New Home ‘Tsunami’ May Snap Sydney Romance With Exuberant Prices

  • Record 213,000 home starts across Australia to boost supply
  • Goldman Sachs says Sydney prices 20% overvalued, glut likely

A home-building frenzy that is shoring up Australia’s economy as the mining boom ends may also be what finally takes the steam out of one of the world’s most expensive property markets.

The case in point: Green Square. Nearly 10,000 apartments will be built in one of Sydney’s newest suburbs in the next four years to satisfy investor demand, which has already sent property prices in the city to the highest ever. It will also add to the record 213,000 new home starts across the country amid slowing population and economic growth, prompting Goldman Sachs Group Inc. to warn of a supply glut by 2017.

“There is a tsunami of home supply coming,” said Nigel Stapledon, head of real estate research at the University of New South Wales Business School and former chief economist at Westpac Banking Corp. “The market is going to be tested in accepting this sort of supply. It’s not like there is economic growth to support it. Income growth has gone from boom time to the lowest in a number of years and population growth has eased back.”

Housing and home prices have been the biggest beneficiaries of the central bank’s 10 interest-rate cuts since November 2011 to a record low that made mortgages the cheapest they have been in five decades. Economic growth has remained below historical rates and capital spending and confidence have sagged.

Some cracks are starting to appear. Auction clearance rates in Sydney dropped to about 73 percent for the week ending Sept. 20, from a peak of over 90 percent in April, as buyers’ tolerance for some of the most expensive property in the world and a median price that touched a record A$773,000 ($561,000) cooled. The measure is at the lowest since November last year, according to the data. Nationally, auction clearance rates, used to gauge buyers’ demand, have dropped to just over 70 percent from a high of more than 80 percent in April.

At the same time, demand from investors, responsible for more than half the mortgage commitments since August 2014, a record, is being choked by tighter lending requirements to landlords. Investor loan growth dropped from 29.6 percent in April to 16.5 percent in July, the latest government data showed.

Homes are 20 percent overvalued, according to Goldman Sachs, which is seeing a one in three chance of a recession in Australia in the coming year, according to a note this month, while Barclays Plc puts the overvaluation at 14 percent.

Dwelling prices have climbed 24 percent across the country in three years to Sept. 1, with Sydney leading with a 46 percent increase, according to CoreLogic. Reserve Bank of Australia Governor Glenn Stevens said in June that Sydney home prices were “crazy,” while Treasury Secretary John Fraser has called it a “bubble.”

A surge in supply as economic growth sputters may temper those gains. The economy, trying to navigate a transition from a mining boom, expanded 0.2 percent in the June quarter, the slowest pace since 2013, while wages climbed 2.3 percent from a year earlier, matching the weakest pace ever.

In the short-term “strong supply growth can create some negative impact on prices,” David Cannington, a senior economist at Australia & New Zealand Banking Group Ltd., said. “With the current headwinds facing the Australian economy and the lack of consumer confidence in particular, a further step up in supply would likely test the depth of demand and face significant challenges in some markets.”

Green Square, about 3.5 kilometers (2.2 miles) south of the Sydney business district, is on course to be the densest suburb in the country. Sprawled across 278 hectares, it will see about 10,000 apartments completed in the next four years, according to the City of Sydney website. They will join almost 59,000 homes across New South Wales state that will begin construction this year, according to the Housing Industry Association.

While new-home starts are forecast to decrease from 2016, they will remain above pre-2013 levels, HIA data show. It estimates there will be almost 720,000 housing starts across the country in the four years to 2019 with more than half of that in Sydney and Melbourne.

Goldman Sachs economists led by Tim Toohey expect an excess of 75,000 dwellings by 2017 rather than a previously forecast shortfall of 140,000.

Besides tighter lending, landlords are facing falling rental yields as the number of homes for rent rises, values increase and population growth slows. Gross rental yields were at a record low in both Sydney and Melbourne in August with a typical dwelling attracting a yield of just over 3 percent in Australia’s two largest cities, according to CoreLogic. Population growth slowed to 1.4 percent in 2014 and is on course for the slowest growth in nine years, according to Macquarie Group Ltd.

“We may be approaching a broad peak in home prices,” Kieran Davies, chief economist at Barclays said by phone. “The main uncertainty about the market is tougher regulatory steps to curb investor demand. It’s been the driving force lately and there are some signs it is slowing.”

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