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The slowdown in residential construction work comes as Melbourne and Sydney grow at near record rates.

Major developers are predicting that a “vicious cycle” of unaffordability will emerge in Australia’s property market, particularly in Sydney and Melbourne, as new construction is hampered by falling prices on the one hand and rising costs driven by extraordinary levels of infrastructure investment on the other.

At the Future Examined panel discussion on the outlook for property hosted by The Australian in partnership with Deakin Business School, Adrian Pozzo, CEO of Cbus Property, admitted they were sitting on land, rather than developing it, until the property downturn eased. He raised concerns that there would be a significant shortage of new apartment supply in the next five years, even as the populations of Sydney and Melbourne grew by more than 200,000 people a year.

Mr Pozzo, who overseas a $3.2 billion portfolio with a further $5bn of development work “in hand” said the industry was in a perfect storm between the royal commission-induced credit crunch, confidence in government policy and declining consumer sentiment.

 “There are no presales in respect to the investment market, and there is no necessity to buy off the plan because there aren’t any concessions,” he said. “So I sit here and in five years say you will have cranes for commercial towers but you won’t have many cranes for apartments.”

According to Mr Pozzo, that will make affordability worse in Sydney — a city he says is still too expensive, despite registering falls of up to 20 per cent for apartments in some areas. “Sydney has got a problem,” he said. “We’ve got a great portfolio of resi (residential construction) that has stopped. We are going to have an undersupply. It’s a vicious cycle.”

Carolyn Viney, executive general manager of Vicinity Centres, which has $37bn in retail assets under management, told the audience that consumers would need to reset their expectations about the value of property.

“Melbourne and Sydney in particular have had sustained growth in property for so long at very, very high levels that are actually abnormal, but we’ve gotten to a place as a community where we actually think it’s normal,” she said. “It [the price decline] probably always had to happen. And the clearance rates over the last quarter are definitely a concern.

“I think the biggest fear for the property sector as a whole is that the reaction from royal commission findings is actually going to exacerbate the issues around supply and affordability and the market engagement around investing in real estate if we just make it too hard at an investor end and owner-occupier level.”

Mr Pozzo added that both government policy and the banks’ reaction to the royal commission were effectively driving foreign buyers out of the market, compounding the situation.

“I was at a function last week with a CEO of a bank who spoke of settlement risk with overseas buyers. They will not lend to overseas buyers now if they have no local income, full stop,” he said. “So it doesn’t matter if you’ve got income in China or in Hong Kong of $2bn or $2 million. If you’ve got no Australian income, you will not get a loan from an Australian bank to settle an apartment.

“The government needs to relent on these stamp duty issues with all those foreign taxes. They’re going to be hurting in two or three years, because once they don’t see the stamp duty revenue that they’ve supposedly forecast, there’s going to be a big hole in everyone’s budget.”

The slowdown in residential construction work comes as Melbourne and Sydney grow at near record rates. At 130,000 new people a year, Melbourne’s population growth is the fastest since the 1850s gold rush, while Sydney is adding 100,000 a year.

Bernard Salt, managing director of the Demographics Group, told the audience there would need to be massive investment in ­infrastructure to cope with the ­influx. But with Victoria only investing half of what NSW had invested over the past 12 years in infrastructure, he predicted a huge increase in government spending.

 “If Melbourne adds, say, 3 million people in the next 30 years, then half of that growth is going to be on the west side [of the city],” Mr Salt said. “Melbourne currently has 13 railway lines feeding into Flinders Street [station]. If you add 1.5 million people on the west side, then the six railway tracks that go into Southern Cross must be leveraged upwards.

“And I’m saying, well, if Melbourne is growing faster than Sydney and we have underspent in infrastructure then the 2020s should be the greatest infrastructure burst of activity in Melbourne since the 1880s.”

Mr Pozzo warned that massive spending on civil works would make the “perfect storm” worse for developers as costs were driven up. “If you’re going to take out infrastructure to 2020 to 2030, we have a problem in the government sector because all our trade costs are going to go through the roof,” he said. “We won’t get any steel. We won’t get any concrete. We won’t be developing anything because we won’t be able to compete with the government handouts for infrastructure.

“Unfortunately, with all this infrastructure they’ve killed development costs for commercial and residential apartments because everyone is working on the road. You’re second and third because there’s more money in civil works than there is in building works.

“This reminds me of Perth five, six years ago, when the government was throwing all this money [around], getting everything done, and the world just stopped.”

Another pressure adding to the industry’s woes was continued ­uncertainty around government policy. Cressida Wall, Victoria executive director of the Property Council of Australia, told the audience the lack of political certainty was the single biggest challenge facing industry.

“The changes of policy setting, when I talk to our members, are just baffling,” she said. “You can’t put a pipeline in place.”

Mr Pozzo was unsure whether Labor’s policy to change negative gearing would help make housing cheaper. “Should they win in March, I don’t think you have a massive dump of houses for sale. We’re still going to have this affordability issue for a long, long time,” he said. Ms Viney was concerned that with so many elections taking place simultaneously, it would be a long wait before clear policies emerged.

“We have one-term governments consistently [with] one set of rules for a very brief point of time,” she said.

“Then we have an election and that creates uncertainty so no one does anything for a period of time and then, after the election we have uncertainty, so no one does anything. We want the rules to be good, but if they’re not perfect, but known, the market can respond to those rules; it’s the absence of any long-term certainty that is the worst evil of the lot.”

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Originally published on The Australian

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the future examined