new properties, such as “offthe-plan” apartments that are yet to be constructed or through sales at auctions of new homes.
At one new apartment auction on Sydney’s North Shore attended by Reuters, it took 50 minutes for the price to be bid up by $50,000, with two foreign investors reverting to small incremental bid rises. That sober behaviour is in contrast to the buying frenzies of the past three years that saw hopeful bidders queuing up to take part.
Among the new entrants into the market are British online realtor Purplebricks, which launched in Sydney in January, and BRICKX, which allows investors to trade small stakes in properties in well known locations, such as Bondi Beach and Port Melbourne.
The BRICKX properties advertise an estimated annual return on equity of up to 19 pct but that would largely be reliant on the boom years repeating themselves.
“It’s a guide to what has been achieved over the last five years,” said BRICKX chief executive Anthony Millet. “Investors in this country are pretty switched on and well educated.”
“Just deserts”
Not everyone is bearish. Realtor Ausnet Financial Services Ltd, which plans a backdoor listing using the corporate shell of a dormant copper explorer, has hired six former agents from listed realtor McGrath Ltd and says it is hoping to build to a salesforce of 600 while opening a storefront on Sydney’s Bondi Beach. Its prospectus shows two years of losses and no forecasts.
“We think there’s still a bit of steam in the Sydney market,” said Ausnet chief executive Paul Niardone, a former public relations executive. —