Foreign investors in Australian real-estate will need to conduct their own sound due diligence after it has been revealed one of the countries leading house price indices has been overstating growth. But it is not the only problem they face.
Australia’s central bank has been forced to drop using a home price index from CoreLogic after the bank said it is “overstating” house price growth.
In a country obsessed with real estate, everyone used CoreLogic statistics as it always portrayed strong, perpetual growth regardless of actual market performance. The last monthly update, published on the 1st August found Adelaide dwellings surged a stunning 1.4 percent in the month of July. Sydney was up a hot 1.3 per cent and Melbourne 1.1 per cent. Corelogic boasted, “Capital city dwelling values reach a record high in July”
As of the 31st of July according to Corelogic, Sydney’s median dwelling price was $775,000 down from $780,000 the month earlier (yes down), Melbourne was $585,000 down from $587,500 a month earlier (yes down) and Adelaide was $417,500 down from $420,000 (no, no mistake – down). This on its own is not a concern. The Corelogic Home Value index is a Hedonic index meaning the data is “massaged” to better track attributes of the property – i.e. the number of bedrooms and bathrooms.
But it had become a regular occurrence this year. Month after month, median down, index up. Sydney started the year with a median $800,000 dwelling price and closed last month at $775,000 according to Corelogic. Despite the fall, Sydney has recorded impressive monthly growth, 0.5 per cent (Jan), 0.5 per cent (Feb), 1.0 per cent (Mar), 2.4 per cent (Apr), 3.1 per cent (May), 1.2 per cent (Jun), 1.3 per cent (Jul).
It is understood Corelogic made a “methodological change” in April and forgot to advise customers of the changes, including the Reserve Bank of Australia.
If you have been in Sydney, Melbourne or Brisbane of late, no doubt you would have witnessed the sight of endless cranes. Australia is in the grips of an unprecedented apartment building boom.
In the March quarter, according to the ABS, the private sector was building 150,706 “other” residential dwellings, typically units and apartments. This is triple the roughly 50,000 only 6 years ago.
Most of these dwellings are off-the-plan and are being built for foreigners. Investors put down, typically, a 10 per cent deposit and is required to pay the remainder when the apartment is complete. This could involve obtaining a loan with a bank when the time comes.
“All the deals have been frozen”
As we reported in May (Banks tighten screws on foreign buyers), Australia’s Big 4 had started retracting and clamping down on loans to foreign investors after detecting widespread fraud.
According to overseas mortgage brokers, many are now struggling to complete their purchases.
Mark Yin, an agent with Shanghai-based Home Tree Group told the AFR, “All the deals have been frozen,” According to the report, nearly 100 per cent of his clients were unable to get finance from Australian banks. Most were buying apartments in the Melbourne CBD.
“I have now stopped dealing in Australian property,” he said.
Lanny Xu, CEO of Iron Fish China said about 20 per cent of her clients were trying to on sell apartments after failing to obtain loans.
For local buyers, the oversupply of apartments have seen prices fall. Banks are valuing the apartment at settlement and many are coming up short. In Melbourne’s Docklands, CBD and Southbank, apartments are selling at up to 24 per cent discounts to the off-the-plan price.
According to a recent article in the AFR, off the plan apartment sales in Brisbane’s inner city is down 44 per cent in the last quarter. (Brisbane apartment sales collapse, settlements now key focus for developers)
» Brisbane apartment sales collapse, settlements now key focus for developers – The AFR, 10th August 2016.
» RBA says Melbourne, Brisbane apartment glut could increase settlement risk – The AFR, 5th August 2016.
» Surviving the off-the-plan finance crunch – The AFR, 28th July 2016.
» Frozen loans trigger Australian property funding crisis – The AFR, 25th July 2016.
» New apartment resale prices tumbling in Melbourne – The AFR, 27th May 2016.
» Risk and fear rise as failed apartment deals reach $5b – The AFR, 27th May 2016.
» Lender Firstmac adds to squeeze on apartment borrowing – The AFR, 27th May 2016.
» Receivers warn apartment developers to get ready on settlement risk – The AFR, 19th May 2016.