High-rise apartments in Sydney, Melbourne and Brisbane will suffer the largest price falls as a result of the coronavirus, analysts have warned.
Each of these cities was already suffering from an oversupply of CBD apartments before the crisis.
And a sharp decline in international students and foreign investors will only add to their pain.
“It’s going to be a real bloodbath over the next 12 to 24 months,” Suburbanite principal Anna Porter told The New Daily.
“What we’re seeing is buyers who already bought apartments six, 12, or 18 months ago and pre-committed to contracts now can’t get the finance through because the lending environment has changed.”
The big four banks have changed how they assess home loan applications in response to the crisis.
Lenders are conducting more rigorous employment checks and lowering their maximum loan-to-value ratios to minimise the risk of non-performing loans.
This means some buyers who agreed to purchase a home off-the-plan will struggle to honour their contracts – leaving developers out in the cold.
“We’re going to see banks potentially repossessing development sites that are near completion or just reached completion,” Ms Porter said.
The scheduled withdrawal of JobKeeper and lowering of JobSeeker in September will make matters worse, she added.
Coronavirus equals more bad news for embattled sector
The coronavirus downturn comes after a series of high-profile evacuations and defect scandals rocked consumer confidence and put downward pressure on prices.
Cate Bakos, president of the Real Estate Buyers Agents Association of Australia, said the pandemic has slashed confidence even further.
With demand evaporating, developers have resorted to desperate tactics to shift stock, she said.
“While developers covering deposits, offering rebates, offering rental guarantees for investors and furniture fit-outs is not unusual, in this particular environment, we’re seeing some particularly motivated off-the-plan selling because numbers are down,” Ms Bakos told The New Daily.
“They’re doing everything they can to protect themselves from valuation vulnerability.”
If a developer is offering $600,000 apartments, gets the deal done for $570,000 but offers a $30,000 rebate, that’s recorded on the contract as a $600,000 sale, she said.
Meanwhile, Charter Keck Cramer director of research and strategy Angie Zigomanis said investors eager to resell because of weakened demand for short-term accommodation would also weigh on prices.
Since 2011, more than half of off-the-plan properties purchased in Melbourne’s CBD and surrounding suburbs, including Docklands and Carlton, later sold at purchase price or at a loss, he said.
However, he said lower prices are good news for owner-occupiers looking to downsize.
“There’s a perception that apartment living and denser types of living puts you more at risk [of contracting coronavirus], so we’re seeing more people move away from those areas,” Mr Zigomanis told The New Daily.
“There is going to be a percentage of sellers who will be price takers, because they are in a position where they need to sell, so you’ll start seeing 10 to 20 per cent reductions from the off-the-plan price.”
Pricing falls may not be as significant, says leading economist
Although some economists have revised down worst-case scenarios in response to government’s success containing the virus, unit prices operate independently of house prices.
According to SQM Research, median unit prices in Canberra’s north dropped nearly $50,000 over the last year, whereas house prices surged from $1,044,546 to $1,270,000.
CommSec chief economist Craig James told The New Daily he’s bullish about the market given Australia’s impressive response to the coronavirus and the positive effects of record-low interest rates.
“You have to look at different market segments, so there will still be demand for a trophy apartment building overlooking Sydney Harbour because of its uniqueness, and there isn’t the degree of latent demand from migrant numbers being down,” Mr James said.
“However, recent controversy over buildings of lesser quality means developers with a poor track record or new developers may find difficulty shifting apartments in the COVID environment.”