“The market has been correcting for some time, since about the start of this year. [However] the Australian market, unlike its foreign counterparts, has certain qualities that allow it to self-correct and adjust through a potential period of oversupply,” said Schwartz.
While national vacancy rates in residential property are sitting at a stable rate of approximately 3%, Schwartz noted some red flags on the horizon for the short-term. These include an increased supply coming into specific precincts across Australia, rising construction costs, rising site values, curbs on loans to foreign buyers, and lower levels of available construction finance.
“Australia is no different to any other first-tier global city in Asia, Europe and the US, in that there are substantial levels of new residential construction activity,” he said. “A key difference, however, is the financing environment for these developments.”
Schwartz said any potential oversupply would be short-lived and predicted the next growth cycle would occur by 2020. By then, prices would have risen, especially in Melbourne and Sydney, to support a new round of much-needed development projects.
Moreover, the Australian construction finance market functions on the need to secure presales at a level that’s at least equal to 100% of the construction loan raised by the developer before development can begin.
“This presale coverage ratio has been required by Australian banks for decades and has created a very prudent standard of lending. It reduces the risks of oversupply, thanks to the non-speculative nature of the sales commitment upfront. Moreover, the buyers need to be diversified, as the banks limit any one buyer from purchasing multiple apartments,” Schwartz said.
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