Undertaking a development in which you confront and conquer planning, selling, construction and settlement risk is difficult enough for any seasoned developer. But over the last 12 months, the Australian government has introduced a raft of legislative changes that have further exacerbated the challenges facing developers.
Not only are these changes affecting developers and creating stronger headwinds, but they’re also creating a ripple effect which may have significant consequences for the property industry as a whole.
To compound matters, developers are now facing uncertainty in respect to off the plan settlements due to tighter lending restrictions imposed by the banks.
Prior to July 1, 2017, off-the-plan stamp duty concessions were available to all types of property purchasers, including local and international investors, but today, these savings are only limited to owner occupiers purchasing below a certain price point.
The government has also introduced a 1 per cent vacant property tax and for foreign investors, this jumps to 5 per cent. In addition to this, foreign investors are also required to pay a capital gains tax at 12.5 per cent of the sale price if a property is sold for $750,000 or more.
The introduction of these changes has placed foreign investors and purchasers at a distinct disadvantage. It was reported in September 2018, that the number of properties approved by the Foreign Investment Review Board dropped by a staggering 27,000 properties in a single year, from 40,149 in 2016 to just 13,198 in 2017.
The consequence of these changes is that investors have retreated from the market in favour of other asset classes. This is a cause for concern when prior to these changes being introduced the Property Council of Australia reported that investors accounted for greater than 50 per cent of off-the-plan apartment sales.
Pre-sales are vital to the success of any multi-unit development as construction funding cannot be obtained until a satisfactory level of pre-sales is achieved. But if investors are retreating and foreign purchasers vacating, developers are left relying on the owner-occupier market.
But the challenges don’t stop there
As a result of banking regulatory changes and the Royal Commission, a credit squeeze has ensued with tighter lending restrictions, resulting in housing credit growing at the slowest monthly pace since 1984. When Australia’s housing market was at its peak, buying off the plan was an attractive choice for many as only a 10 per cent down payment was required prior to settlement, with the remainder paid some 18 months to two years down the track.
But with national dwelling prices dropping 2.7 per cent in the past 12 months, off-the-plan buyers are now struggling to settle at completion due to valuations coming in below the purchase price and banks getting tougher with lending.
This credit squeeze, coupled with the legislative changes and negative media reporting on the property market is having a psychological impact on owner-occupiers, investors and overseas purchasers.
Australians have gone from a ‘fear of missing out’ mentality to ‘the joy of missing out’ and this is a dangerous mindset for the construction and development industry.
A lack of confidence in the market leads to fewer off-the-plan sales, which in turn, means new projects will not commence construction. The property industry accounts for 13 per cent of Australia’s GDP and for every $1 million spent in construction output, $2.9 million is contributed to the economy.
So when a project of 35 apartments with a construction cost of $10 million is shelved, 105 jobs are lost.
The consequences of reduced development activity
Whilst these measures by the government have taken the heat out of the residential market in the interim, the consequence of reduced development activity will see a rise in unemployment, a thinning supply pipeline and subsequently, a decrease of housing affordability.
Let’s not forget that Victoria is experiencing unprecedented population growth, with approximately 137,000 more people coming into the state over the year to March 2018, yet our housing market remains heavily undersupplied.
Based on the assumption that Melbourne’s population continues to increase by 120,000 per annum and there are approximately 2.7 people per household, we would require around 45,000 new dwellings per annum.
Prior to the current environment, it’s fair to say that developers were not able to satisfy the existing demand for new dwellings, so why then, are we making the environment so challenging for developers, when they’re such a vital catalyst for economic growth?