[+] It All Just Got Harder: Rate Rise Will Cruel Housing Plans

For Queensland developer Don O’Rorke, the arithmetic is simple: he can’t produce an apartment for less than $15,000 for each square metre of net-sellable area. Which means a 100sq m must be sold for $1.5 million or more. “So now we only pursue sites where we know we can get $15,000 a square metre, or better,” the Consolidated Properties Group chief executive says. “And that’s generally inner-city riverfront.” That’s where the equation comes to an end. At those price points, Consolidated Properties is deliberately targeting the downsizer Baby Boomer market—those who want out of their three and four-bedroom, empty-nester houses. With no mortgage. First-home buyers need not apply. “From a developer’s perspective, our job is to make products that people can live in, work in and shop from,” he says. “This makes our job harder. “And after today? Our job will be incrementally more difficult.” The Reserve Bank of Australia stared down political pressure on Tuesday and raised interest rates by 25 basis points to 4.35 per cent. It was the 13th rate hike since May last year and now means anyone with a $750,000 mortgage is paying $1815 a month more than they were 18 months ago, according to the financial comparison website RateCity. Underlying inflation remains higher than expected, according to the RBA. ▲ RBA governor Michele Bullock: Costs of services are rising briskly. “Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago,” RBA governor Michele Bullock said after the board’s meeting. “The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly,” she said in a statement. “Conditions in the labour market have eased but they remain tight. Housing prices are continuing to rise across the country.” Property developers don’t need to be told. The Sydney-based property and construction group Traders in Purple currently counts 25 projects in various stages of development across Australia. They are now re-evaluating each project every three months. “In this environment we are now looking at some of those projects that would have worked a few years ago that just don’t work at the moment,” Traders in Purple director Charles Daoud says. “And yes, we’re having to postpone plans for some of our projects.” He points to a 200-apartment project slated for a development on a 7500sq m lot about 8kms from Brisbane. “We’ve just put that on hold,” he says, “even though we deliver these developments ourselves. We are our own builders; we bought the land very well, at a low cost. “Now we just have to wait.” Like Consolidated Properties, Daoud says they are now concentrating on the higher end of the residential market. ▲ The new interest rate rise means anyone with a $750,000 mortgage is paying $1815 a month more than they were 18 months ago. “We do projects from the social housing, all the way through to really high-end luxury,” he says. “But those properties, those development sites where they have higher-end potential, will likely take precedence in our organisation. “Because the ones we are delivering for that mid-market are just not feasible at the moment.” In May this year Consolidate Properties broke ground on its $450-million Monarch development—a 224-apartment project across two buildings on Brisbane’s riverfront. Of those 224 apartments, just 40 are left to be sold. Eighty-eight per cent of the pre-sales, says O’Rorke, have gone to Baby Boomers from the western suburbs looking to downsize. “They’re looking to sell a big house and move into something that more suits their lifestyle, generally an apartment,” O’Rorke says. “They’re completely different to the young couple walking into a sales office in Springfield, for instance. “At the end of the day, the numbers have got to work for us if we’re going to produce those products,” he says, “and without those products, you know, our society is worse off.” AMP Capital’s chief economist, Shane Oliver, tells The Urban Developer the RBA’s interest rate strategy is working. “I think there’s clear evidence that higher interest rates work to slow inflation by slowing demand in the economy,” he says. “And we have seen demand slow down. We’ve also seen inflation slow down. “We are seeing consumers slow down their spending, we’re seeing the jobs market slow down—job vacancies have fallen five quarters in a row now, which suggests that the labour market is cooling. ▲ Consolidated Properties’ Monarch development on Brisbane’s riverfront. Nearly 90 per cent of sales are to Baby Boomers wanting to downsize. “So, I think it is working, perhaps taking longer than they might have hoped,” he says. “The economy has proven to be more resilient, I suppose, than I certainly expected.” Oliver concedes it’s been a rocky couple of years for development and construction. “More recently, they’ve been hit by higher interest rates on their own debt and now falling demand from potential customers,” he says. “But it’s all occurring at a time when the fundamental demographic-driven demand for housing in Australia remains very strong, which is evident in rising home prices. “So it makes it hard for a developer.” O’Rorke says the ongoing interest rate hikes have meant developers can take less debt into a project and must replace that with more equity. “One of the measures providers of debt look for is interest rate cover,” he says, “so if your cash flow is fixed, and the interest rates go up, you can borrow less. “If you want to do a project, that means you’ve got to top that up with equity.” And ultimately equity is more expensive than debt so again, that problem of high cost of capital ultimately has to translate to higher cost of product.” When is enough, enough? When will interest rate rises end? Oliver can’t say but would like to see the Reserve Bank pause longer between rate rises to allow the economy time to catch up. He fears recession. “The problem with economics is that there’s always a judgment call about whether you’ve done enough or not,” he says. If the RBA doesn’t do enough, the country will have higher inflation, for longer. Which ultimately will adjust and mean high interest rates for longer. “But if they over tighten, then the risk is you end up in recession,” Oliver argues. “What the previous Reserve Bank governor called ‘the narrow path between doing too little and doing too much’.” “There’s no clear answer as to when you’ve done enough. You will only know that with the benefit of hindsight.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] It All Just Got Harder: Rate Rise Will Cruel Housing Plans

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