Will this market oversupply be different?

By Grant Müller

Dire warnings of a price correction in the Melbourne CBD apartment market fail to take into account the extraordinary changes in both the developer and buyer profiles.

Hocking Stuart director Scott McElroy said the last apartment oversupply in the early 2000s was controlled by local developers and funded by local banks which kept a tight rein on the market fundamentals that kept the oversupply in check.

People with a long memory may recall that the “Chicken Littles” in the 2003 market claimed no new apartments would be built in the CBD for a decade, however new towers were starting to rise within three years of the bottom as supply drove demand and capital values rose to the point that development was feasible again.

That was the start of the current market boom that has now continued virtually uninterrupted since that time.

Recently BIS Shrapnel forecast that by June 2016 there will be a surplus of 14,300 multi-residential dwellings in Victoria with the vast majority in Melbourne – particularly in the CBD.

It said if construction doesn’t begin to ease back significantly in the next 12 to 18 months there will be a “long, long downturn” where prices are depressed for a period of up to seven years, or a “very significant correction in price”.

A BIS Shrapnel report on the inner-Melbourne apartment market found that an annual average of 6212 apartments are set to be delivered between 2012/13 and 2016/17, which is more than double the long term average of 2563 apartments a year in the 16 years to 2011/12.

Mr McElroy said this comparison of bald figures failed to take into account that the CBD apartment market was now being controlled by foreign developers and funded by foreign banks that didn’t work to the same local market requirements.

In addition, he said the buyers of these apartments were from offshore and had different investment requirements which would insulate the local buyers from the worst of the downturn.

While Mr McElroy agrees that there is a supply issue, he believes many of the apartments bought by offshore investors are for their student children or for a safe haven investment and will never be placed into the rental market minimising their impact on rentals and, therefore, helping to support capital values.

He also believes that the oversupply will be quarantined to the mega towers that offer hundreds of mainly small apartments in identical buildings.

“The local market is still searching for ‘boutique’ apartments and remains very competitive in the owner occupier segment,” he said.

Mr McElroy qualified his optimism by saying nobody should buy for a short-term gain.

“People need to look at the property market the same way they look at shares.  The property market will go up and down but buyers need to keep the long-term view to realise capital gain in any market,” he said.

Grant Müller has been reporting on the property market for more years than he would care to admit.

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