Australia's Forthcoming Construction-Led Property Boom

[boz]

Looks like it's starting, right on schedule...

http://www.theage.com.au/business/boom-in-new-homes-on-the-way-20091109-i5d7.html

I just thought at you shadow when I saw that report, was also wandering if was you behind it...
I think any construction boom is long way away, we will be dealing with FHB demand dropping for a while, but with government help a construction boom is possible in few years

 

[Shadow]

CBA moves to dampen construction boom!

Some interesting developments in relation to the forthcoming construction boom. The chief economist at the commonwealth bank (Michael Blythe) has come out with the following statement:

http://www.smh.com.au/business/investors-fear-housing-bubble-will-pop-20100310-pz8q.html

''We've got this situation in Australia which is being driven by very strong demographics, very rapid growth in population we're seeing at the moment and of course supply has failed to keep up and we've seen the outcome there in the way house process are moving,'' the chief economist at the Commonwealth Bank, Michael Blythe, said.

However, Mr Blythe believes Australia is ''on the verge'' of a significant supply response which will cool the pace of price growth.

Despite yesterday's deeper than expected drop in housing finance applications, Mr Blythe said the bank's own figures showed lending to housing construction (rather than for acquiring existing dwellings) has been rising very strongly, suggestion there is a ''major lift'' in residential construction looming.

While at the same time, CBA has announced some significant credit tightening for property developers and share investors:

http://www.heraldsun.com.au/business/cba-tightens-screws-on-lending/story-e6frfh4f-1225838448648

COMMONWEALTH Bank has moved to rein in some parts of its home lending business by tightening lending criteria for investment borrowers.

The bank has written to mortgage brokers advising them that loan to value ratios will be reduced to 80 per cent from 90 per cent on a range of investment home loans.

The changes will make it harder for borrowers to get a mortgage product if they use it to build a new house with the sole intention of selling it when it is completed.

The changes will also make it harder for borrowers who use part of their home loan to fund a share portfolio or other personal investments.

At first glance this seems to be a subtle ploy by CBA to add further fuel to the new property boom. These changes will inhibit development of new property, exacerbating the already critical shortage, and they will also discourage people from investing in the stockmarket. What does that leave? Existing property. There is no mention of tighter credit for people who wish to buy additional existing property. Seems that's where CBA wants people to invest.

Interesting to note the timing of this change in line with Mr Blythe's statement above. CBA will tighten credit for property developers (and share investors), but not for people who wish to invest in existing property. It looks to me like CBA actually want to dampen the construction boom, because they know that if the construction boom overheats, and we develop too many properties, then we may face a US style crash due to over-supply.

That is a possibility that I have been discussing for several years, and is just one of the reason why I think there is a chance of a crash around 2014-2015, because that is how long one can reasonably expect the forthcoming construction boom to kick off, build up steam, and then eventually lead to an oversupply of property. However, if the banks do move to restrict development, then we will simply get higher house prices due to an inadequate supply-side response.

Shadow.

 

[INVSTOR]

At first glance this seems to be a subtle ploy by CBA to add further fuel to the new property boom. These changes will inhibit development of new property, exacerbating the already critical shortage, and they will also discourage people from investing in the stockmarket. What does that leave? Existing property. There is no mention of tighter credit for people who wish to buy additional existing property.

I've been thinking along these lines since late last year. I bank with two banks. I went to bank (a) and asked for a loan on an existing house (105% lend) for $490,000, rent $330/wk. They said yer no probs. I decided it was too risky and return was too low so didn't go ahead. A couple of weeks later I went to bank (b) and said I want to borrow $350,000 to build two houses on land we already have, rent will be $800/wk on completion. I didn't go through the formal process but they advised they may not lend me the money to do it. It doesn't make sense.

 

[tigerGT]

INVSTOR,

If you dont mind me asking, who said yes to 105%?
I know STG wont go above 95%

Thanks

 

[Aaron Sice]

At first glance this seems to be a subtle ploy by CBA to add further fuel to the new property boom. These changes will inhibit development of new property, exacerbating the already critical shortage, and they will also discourage people from investing in the stockmarket. What does that leave? Existing property. There is no mention of tighter credit for people who wish to buy additional existing property. Seems that's where CBA wants people to invest.

