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Melbourne & Sydney Property Markets – Joker In The Pack

Melbourne & Sydney Property Markets – Joker In The Pack
June 26, 2014 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

Structural changes resulting from the revolution known as the ‘Asian Century’ has directly resulted in unprecedented volumes of properties being purchased in Australia by Asian investors.

With Sydney and Melbourne having Australia’s biggest profiles internationally, they have been the centre of attention for the construction industry’s marketing teams.

In a majority of cases, Asian investors are buying brand new properties – only Australian residents are permitted to buy established properties.

PROPERTYOLOGY recently read the latest report from Australia’s Foreign Investment Review Board (FIRB). According to the FIRB, there were 12,647 applications approved in 2012-13. A total of 12,025 of these approvals were for Australian real estate transactions (289 were for mining).

The number of FIRB approvals for Australian (residential) real estate has grown from 3,723 in 1999-10 to 11,668 in 2012-13. For the nine months to March 2014, this figure has increased further to 10,244. Victoria (38%) and New South Wales (30%) account for the lion share.

And, the tsunami hasn’t started!

As reported previously by PROPERTYOLOGY, high buyer activity levels from Asian investors is the primary driver of Sydney and Melbourne’s property markets.

We have a keen interest in commentary coming from the FIRB and the Reserve Bank at the moment. If Sydney and Melbourne continue to produce strong growth it will be incredibly interesting to see how the FIRB and RBA respond.

In normal circumstances, the RBA would typically roll out a couple of interest rate rises as a handbrake for consumers. But these aren’t normal circumstances. Property markets throughout Australia, other than Sydney and (to a lesser extent) Melbourne, are performing ‘normally’. It wouldn’t make sense for the RBA to pull the interest trigger on Australia’s 23.5 million population when around 5 million people live in a pocket with heat in the market. Moreover, we doubt that the RBA will want to tinker with improving, yet still fragile, business confidence.

A more plausible course of action is the FIRB tightening policy to curb Asian-based property transactions.

The other possible concern for the Sydney and Melbourne market lies in China itself. There are frequent reports of China’s residential market declining by 15% over the last 12 months and a bigger downturn is on the cards. When times get tough investments are often the assets disposed of ahead of the family home. Further instability in China may result in high levels of resale stock flooding the market in Sydney and Melbourne.

Chinese developers are also buying up sites in Sydney and Melbourne and, along with reinvigorated Australian developers, are in the midst of producing significant volumes of new housing supply.

Beware the house of cards!