Sydney Swans and Melbourne Demons

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What passes for analysis or commentary on property matters in Australia’s media is bloody woeful.

Robert Gottliebsen is out this morning on Business Spectator Why Sydney won’t mirror Melbourne’s apartment glut supposedly comparing Sydney and Melbourne apartment markets. The piece deserves a good kicking.

Australia’s two largest inner city apartment markets are developing in vastly different directions. Melbourne has achieved what Sydney has always wanted to achieve but Melbourne is about to discover what actually happens when a city gets what it wants.
In Sydney, the complex web of councils, government bodies and various other organisations has always made gaining approval to undertake economic apartment developments in the inner city and suburbs very difficult.
The advent of the Coalition government and other changes has made it easier to get approvals and undertake developments but it is still an extremely difficult process – a bureaucratic nightmare.

Really? Do you have a fact? A statistic? A morsel to support this sweeping assertion? No. It is a given, a broadcast wisdom and received comfort to prompt the nodding of sage heads. That is, heads filled with sage, not brains or analytic skill.

As a result,

AS A RESULT! As a result of what discernible, measurable change?

although there are many developments that have managed to get through, the bureaucracy that makes approvals difficult has stopped a glut of new developments. Demand is strong, driven by the combination of Chinese/Asian buyers, Australian investors and those wanting to own an apartment to reside. Chinese and Australian banks are providing the funding.

If Gotti emerged from his rubber room a moment to take soundings, he would know the Australian banks are refusing to finance speculative apartment construction and are insisting on 100 per cent pre-sales. They can see the gamble in vertical dog-boxes and have no desire to share the risk – not at these emergency interest rates.

As a result of the Sydney scarcity factor, the low interest rates and the abundance of funds, the price of inner city apartments has risen by about 15 to 20 per cent over the last 18 months.
In Melbourne, the combination of Chinese/Asian buyers, Australian investors and those wanting to own an apartment in which to reside is also fueling very strong demand. Chinese and Australian banks also have cash at the ready. But again, similar to Sydney, gaining approval has historically been a nightmare.
But that’s where the similarity ends. In the last two years the combination of a Coalition planning minister Matthew Guy (now opposition leader) and a refining of the approval process to encourage developments, has seen the number of new high-rise apartment approvals explode.

A very interesting claim. Negotiating the planning process is a key developer skill. Sage-head judgements are made on just how far the rules can be stretched by pumping in as much floor-space as possible, to be capitalised into land prices. On this, conservative planning ministers are much more, ahem, flexible – a practical reality that can be exploited with outrageous proposals, lobbying and political campaign contributions.

If speed was the only objective, merely conforming to regulation gets a plan stamped – in both Sydney and Melbourne.

So in Melbourne, while demand is strong, the market is being flooded with one- and two-bedroom apartments, led by an avalanche of Chinese-funded and purchased developments.
You don’t need to be a Rhodes Scholar to know what will happen in a couple of years. The looming high vacancy rates are likely to depress prices and that will have an effect on overall dwelling values. That is unless Chinese investors are happy to keep buying apartments that are vacant.

An oblique reference to Prosper’s Speculative Vacancies report, the only material measure of genuine vacancies around. And I am always bemused by talk of property ‘values’, a land bubble euphemism for housing costs, the bane of urban living.

It is ironic that Melbourne achieved what Sydney has always hoped for — a relatively smooth approval process — but that process coincided with an abundance of capital in the market and it has caused a flood.
That said, Sydney also has some underlying problems.
While the price of apartments has risen by 15 to 20 per cent, rents have not risen. A $1 million apartment in, say Alexandria would probably be leased for about $700 a week or $36,400 a year, providing a 3.6 per cent gross yield.
Once you take out rates and other outgoings plus small periods of vacancy, the yield gets down below 3 per cent. That is not a level that can sustain continued increases in value. But with so many Sydney salaries close to frozen and national income falling, it’s hard to increase rents.

The yields do indeed go below 3 per cent, Gotti. They actually go below 2 per cent, a figure even less likely to “sustain continued increases in value”.

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If Sydney rents don’t increase, eventually apartment buyers will think twice about bidding up prices. But at least there is no looming glut as is happening in Melbourne.

Thank heavens! Sydney property prices can sail onward, while those filthy Southerners drown alone and unaided. What a pity none of this is supported by reality, or even a glance out the window.

Lift your game, Robert Gottliebsen.

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