Could

uncertainty
be your best
opportunity
for growth?
Building resilience in Australia’s
slowing housing market
 House prices in Australia’s five largest capital cities have
fallen an average of 3.5% in the past 12 months, with the
sharpest drops in Sydney and Melbourne.
Over the last decade, national dwelling values have surged
by 43.9%.1 But after a prolonged period of strength, the
residential housing market is slowing.
While that may be a welcome trajectory for first home
buyers, there are implications for developers, builders and
financiers – especially those that are already highly geared.
How can your business build resilience to navigate a
softening market?

2 Could uncertainty be your best opportunity for growth?

A market snapshot
Australia’s economic fundamentals are strong after 28 years

5.9%
of uninterrupted growth. The nation’s GDP growth currently
sits at 3.4%, inflation at 2.1% and unemployment below 5.5%.2
Investment in infrastructure and dwellings remains high,
supported by a large pipeline of work.
The fall in Sydney’s house prices
However, there are clear signs the residential market is slowing.
CoreLogic’s mid-September update finds house prices have
fallen by 5.9% in Sydney and by 2.5% in Melbourne. Together, Meanwhile, a regulatory clamp-down is making it harder for
these two cities make up more than half of Australia’s entire people to borrow. Tightening lending criteria, introduced by
residential real estate market. banking regulator APRA in 2014, has deterred some investors.
Latest figures from the Foreign Investment Review Board
Capital city home value changes reveals a 67% drop in offshore buyers purchasing Australian
Weekly Monthly Yr to date 12 mth property as new state and federal foreign investor taxes take
Capital city
change change change change their toll.5
Sydney -0.1% -0.4% -3.7% -5.9% The Labor Party has proposed significant changes to property
Melbourne -0.2% -0.5% -3.8% -2.5% taxes if it wins government, notably around negative gearing
and capital gains tax concessions, which may cause further
Brisbane -0.0% -0.2% 0.2% 0.7%
disruption to housing markets.
Adelaide 0.1% 0.3% 0.7% 0.9%
And the Financial Services Royal Commission has compelled
Perth -0.3% -0.8% -2.7% -2.5% Australia’s biggest banks to address issues of transparency and
Combined accountability in mortgage lending.
-0.1% -0.4% -3.1% -3.5%
5 capitals
The ripple effect of the Royal Commission, tighter credit
The monthly change is the change over the past 28 days.
Source: CoreLogic Property Market Indicator Summary, all data to week ending
restrictions, new taxes on foreign investment, political
16 September 2018. uncertainty and highly-geared households is flowing through to
While interest rates remain at historic lows, Australia’s consumption and confidence in the broader economy.
household debt is among the highest in the world, exceeding The construction industry employs 1.18 million Australians –
120% of GDP. around 9.4% of the total workforce. Over the past five years,
While the Reserve Bank remains of the view that holding the employment in the construction industry has increased
cash rate steady at 1.5% promotes “stability and confidence”, by 17.8%.6 A stalling housing market can have massive
in August it noted that “higher interest rates are likely to be implications for unemployment rates.
appropriate at some point, if the economy continues to evolve While the RBA expects a “modest slowdown” in house prices,
as expected”.4 this deceleration may introduce risks to business models,
putting profit and equity at risk.

Australia household debt exceeds 120 percent of GDP

Note: Household debt as % of GDP

Source: Bank for International
Settlements, December 20173

Could uncertainty be your best opportunity for growth? 3

 120%
The percentage by which Australia’s
household debt exceeds GDP

What happens next?

The 1987 housing crash triggered the collapse of financial
institutions, interest rates of 17.5% and the “recession we had
to have”. Could this happen again? While the future is anyone’s
guess, falling residential house prices have several implications
for developers, builders and financiers:

1
Project and land sales slowing may affect the timing
of cash flows and payments. Existing milestones and
forecasts may be unachievable, placing pressure on
developers’ finance covenants. Cash flow constraints
may also impact development pipelines – leaving
developers vulnerable in the medium to long term.

2
Declining land values may impact loan-to-value ratios
and require developers to generate more or new
equity to get new projects off the ground. This will be
intensified by the possibilities above and the current
or forecast environment may not be conducive to
raising fresh equity so projects can be debt-funded by
traditional or even non-traditional lenders.

