Long and Winding Road for Sydney Property

As we move into the Winter months it is becoming increasingly evident that there is a long and winding road ahead in the Sydney property market. Headwinds are being felt in two key areas. Firstly developers are struggling to get finance to settle development sites across Sydney. The major banks have pretty much vacated this funding space and finance that was obtained through Mezzanine funders and overseas investors is starting to dry up. The upshot will be that many very good high yielding development sites will come back on the market at a discount to prices previous paid by developers.

The second troublesome area is the increasing evidence that Chinese off-the-plan buyers are failing to settle properties. The biggest exposure seems to be the Melbourne apartment market where there is talk that as much as 40% of the new apartment sales to Chinese are likely to fall over. Your first reaction is that this might be a windfall gain for developers who get to keep the deposit and resell into a supposedly strong market. But more concerning is that the failure to complete contracts leads to pressure by funders to change gearing ratios to reduce risk by developers. It seems that the Chinese authorities are making headway into restricting capital flows from mainland China into Australia and this will have far reaching impacts into the Australian property market.

It is not a long stretch to see how these two combined effects lead to substantial discounts to newly completed properties. Banks then revise their Loan to value ratios and make calls to new home owners asking for capital contributions. Our valuation downward spiral would then begin and feed on its self. We are not there yet but investors need to keep a watchful eye on Sydney property prices.

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