More housing market shockwaves predicted as interest hikes hit property developers

More pain comes to the Aussie housing marketa construction insolvency expert has warned, as the nation’s biggest developers face broken sales deals, cooling demand and some of the most difficult conditions hitting the industry for years.
“It was in the tea leaves,” Jirsch Sutherland partner Andrew Spring said of the severe headwinds, which he predicts will only intensify over the next two years. interest rate follow.

He said it was ‘inevitable’ that more big developers would collapse in the coming months, following a host of other big-name Australian construction companies that were unable to survive in the current market.

The viability of ongoing developments is under intense pressure, due to rising interest rates and other factors affecting the sector.
The viability of ongoing developments is under intense pressure, due to rising interest rates and other factors affecting the sector. (SMH / James Brickwood)
The developers are already dealing with a nightmarish stacked game of increased material costsshutdowns related to COVID-19, supply issues and labor shortages.

“The concern about rising interest rates is that it will dampen or eradicate the housing boom to such an extent that the buyer fears that the value of their property will continue to rise and that they may actually decline,” Spring said.

That fear, he said, could see end users withdraw from real estate transactions, banks approve fewer mortgages and investors cautiously withdraw.

“Prices could start to weaken even faster,” he said.

“For the developments that are being built right now, if they have presales in place, what’s the risk now that those presales will actually end?”

Spring said he has heard a growing number of stories of developers approaching buyers asking for more money so homes or apartments can be completed.

“At what point is there a tipping point where you say, ‘Well, actually, I can’t make any more money and I’m not going to finish these projects.’

Demand has driven up the cost of materials, making pre-negotiated contracts no longer make financial sense for some under-pressure developers.
Demand has driven up the cost of materials, making pre-negotiated contracts no longer make financial sense for some under-pressure developers. (AFR / Nic Walker)

“And if the sale fails, what does the developer do with this property?

“They have to bring it back to market, which creates oversupply and does that also drive prices down?”

Spring said last week’s rate hike, from 0.10% to 0.35%is not in itself a huge problem, it is the imminence RBA interest rates are climbing towards 2%, which is really going to start to bite.

AMP Capital, which called the rise to 0.35% “above market expectations”, forecasts the RBA’s cash rate to reach 1.5% this year and 2% by mid-2023.

“This is obviously going to shake consumer confidence, and as a result (we) may well see the rush to buy property subside, which will at least keep house prices up and potentially exert a downward pressure on prices,” Spring said.

He said material cost and labor shortage issues are “only getting worse” in 2022, largely due to massive demand caused by catastrophic flooding in New South Wales and in Queensland, and ongoing heavy rains.

The cost of building materials has increased by 15-20% throughout 2021.

“When there’s super demand, prices are obviously going to go up,” Spring said.

“That’s another explanation of why this is something that’s on the cards, we’ve created an inflationary environment, interest rates have to follow to deal with that, and all of that puts pressure on this one industry.”

Thanks to exploding costs, pre-negotiated contracts were unsustainable and pushing developers to the brink, with some already collapsing.

AMP Capital predicted home prices would fall 10-15% by early 2024.
AMP Capital predicted home prices would fall 10-15% by early 2024. (AFR / Robert Rough)
Giants like Probuild and Condev have already folded, while Privium Group, Dyldam Developments, the Hotondo Homes Tasmanian Constructions franchise, ABD Group, BA Murphy, Pindan and Inside Out Construction have gone bankrupt in recent months.

“It’s inevitable that there will be a lot more insolvency in the construction industry,” Spring said, which will inflict a “domino effect” on builders, contractors and trades.

AMP’s chief economist, Dr Shane Oliver, has predicted that rising interest rates will cause house prices in Australia to fall by 10-15% by the start of 2024.

The RBA would only raise rates “to the extent necessary” to calm inflation, Oliver wrote in a market note, following the RBA’s decision last week.

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“It won’t be on autopilot of the reckless rise and fall of house prices and the economy in the process,” he continued.

“Instead, after a few initial hikes, it will likely pause to see what happens before doing more, but rates won’t reach nosebleed levels.”

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