3
Sales prices decline and revenues from projects may
not cover returns to equity and debt holders. Such a
scenario may deter existing and future investors from
continuing to invest in these types of projects. Capital
starvation will lead to distress and likely destruction of
value on those projects.

4
Shrinking profit margins may prevent developers
from recycling capital and profits into future existing
projects which may put those projects in jeopardy.
It may become more difficult for developers to
repatriate capital to any non-traditional lenders to
projects – and these lenders may not be subject to
the same concerns about enforcing their rights to be
repaid as traditional bank lenders. This could lead to
an increase in “fire sales” which will re-set the market
and cause further concern from a finance perspective.

These potential scenarios will also create opportunities

for those with ready access to capital who are positioned
to take advantage of the downturn by acquiring new sites
and portfolios.

4 Could uncertainty be your best opportunity for growth?

 The bottom line?
Get your house in order.
To find out how EY can help
you build resilience in your
business, contact:
Richard Bowman
Partner, Valuation
& Business Modeling,
Ernst & Young Australia
+61 3 9288 8085
richard.bowman@au.ey.com
Brett Lord
Partner, Restructuring,
Ernst & Young Australia
+61 2 8295 6429
brett.lord@au.ey.com
Luke Mackintosh
Partner, Real Estate
How do real estate businesses build resilience? Advisory Services,
The strategy for managing shocks obviously depends on the shock itself – whether Ernst & Young Australia
that’s slowing demand, an oversupply of product, a credit crunch or increases in
input costs.
+61 3 9288 8411
luke.mackintosh@au.ey.com
Any real estate business can prepare for shocks by building its resilience. To do this:
Sebastian Paphitis
Right size the development for your market by understanding demand,
Partner, Capital &
1 which may mean targeting your product offering to suit the needs of
Debt Advisory,
owner-occupiers rather than investors
Ernst & Young Australia
Consider a restructure and how to recast your product mix, such as
2 tapping into government funding opportunities for social housing
+61 2 9248 4773
sebastian.paphitis@au.ey.com
Re-run feasibilities to sensitise the project returns based on changes to
3 revenue timing and value Selina Short
Diversify your capital sources and look broader than business-as-usual
Selina Short, EY Oceania
4 to new models like build-to-rent, or consider re-trading assets Managing Partner, Real Estate,
Hospitality and Construction
Undertake a desktop health check of labour and material suppliers
5 before striking any new deals +61 2 8295 6880
Assess investment and purchasing decisions and reconsider any
selina.short@au.ey.com
6 potentially risky strategies
Make contingency plans and look at cost cutting initiatives that can be
7 implemented if the trend continues
Manage your cash flow to ensure timings of inflows and outflows align
8 with your payment cycle
Check on the solvency of your sub-contractors and plan a response to
9 any potential insolvencies

10 Work with the experts in global property restructuring.

Could uncertainty be your best opportunity for growth? 5

EY | Assurance | Tax | Transactions | Advisory

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1 CoreLogic, How Have Dwelling Values Changed Over The Past Decade?, 23 July 2018, accessed online 24 September 2018
<https://www.corelogic.com.au/news/how-have-dwelling-values-changed-over-past-decade>
2 
Reserve Bank of Australia, Key Economic Indicators Snapshot, 6 September 2018, accessed online 24 September 2018
<https://www.rba.gov.au/snapshots/economy-indicators-snapshot/>
3 
Zabai, A., Household debt: recent developments and challenges, Bank of International Settlements, December 2017, accessed online 24 September 2018
<https://www.bis.org/publ/qtrpdf/r_qt1712f.htm>
4 
Reserve Bank of Australia, Statement on Monetary Policy, August 2018, accessed online 24 September 2018
<https://www.rba.gov.au/publications/smp/2018/aug/overview.html>
5 F
 oreign Investment Review Board, Annual Report 2106-17, accessed online 24 September 2018
<https://cdn.tspace.gov.au/uploads/sites/79/2018/05/FIRB-16-17-Annual-Report.pdf>
6 Labour Market Information Portal, Australian Government Department of jobs and Small Business, accessed online 24 September 2018
<http://lmip.gov.au/default.aspx?LMIP/GainInsights/IndustryInformation/Construction>