Analysts expect to see undersupply from 2020

27 Feb 12:00 PM
Australian Financial Review
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A record number of new apartments is set to hit the market this year, but any oversupply in the coming months is unlikely to trigger a crash in house prices, Bank of America-Merill Lynch economists say.

Instead, a moderating property mar-ket will lead to fewer housing starts and sow the seeds of undersupply come 2020.

“The stage is being set for the next property cycle,” BAML economists Tony Morris sans Alexandra Veroude write in a recent research note. “Forget oversupply,” they write, urging their clients to look beyond 2018: there are “risks of undersupply brewing”.

Building approvals peaked in 2015. Assuming a three-year construction period on average suggests that the lump of new building will be com-pleted in the coming year.

That has raised the spectre of over-supply in major property markets such as Sydney, Melbourne and Brisbane.

The rush of new supply comes as housing prices have moderated in recent months. Dwelling values fell across six of the eight capital cities in January, CoreLogic data shows.

But as new housing starts crumble under the weight of moderating house prices, higher rates and climbing con-struction costs, today’s abundance of new housing will flip to scarcity by 2020, the BAML economists say.

“With population growth expected to keep underlying housing demand robust, we see underlying demand out-pacing supply in Australia’s largest housing markets, New South Wales, Victoria and Queensland, from 2020,” they write. “Laws of supply and demand suggest that house price pres-sures would be expected to build from this time. Our analysis supports our analysis supports our view that any oversupply now, with Brisbane of greatest concern, should not create large imbalances over an extended period and present as a risk to financial stability.”

A more immediate worry among observers is that those who bought off the plan will prove unwilling to go through with the transaction should they see a weaker market no longer jus-tifying the initial asking price. But the BAML economists are more sanguine.

While property prices have moder-ated of late, three-quarters of the new apartments scheduled for completion this year are in Melbourne and Sydney, where values have jumped by a fifth since 2015. Less chance, then, of bank valuations on the completed property coming in well below what the buyer agreed to pay.

“To date, settlement defaults remain low and, given our analysis, we do not expect settlement defaults to rise signi-ficantly – particularly in an environ-ment where the economic outlook is strengthening and the labour market is tightening,” they write.