Interesting to note the timing of this change in line with Mr Blythe's statement above. CBA will tighten credit for property developers (and share investors), but not for people who wish to invest in existing property. It looks to me like CBA actually want to dampen the construction boom, because they know that if the construction boom overheats, and we develop too many properties, then we may face a US style crash due to over-supply.

That is a possibility that I have been discussing for several years, and is just one of the reason why I think there is a chance of a crash around 2014-2015, because that is how long one can reasonably expect the forthcoming construction boom to kick off, build up steam, and then eventually lead to an oversupply of property. However, if the banks do move to restrict development, then we will simply get higher house prices due to an inadequate supply-side response.

Shadow.

i've been saying this for a long time, thant banks are restricting new supply to generate equity, thru pent up demand, in existing stock on their books.

al banks are overleveraged and they can't fix it without generating cash. they can't generate cash because they can't print, so they constrict supply which drive up prices and generates equity in case the need to foreclose comes about.

you watch - and mark my words because i've been nigh spot on lately - 3 missed mortgage payments will result in foreclosure. the 12m mandated repayment holiday will end and foreclosure rates will "skyrocket" and the banks will take the profit generated from the foreclosure sale - and they know it will sell because THEY generated the demand thru lack of new supply.

there'll be no chance for YOU to sell the home because then they just get their money back and you get the profit.

you'll all get the little booklets explaining their changes and you'll all throw them out without reading it.

 

[Savanna100]

I've been thinking along these lines since late last year. I bank with two banks. I went to bank (a) and asked for a loan on an existing house (105% lend) for $490,000, rent $330/wk. They said yer no probs. I decided it was too risky and return was too low so didn't go ahead. A couple of weeks later I went to bank (b) and said I want to borrow $350,000 to build two houses on land we already have, rent will be $800/wk on completion. I didn't go through the formal process but they advised they may not lend me the money to do it. It doesn't make sense.

argh !!!! unbelievable. The banks are really stymying development in this country at a time when the development assessment process, a well known bottleneck, is rapidly being reformed so that development can happen more quickly.

It will be a while before we have an oversupply of new housing so this is a poor outcome from that point of view. Also, what about knockdown rebuilds or knockdowns for units? They should escape this problem simply because they are existing houses in both cases. Even if you cant rebuild, you could land bank this way until such time as the rules were relaxed a bit.

argh ..Bloody banks !!!!!

 

[INVSTOR]

Hi Savannna100, my property is a cashflow positive triplex block so the intention was to build two more houses behind.

INVSTOR,

If you dont mind me asking, who said yes to 105%?
I know STG wont go above 95%

Thanks

Hi TigerGT, I'd rather not say to anyone I don't know, sorry

 

[Savanna100]

Hi Savannna100, my property is a cashflow positive triplex block so the intention was to build two more houses behind.

Thanks for that. I really hope as many developers and would-be developers post on this thread as its important to know as much as possible about the current state of lending for development.

I have a town planning biz but if I re-set it to an after hours biz and get a proper job, I can borrow up to $600k (with my partner). This is my current intention. I was thinking of buying 3 regional centre properties and dual or triple occ-ing each one but it seems that it may be too difficult to do anything other than buy and hold them.

Just speculating out loud, I wonder what the world would have to look like for banks to lend freely for development again.

 

[Ausprop]

I think all but the biggest blue chip developers have given up. there are no funds readily available.

credit for purchasrs tightened as well. the future IMO is set - housing supply restrained, but you cant buy them anyway. cap growth will be lower and yields higher. this makes sense... rents have been untenable for way too long anyway

 

[Savanna100]

i've been saying this for a long time, thant banks are restricting new supply to generate equity, thru pent up demand, in existing stock on their books.

al banks are overleveraged and they can't fix it without generating cash. they can't generate cash because they can't print, so they constrict supply which drive up prices and generates equity in case the need to foreclose comes about.

BlueCard, what you say makes a lot of sense to me and I'm sure that banks are absolutely capable of thinking like this and being this cynical ...they have shareholders to put first, after all.

 

[Ausprop]

BlueCard, what you say makes a lot of sense to me and I'm sure that banks are absolutely capable of thinking like this and being this cynical ...they have shareholders to put first, after all.

there are all sorts of motivations, St Georgepac appointed receivers to 152 of their clients and liquidated them even if their defaults were technical in the slightest... doesn't sound like a bank wanting to prime up asset values.

