When Australia’s largest apartment developer spoke to the media at the weekend, he probably thought he was calming markets jitters over ‘bubble Australia’.
Harry Triguboff, managing director of Meriton Group and Australia’s richest man, told The Australian newspaper “there is no housing bubble”.
But in the same article he asserts that property prices had stabilised because “our prices (average for a two-bedroom unit) are down to $950,000 … It was over a million”.
Investors who bought one of those apartments for $1 million may be a little uneasy at the thought it’s now worth about $50,000 less.
But what should make them doubly uneasy is the number of apartments about to hit the market.
In October, investment bank JP Morgan predicted that a “glut” of apartments was “going to get ugly” and that price falls of 10 to 15 per cent were likely.
None of this will surprise the banks. Six months ago they started making hefty cuts to the amount they would lend against high-rise apartments, particularly in inner-city parts of Melbourne, Sydney and Brisbane.
For developers this is all bad news, as the selling price of properties is a function not only of supply and demand, but of available credit.
That’s why Meriton Group has been making its own loans to customers – its in-house mortgage book has reportedly nearly doubled to $120 million.
A tough sell
One can only wonder how the agents selling these apartments gloss over those facts – apartment prices down, a glut of new apartments about to hit the market, and the nation’s biggest developer making loans the banks are afraid to touch.
Mr Triguboff appears to be relaxed about the situation, but then he is an influential man. He has good reach via the news media, where some journalists are very keen to report his point of view.
And he no doubt has the ear of key politicians – without the apartment construction boom his firm is part of, the jobs slow-down caused by the end of the mining boom would have been much more severe.
There are a number of flies in the ointment, however.
The first is that the debt-funding for the housing market is already looking shaky.
That’s because of record low wages growth, which means the average home buyer’s borrowing power is either not growing, or may even be shrinking due to tighter bank lending requirements imposed by regulators.
At the same time, the price banks pay to borrow abroad – the source of roughly a third of their funding – is rising due to the Trump presidential win.
But wait, there’s more
And all of that is before developers factor in political decisions.
House price growth in Australia has been propped up over the past two decades by two factors other than low interest rates: high immigration and the generous tax refunds to property investors through negative gearing and the capital gains tax discount.
While the Coalition government has vowed not to touch negative gearing and capital gains tax, it has announced it intends to make cutbacks in the 457 temporary visa program to open up more job opportunities for underemployed Australians.
A shrinking of the pool of 457 workers will have a small effect on housing market demand, but is not the main game.
The bigger reform, that will only come pass if Labor wins the next federal election, is the tapering off of the twin tax breaks mentioned above.
Moreover, Labor appears determined to outflank the Coalition on immigration – it is promising policies to “buy Australian, build Australian, employ Australians”, implying big cutbacks on foreign worker visas.
So there are big political risks ahead for property developers.
Meriton’s decision to double its lending into a sagging sector to keep demand and prices high is a huge gamble.
It’s a gamble that becomes riskier if the Coalition really does cut back on 457 visas, and riskier still if Labor wins government and adds the long overdue reforms to property taxes.
Of course, looked at from the point of view of younger first home buyers, both a cut to immigration and Labor’s tax reforms would set the market on a course for better affordability.
Seen in context, Mr Triguboff’s attempts to assure Australia there’s “no bubble” look like pure jawboning – and jawboning that would be more effective if he kept quiet about price falls that have already happened.
To read more columns by Rob Burgess click here.