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Don’t Let the Exaggerated Oversupply Commentary Prevent Investing

By June 19, 2017 Blog No Comments

A Look at Australia’s Housing Construction Cycle featured a recent research report by NAB Economics which stated that while the apartment construction pipeline is two times higher than historical norms across most states, most of the commentary related to these circumstances is “overly alarmist.” This industry is known for self-regulating its supply. Mortgage brokers in Sydney are following NAB predictions and forecasts in the coming two years, which point out the following.

NAB says, “Much has been made of emerging risks in the apartment market.” They also reported that some central business district apartment markets are already falling, but they believe this is mostly due to tougher credit rules, reduced construction capacity, and lower construction approvals, which diminish the rate of completed developments. Mortgage brokers can help with development loans in a variety of credit situations, which helps some borrowers get approved.

According to NAB, the apartment construction industry has demonstrated its ability to self-regulate supply in the past. This means there are likely some areas of the market that might experience excess supply, though lengthening the construction cycle often reduces risk of destabilsation in the market. The analysis from NAB shows the construction cycle could reach a peak sometime in 2018. The data analysed by NAB show that new projects could drop 13 per cent this year, 7 per cent in 2018, and 9 per cent by 2019.

NAB’s statistical models also predict that the large pipeline of current/ongoing projects will run down more slowly than the general commentary would suggest. NAB are forecasting a rise in dwelling construction of about 2 per cent in 2017, which may fall slightly to 1 per cent in 2018 and possibly rise to 3.5 per cent in 2019.

NAB states there are indicators that show the industry is already self-regulating dwelling supply. Approvals for construction have fallen from the peaks, but have not been as substantial as expected. There are signs of already approved projects taking longer to begin.

NAB predicts that we will most likely see longer construction cycles than previously believed. This will bring the industry’s peak level down, and help relieve concerns about oversupply.

Although prices for units have dropped a bit – and may appear unsteady – the above trends indicate that oversupply is unlikely.