Around Australia, there are many predictions about when the economy will recover. But it will be very difficult for a substantial recovery to take place while the Sydney residential building industry remains depressed.
Few know more about the Sydney apartment market than the largest apartment owner and one of the biggest developers, Harry Triguboff. As you would expect, Triguboff has some very clear views as to what is now happening in Sydney and what needs to happen to spark a recovery.
Triguboff has always believed that because so much land in Sydney is frozen, apartment building would be the key driver of residential building activity, which is why he put so much money into it. (As I explain below, the Sydney situation is very different to Melbourne’s).
Triguboff says that Sydney’s mid-priced apartments have seen virtually no price movements over seven years, with the rises and falls averaging out. Expensive and low-priced apartments have fallen in value, which means a large amount of bank lending in these two Sydney markets is in danger of default.
In addition, there are large amounts of undeveloped apartment land that is no longer salable at the old prices. Where there is high leverage, if the banks want to be repaid, they normally have to sell the land and take a loss.
The Australian banks have seen the sharp reductions in the values of residential property overseas and expensive apartments in Australia, and so are jittery. Triguboff says that in valuing Sydney apartments to determine how much they will lend, the banks usually reduce normal valuations by about 10% to 15%.
That restricts what buyers can pay for apartments, even if they have the first home buyer grant. In turn, that puts a lid on apartment prices and the current price ceiling is too low to make building apartments economic.
Many wanting apartment accommodation in Sydney are forced to rent, so rents are pushed up, given the restriction on supply. The higher rents in turn force more people to live in the same space and/or cause people to leave Sydney.
Triguboff says that to re-start apartment building on a major scale will require banks to lift their lending on apartments, which will then allow the price of apartments to rise to a level where it is economic to build again.
Triguboff is the first to admit he would be one of the biggest beneficiaries from such a price rise, but as we saw in the 1990s it was not until the banks began lending at levels that pushed up prices that the property building slump was overcome.
Triguboff says last year banks were able to justify loans when interest rates were around 8.5%. Now they have fallen by about 3%, which should theoretically have allowed them to lend more money on the same income dollar. That has not happened in the Sydney apartment market. Triguboff urges the banks to re-think their apartment lending to boost prices and create development as part of economic recovery.
But banks should not really start that process until Sydney rids itself of the rules that artificially cause a scarcity of land. At present, there are a myriad of local council and state government restrictions designed to minimise building in Sydney. These rules were created at a time when Sydney was dominating Australia.
It will be hard to get the banks to budge, but local councillors and politicians who place building employment as a low priority may turn out to be even harder to budge.
In Melbourne, Victorian Premier John Brumby has moved to make sure he is not caught in the NSW trap and is freeing up land in outer suburbs to fan a building boom based on the first home buyer grant.
Melbourne is also fast tracking the approval process in several large residential projects close to the city. Nevertheless, Melbourne is becoming a Los Angeles-style city, helped by the fact that bank finance is available that enables people to move into a home with a token or no deposit.
The strategies of our two largest cities could not be further apart.
This article first appeared on Business Spectator
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
