Oversupply is the killer

Posted on 13/05/2015  
Oversupply is the killer

The developer lobby, better at promoting self-interest than anyone else in society, would have us believe that building more homes will make homes cheaper.

Developers themselves believe that building more houses will make themselves more profitable – particularly if government gives them their wish list of things to make their lives easier - and what happens after that … well, who cares?

The truth is: the only way to make homes significant cheaper is to build far too many of them. Over-supply is the one thing that can crash a market.

All of the areas I call the No Go Zones are places undermined by over-supply.  Click here to buy our Over Supply Report

Investors far too often fall victim to such places because supply is the factor most over-looked by property investors.

Those who take the time to do some research before tossing a few hundred thousand at an investment property tend to focus on demand, with scant regard for the flipside of the growth equation.

Some organisations that purport to advise investors preach a simplistic follow-the-population-growth strategy.

If high population growth was the core element in a good locational choice, the leading capital growth performers in the past five years would have been the Gold Coast and Wyndham City in the south-west of Melbourne. Gladstone, boosted by the influx of tens of thousands of gas project employees, would have soaring prices.

The opposite is true in those markets, which have all suffered recent periods of marked decline. The too-often forgotten factor is supply.

The Gold Coast had five years of falling property values because of too much supply. Wyndham City, which overtook the Gold Coast as the municipality with the greatest annual additions to its population, recorded no growth in prices for three years, because of an excess of house-and-land packages – ultimately flogged off to distant investors by dodgy marketing companies.

Gladstone, after recording high growth in rentals and prices in 2011 and 2012, saw rising vacancies and a sharp downturn in prices and rents after 2012 because developers went overboard yet again.

Over-supply causes rents to fall and that drags down property values.

The developers building the new projects don’t care as long as they can sell their product to someone and move on to the next project. In over-supplied markets, they tend to target distant investors unfamiliar with local conditions. The Chinese are the victims of choice these days.

There are two “danger situations” at the core of the No Go Zones issue: (1) inner-city apartment markets; and (2) regional centres where a rise in supply (through new development) has coincided with a decline in demand (through downsizing in the resources sector).

Inner-city units present a significant danger throughout capital city Australia. Boom-bust scenarios are common. As Hegney Property Group chairman Gavin Hegney says: “Apartments are always in over-supply or under-supply because of the lumpy nature of the market. With a housing estate you can release allotments in stages but you can’t do that with an apartment tower.”

Another problem is the long lead time in creating high-rise unit buildings. Multiple developers will decide simultaneously to build towers in a strong market – two or three years later when they are completed, a lot may have changed.

This is a clear and present danger for Australian buyers. Developers don’t care who buys their units as long as someone does, nor are they concerned if their buyers later find themselves unable to tenant their units or are forced to sell at a loss.

But it is a concern for the market and for real estate consumers.

Given that Melbourne, Brisbane, Perth, Canberra and Darwin already have – or are heading towards - surpluses of inner-city apartments, and Sydney and the Gold Coast are trending in that direction, a good strategy for property investors is to simply avoid CBD unit markets altogether. There are much better (and cheaper) places to buy.

The coal and iron ore industries are the cause of the other core “danger situation”. When the resources boom was at its strongest, mining expansion created strong property markets in towns and regional centres that felt the positive impacts.

This prompted developers to initiate new projects to exploit the demand. Sadly, this coincided in a downturn in the coal sector, with commodity prices declining at a time of rising costs for mining companies. The iron ore industry has had similar problems.

Rising supply coincided with falling demand – a recipe for decline in property markets. The result has been sharply rising vacancy rates, leading to lower rents and ultimately falling prices.

Another factor is the growing use of fly-in-fly-out workers accommodated in workers camps, rather than renting in the local property market.

This has been a big factor in the Surat Basin region of Queensland, where developers built a lot of new dwellings in anticipation of strong rental demand – but more than 90% of resources workers have been accommodated in purpose-built temporary villages.

The result has been the highest vacancies in the nation.

Terry Ryder is the founder of hotspotting.com.au

hotspotting@gmail.com

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