Expert Advice with Simon Buckingham
The housing construction "boom" of the past few years is well and truly over, with the latest stats pointing to a significant slowdown in this sector of the economy.
Construction Jobs at Risk!
Residential construction hit it's peak in 2017, but the volume of new dwellings approved for construction has fallen a whopping 40 percent since.
Construction and related industries are a pretty big part of the employment picture - accounting for around 1.2 million jobs or 9.5 percent of the workforce in Australia.
Residential construction also makes up about 6 percent of Australia's GDP.
It's no surprise that the Reserve Bank and the Government are concerned about how the downturn in construction activity could affect jobs and the economy.
So - what has caused this significant slowdown in the number of new homes and units being built, what can be done about it, and what does this all mean for property investors...?
"A Perfect Storm"
There's not any one single cause for the slowdown in residential construction.
Instead, the slowdown is the result of a "perfect storm" with several contributing factors...
Oversupply in some areas
When the property market in a suburb is booming, rising sale prices attract developers to build new housing in the area.
This can lead to an oversupply situation - where there's just too much new housing being added to the market relative to the demand for that housing. The resulting downward pressure on prices leads in turn to a reduction in new development.
For instance, Sydney actually had relatively low volumes of new development for several years leading into the most recent property boom, but when that boom took hold, new apartment towers started popping up all over the place.
With over 50,000 new apartments built in Sydney over the past 2 years, now Sydney's CBD and inner suburbs have a glut of units, and the rate of development has slowed considerably.
Unfortunately, most property developers don't understand how to read market trends, or how to identify whether an area is already oversupplied. They often get in too late, overpay for sites, and just end up adding more supply to an already overdeveloped suburb.
As an aside... We'll be teaching exactly how professional investors read the market at our upcoming free property workshops - so that you can avoid oversupplied suburbs, and also pick the suburbs about to take off in value. EVERY investor needs to know how to do this, and if you're a developer then it's an especially important skill to have -- make sure you register to attend now
Less demand from foreign buyers
Since 2016, State governments have increased the stamp duty (or "transfer duty") payable by a foreign buyer to over 12 percent of a property's purchase price.
The original justification for this was a misguided perception that foreign buyers were somehow driving up housing prices for Australian residents.
By adding an 8 percent surcharge on top of regular stamp duty for foreign buyers, the State governments claimed they would make housing more available and affordable for everyday Australian residents. (No doubt the States were also hoping for a stamp duty "windfall" from the surcharge!)
But there is little factual evidence that foreign buyers were actually responsible for the rising house prices - particularly as foreign buyers are restricted to buying new or off-the-plan dwellings only, and therefore represent only a small portion of the total housing market.
In any case, the greater cost of entry for foreign buyers has led to a reduction in foreign demand for new dwellings - and Australian residents haven't taken up the slack.
Whilst the State governments might have been hoping for a tax windfall by increasing stamp duties on foreign buyers, the reality is that by putting off foreign buyers they've simply hurt the construction industry - adding to the sector's woes at a time that the industry was starting to come off its peak.
At the same time the change has actually delivered less stamp duty revenue to the States overall.
The imposition of the foreign buyer stamp duty surcharge coincided with Australian banks significantly restricting lending options for foreign purchasers, and also with the Chinese government imposing stricter limits on capital flows out of that country.
All of this makes it harder and more expensive for foreign buyers to purchase new houses and new apartments in Australia, compounding the issue and reducing demand for new housing.
Less demand from local investors
Lending restrictions imposed by APRA and ASIC over the last 4 years led to a reduction in demand for property, as many investors and owner-occupiers found it more difficult to qualify for lending (or for as much lending).
In addition, the property booms in Sydney and Melbourne ran their course, with an inevitable correction downwards during 2018.
The broad correction in property values, along with uncertainties surrounding the Financial Services Royal Commission, fears about tax changes leading into the Federal Election, tighter lending, and a slew of negative media headlines concerning the property market (remember the alarmists predicting 40% price falls?) - all combined to sour investor and home-buyer sentiment.
The net result was less buying activity in the property market, including less interest in new and off-the-plan properties.
Tighter finance for developers
Talk to any property developer and they'll tell you about their frustrations with the big banks at the moment.
When lending becomes tighter, one of the first segments to get hit is construction finance - particularly where the big banks are concerned.
This happened during the GFC, where construction finance became much harder to obtain - and more restrictive where it was available.
We've seen similar behaviour from the big banks in more recent times, where pressure from regulators on the banks to limit growth in their investment lending translated first to a reduction in many banks' appetites for construction finance.
