Bracing for a price correction

/ EdgeProp |

January 2, 2019 12:00 PM SGT

On the first weekend of December, Australian developer Crown Group showcased its Mastery by Crown Group project in Singapore. It was part of a global launch that kicked off simultaneously in Sydney, Jakarta and Shanghai in mid-November; followed by Hong Kong at end-November; Singapore in early December; and Tokyo in January next year.

Upon completion, the project located in Waterloo, Sydney will have five towers with 374 luxury apartments, restaurants, cafés and shops. According to Iwan Sunito, Crown Group chairman and group CEO, foreigners generally make up 30% to 40% of the buyers of his residential projects. They include Chinese, Indonesians and Singaporeans.

Higher stamp duties

Over the past two years, the Australian state governments have raised buyer’s stamp duty and surcharges for foreign homebuyers in an effort to tame property prices, particularly in cities such as Sydney and Melbourne.

In December, Crown Group launched its latest Sydney residential project, Mastery by Crown Group (Credit: Crown Group)

Foreign homebuyers in Sydney have to pay an 8% surcharge (from 4% before), on top of a 7% buyer’s stamp duty from July this year. In Melbourne, the foreign buyer’s surcharge is 7%. Foreign homebuyers in South Australia were likewise hit with an additional stamp duty of 7% from January this year, while those in Western Australia will have to pay additional buyer’s stamp duty of 7% from January 2019.

The latest upswing in the property market has seen “extraordinary price growth” in Sydney and Melbourne, says Craig Godber, CBRE Australia head of residential research. House prices in Sydney rose 46% from 2012 to 2017. “Foreign investment in Australian residential properties peaked in 2015/16, further stoking the strong demand conditions in Sydney and Melbourne, but has fallen since,” he adds.

Higher stamp duties on foreign purchasers is just one of a range of factors that have significantly dampened foreign demand, says Leigh Warner, head of residential research at JLL Australia. Other factors include Chinese capital controls and domestic credit conditions. “With the Sydney and Melbourne housing markets being in late-cycle, more buyers are looking elsewhere at present,” he adds. “We don’t expect a further decline in foreign buyer demand because it has already fallen to quite moderate levels.”

Crown Group’s Sunito points out that even the governments of Singapore, Hong Kong and Canada have raised stamp duties for purchases by foreign homebuyers in recent years. “Nevertheless, there are still investors who want to deploy their money overseas, and real estate is the preferred choice,” he says. Sunito cites his father’s experience. Originally from Indonesia, his father purchased his first property in Sydney in 1995 for A$100,000. “Today, that same property is worth A$3 million [$2.9 million],” he relates. “Even my own property investments in Singapore haven’t grown by the same pace. That’s why Asians still favour Sydney.”

‘Hard landing’?

A recent Organisation for Economic Cooperation and Development (OECD) survey on Australia, released earlier in December, highlighted risks related to housing and debt. While house prices have eased recently, they remain high — for example, prices in Sydney and Melbourne have more than doubled since 2005. Historically, price falls of 5% to 10% are associated with cyclical downswings in the Australian property market, notes CBRE’s Godber. With a higher volume of new apartments being completed next year in submarkets such as inner Brisbane and inner Melbourne, residential property prices in these submarkets could fall more than 10% in 2019. “We interpret price falls as markets correcting rather than crashing,” he says.

A view of Sydney Opera House and the city skyline. In July, the New South Wales state government doubled its foreign buyer’s stamp duty to 8%. (Picture: Crown Residences)

JLL Australia’s Warner sees “the possibility of further tightening of credit, uncertainty around a federal election where the impact of negative gearing changes will be front and centre, plus high prices and debt levels”. These are factors that could affect the Australian property market next year, he adds. Warner does not expect a hard landing. “None of these factors alone or together will necessarily cause a bigger downturn,” he adds. “But they do make [the Australian property market] very vulnerable to an external shock to our economy at present”.

Increase in ‘non-price incentives’

As more projects complete in 2019, developers of new apartments priced at the same level as 18 months ago may need to adjust prices to meet the changing level of demand, says Michelle Ciesielski, head of residential research at Knight Frank Australia. Eighteen months ago, new apartments in Sydney were priced at an average of A$1,300 psf; in Melbourne, they averaged A$901 psf.

However, Ciesielski sees developers of new projects in Melbourne and Sydney increasing “non-price incentives” to draw in buyers instead of adjusting prices.

By end-2019, Perth, Adelaide and Sydney will align with Melbourne’s (pictured) foreign buyer’s stamp duty rate

Crown Group’s Sunito says there have been only two new project launches in the prime area of Sydney since June. “There is no large supply coming in,” he observes. “Chinese developers are exiting the market because of their government’s capital controls.”

In the luxury property markets, with only a limited pipeline of new prime residential projects slated for launch in Sydney next year, Knight Frank’s Ciesielski is projecting an overall price growth of 2% to 3% in 2019. “Melbourne will welcome more new prime projects in 2019, so the city is forecast to see a more sustainable 1% to 2% price growth in its prime residential market over the same period,” she adds.

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