Brisbane on the slippery slope to oversupply

A media release this week was positively gushing in its eulogy of the Brisbane inner city apartment market. Sales are surging, it said, and the level of new construction in the pipeline was a cause for celebration. The market, apparently, “continues to shine”.

From where I’m sitting, sales are not surging and the new construction – 14 new projects with 1,400 apartments were launched in the June quarter alone – will make worse an existing oversupply.

The thing is, the people building, promoting and selling apartments are concerned only about finding buyers. They’re not interested in the broader consequences of the projects that are earning them money.

If the apartments in the current project sell, they pocket the profits and commissions, and move on to the next one.

Others have to deal with the carnage created by their projects. And there will be repercussions from the overbuilding of apartments in Brisbane.

The situation in the Brisbane inner city market is not (yet) as serious as that in Melbourne, where the existing oversupply is serious and the future oversupply will border on catastrophic.

But Brisbane is heading down the same slippery slope to surplus as Melbourne.

In Brisbane, as in Melbourne, Sydney, the Gold Coast and other major unit markets, the inspiration for the high level of new building is the Chinese investment market. Everyone is targeting Chinese investors.

Developers and their marketing stooges don’t care about the vacancy rate figures. That’s someone else’s problem. If they can flog their apartments to Asian buyers, nothing else needs to be considered.

The people who will feel the most pain in the future will be the investor buyers. High vacancies will push down rents and the returns they will earn from their investment. That in turn will undermine values.

Others will suffer. Owners of existing properties in or near the inner city will also find it hard to tenant their properties and will have to cut rents. Their values will fall also. Home owners in those areas will be equally affected by falling values.

Overbuilding is a constant and recurrent problem in inner city apartment markets. It’s the reason capital growth rates have been so poor in Brisbane.

The average annual rise in the median unit price in the Brisbane CBD has been around 3% per year over the past five years and also the past 10 years. In real terms, capital growth has been negligible at best.

Suburbs just outside the CBD, including Kangaroo Point, Fortitude Valley and South Brisbane, have similar track records.

This week’s media release claims sales are now “surging” in the Brisbane inner city apartment market. Not according to the sales data I’m seeing. Sales levels did rise last year, with every quarter producing an increase in sales volumes. But the market peaked in the December 2013 quarter and sales activity has declined in 2014.

That probably explains why there has been little price growth in evidence recently. According to Australian Property Monitors data, there was no change to median prices in the CBD and Woolloongabba in the most recent quarter, a rise of about 1% in Fortitude Valley and South Brisbane, and a 4% decrease in Kangaroo Point.

The real issue is that the Brisbane inner city areas already have too many apartments. The CBD and the near city suburbs all have vacancy rates in the 3.5% to 4.5% range. Those vacancy levels would not cause undue concern, except that massive levels of new supply are in the pipeline.

The writer of this week’s media release was clearly excited about the new projects coming up. It scoffed as the “predictable murmurings” about oversupply. But the concerns are real and well-placed. Dozens of new highrise apartment buildings are under construction or in planning, bringing thousands of new units to an oversupplied market.

There’s been a lot of media about the potential for prices to fall because of a “bubble”. There is no bubble in Australian property prices but there is a real threat of value decline in many major markets caused by developer overbuilding.

We’ve seen many times in the recent past how much damage oversupply can do and how much angst it can cause to property owners, including both investors and home owners, when values fall.

The Gold Coast has just emerged from years of falling property values – many people own properties worth less than they paid four or five years ago. The median unit price in Surfers Paradise is still lower than it was in 2009.

Owners of property in Gladstone have suffered double-digit value losses, not because of a decline in demand but because of absurd levels of overbuilding by developers. What were they thinking?

Where overbuilding has coincided with a sharp drop in demand because of a pause in the resources sector, values have dropped as much as 40% from their peak levels, including in Karratha in Western Australia and Moranbah in Queensland.

Inner city apartment markets, including those in Brisbane, face the same risk.

I’m not sure what the solution is, with councils and state governments eager to approve anything that’s proposed and trumpet the outcomes as a construction boom benefiting everyone. Until Chinese investors realise they’re being sold over-priced apartments for which there is little or no tenancy demand, developers will continue throwing up high-rise in inner Brisbane and elsewhere.

The outcome, in some places at least, will be a market crash that will be ugly to behold.

I’m urging investors and owner-occupiers to stay well away from these markets.

You can contact Terry via  email or Twitter.

This story originally appeared on Property Observer.

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