Australia’s high-rise construction boom rests on shaky ground, analysts say

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Australia is experiencing a major high-rise construction boom, especially in the southeastern capitals. And despite the danger of oversupply, building approvals have jumped once again.

According to the Australian Bureau of Statistics (ABS), building approvals increased 11.3% to 20,987 in July (in seasonally adjusted terms). This was the largest percentage increase since September 2013.

Like a number of other pundits, Bill Evans, chief economist at Westpac, is uneasy about the high rise construction boom, stating in late September that “huge uncertainty prevails in this market.”

The source of this uncertainty is the heavy involvement of Chinese buyers in Australian real estate. Indeed, the growing demand for Australian property among Chinese buyers has not only fueled the building boom, but has increased the prevalence of housing investors.

According to a recent survey conducted by ANZ in consultation with the Australian Property Council, foreign investors (also known as FIRB buyers) accounted for 23.9% of all property sales in Australia during the June quarter of 2016. The proportion of sales to foreign investors in NSW and Victoria were the highest in the nation, accounting for 25.4% and 30.8% of all sales over the same period.

For domestic property buyers, it’s clear that prices for residential real estate are disproportionately determined by foreign investors. According to Evans, this creates heightened risks for the sector should foreign demand dry up. Adding to this uncertainty, Aussie banks have stopped funding FIRB buyers, which creates risks for local developers who may have sold more than 50% of their stock to FIRB buyers.

Cameron Kusher, research analyst at CoreLogic, suggests that tighter restrictions on foreign buyers from Australian banks could amplify settlement risks for newly built apartments in the years ahead.

“Mortgage lenders have recently tightened their lending criteria, subsequently some people who have committed to off-the-plan units may not be able to borrow as much as they could at the time of signing the contract,” said Kusher.

Consequentially, there’s a risk that some properties would be worth less than the price they were purchased for, heightening settlement risks.

“Many of the units are coming up for settlement in similar locations and will compete with existing unit stock,” said Kusher. “With so much stock coming online at once there is an increasing concern as to whether settlement valuations will actually meet the contract price of these units.”

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