 

[Aaron Sice]

but that's westpac and it's run by a woman.....

JOKING ALREADY!

 

[INVSTOR]

If banks won't lend to developers, will that affect building companies and tradies - (lack of) income or will there be enough owner occupiers to keep it going?

 

[Savanna100]

If banks won't lend to developers, will that affect building companies and tradies - (lack of) income or will there be enough owner occupiers to keep it going?

The short answer to that would have to be "yes"

I know that when I last consulted 3 days a week to a Council, work really dropped off as less development applications were coming through the door as my developer applicants were finding it harder to get finance. Quite a change from there being so much construction work, tradies had to come down from Sydney.

 

[INVSTOR]

Schools around Aus are currently construction sites. It will be interesting times when the school buildings are complete.

 

[Savanna100]

I was part of the NSW nation-building task force last year but finished with them before Xmas. At last count my former colleagues had completed over 800 development assessments for schools across NSW. This will provide construction work for part of this year but the work is supposed to by finished by September or thereabouts.

There will be tradies and subbies looking for jobs after that but most of the metropolitan works were undertaken by only 4 or 5 big building companies.

 

[Shadow]

NSW government changes policy to encourage construction boom!

When asked about the construction boom in the past (i.e. why will a construction boom happen) I always give two possibilities:

1. Government policy will change (for example, reducing the taxes, restrictions and red-tape that currently restrict new development).

or

2. House prices will rise to a level whereby developers can make a decent profit despite the government's restrictive policy.


It looks like what we have here is number 1. A government policy change to encourage development. I wonder if CBA had some wind of this when they decided to tighten credit to developers (as per the articles discussed yesterday). This is a significant move, and may be considered to be the beginning of Australia's forthcoming construction-led property boom.

http://www.smh.com.au/nsw/private-land-to-be-seized-for-housing-20100311-q1l0.html

Private land to be seized for housing

MATTHEW MOORE URBAN AFFAIRS EDITOR

March 12, 2010

THE state government is rushing to prepare laws to create a development authority with sweeping powers to compulsorily acquire and rezone privately owned land for resale to developers.

With Sydney's population set to grow 40 per cent to 6 million in the next 25 years, the government has decided it needs a metropolitan development authority to buy privately owned land near rail and bus routes for medium- and high-density housing.

Legislation for the new authority, believed to be the first of its kind in Australia, will be introduced before June in an attempt to increase housing construction rates, which are the lowest on record even though the city's population is growing at the fastest rate since the 1960s...

Continues... http://www.smh.com.au/nsw/private-land-to-be-seized-for-housing-20100311-q1l0.html

 

[bene313]

When asked about the construction boom in the past (i.e. why will a construction boom happen) I always give two possibilities:

1. Government policy will change (for example, reducing the taxes, restrictions and red-tape that currently restrict new development).

or

2. House prices will rise to a level whereby developers can make a decent profit despite the government's restrictive policy.

How about:

3. Land values to fall, thereby acheiving the same as (2).

Perhaps this coincides with (1) also in that land values could fall if the goverment were to increase supply of available land for development.

 

[Shadow]

How about:

3. Land values to fall, thereby acheiving the same as (2).

Perhaps this coincides with (1) also in that land values could fall if the goverment were to increase supply of available land for development.

Yes, it is pretty much the same as point 1. Well, actually there are two ways that land values could fall - reduce population growth, or increase supply. But successive governments seem pretty keen on a 'big Australia' policy, with high migration levels and strong population growth.

 

[Aaron Sice]

shadow - that link seems more like land confiscation for the govt to develop - thereby taking the future profit off developers and putting it in govt coffers.

may be the only way to go - think about it.

you can't develop because you can't get finance. so you're sitting on this block of land and the govt steps up and "we'll buy it, sonny", so you sell to them for stupid govt rates and then they get to develop and sell and take the profit topay for their past ineptitudes and fund - i dunno, hopefully better rail network but more than likely put into more police drug cartels (sorry, i meant police drug UNITS...).

makes me wonder if the NSW govt and CBA are in collusion - to be honest, i don't think ANYONE would put it past them. collusion is obviously a big call, but maybe the NSW govt are now a predatory force?

cynical? sure. in a world full of happy-go-la-la folk with no care in the world, something like this could sweep well under the radar.