Non-bank lenders have to some degree stepped into the void left by the big banks in this space, but non-bank lending for construction - while often more flexible than mainstream lending - tends to be more expensive, and not all construction projects can afford the additional cost.
An inability to finance a construction project will stop a developer in their tracks, and many development projects have been "mothballed" in recent times due to a lack of funding.
Media coverage of flammable cladding issues and structural problems with high-profile construction projects such as the Opal Tower and Mascot Towers in NSW have caused many buyers to hesitate in purchasing off-the-plan units.
This has created a challenging environment for off-the-plan sales, which are often required in order for a developer to obtain the construction finance needed to get a project "out of the ground".
Developers who are unable to achieve sufficient off-the-plan sales or to obtain the finance needed to commence construction may end up on-selling their project to someone with deeper pockets, or may choose to "land bank" the site - deferring construction for the time being.
Naturally this further reduces the volume of new construction work in the pipeline.
What Can Be Done About It?
Some of the blame for the current construction industry slowdown has to rest on the shoulders of overly-zealous financial regulators and government agencies.
We've argued in this newsletter before that banking regulators APRA and ASIC have a lot to answer for by failing to adequately balance economic consequences with financial stability objectives - and going a too far with tighter lending restrictions as a result.
The Government's own Productivity Commission has been scathing in its criticism of the regulators in this respect too.
Our financial regulators must become more conscious of the impact of their decisions on the broader economy. Recent moves to relax certain lending restrictions suggest that they're finally waking up to the consequences of their decisions, and the need for a more balanced approach...
Meanwhile, the Federal Government - which should have taken proactive steps earlier to reign-in the regulators - has since had to commit billions of dollars to public infrastructure spending in an attempt to shore-up employment in the construction sector.
It's encouraging to see that the WA government has just taken the proactive step of introducing a 75% stamp duty rebate for off-the-plan purchases - specifically to help support the housing industry in that State.
What's more, the new WA off-the-plan rebate is available to foreign buyers - and applies to the foreign buyer stamp duty surcharge as well.
Other State governments would also do well to reconsider their stance on the stamp duty surcharge for foreign buyers - if they want to be seen to be supporting jobs in the construction sector.
What's Ahead for Housing Construction and the Property Market?
Ironically, with less future new housing stock in the pipeline, we might see a shortage of new housing emerge over the next few years...
Such a shortage would help underpin new house and unit prices - and even drive prices of new dwellings higher. This in turn could encourage more new housing development, beginning the construction sector boom-bust cycle all over again!
But that's a longer-term outlook... What does the immediate future hold for the property market?
Recently we've seen some relaxation in certain lending restrictions - first with APRA lifting the caps on lending growth (including interest-only lending growth), and - most importantly - the removal of the requirement for lenders to test loan affordability at a 7%+ interest rate (which would now be quite out of step with actual interest rates at their current record-low levels).
This has helped attract investors and home buyers back into the market - including to new housing.
In addition, the "surprise" election result with the re-election of the Coalition government and therefore no change to negative gearing, CGT and other taxes, appears to have acted as a catalyst for renewed activity in the market - with many developers reporting renewed interest from buyers since the election.
In fact, the very latest lending statistics show a RESURGENCE in investor activity, suggesting that property investors are returning to the market in increasing numbers.
And with house prices on the east coast now rising again, this has led many to speculate that the next property boom may have already begun...
But that's a topic for another time!
For more property market insights and practical strategies, tips and techniques for investing successfully in the changing market, join me at one of our upcoming FREE in-depth property workshops
Simon Buckingham is Director of Results Mentoring and a highly experienced investor. Simon has been investing in property for over 15 years using a broad range of strategies including positive cash flow, renovations, property development and commercial properties, both within Australia and overseas.
Holding university degrees in Commerce and Law, and with over 10 years' experience as a business consultant, Simon turned his back on corporate life forever following the births of his two children and now spends his time investing, developing property, supporting multiple charities, and building businesses - while teaching others how they can do the same. He has personally coached hundreds of investors in techniques that can be used to profit from property in any market conditions, regularly facilitates public workshops and provides other free resources for property investors through ResultsMentoring.com, and has presented to thousands of people at property conferences and seminars around Australia and New Zealand.
Simon writes the highly regarded Sophisticated Property Investor e-newsletter and his opinions on the property market and real-world investing strategies have featured in Your Investment Property magazine, Smart Property Investment, Channel7 News at 6, Kevin Turner's Real Estate Talk, and Property Observer. He is co-author of the critically acclaimed property book The Real Deal: Property Invest Your Way to Financial Freedom, and a founding Mentor in Australia's award-winning personal mentoring service for property investors: the RESULTS Mentoring Program.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.