The Scary "B" Word: Will Investors Create a Downtown Austin Condo Bubble?

Much has been written about the condo bubble in southern Florida, especially the dramatic rise and fall of the Miami condo market. Between 2004 and 2006, condos were being snapped up by investors and quickly flipped for a profit long before buildings were completed. As more and more investors joined the fun, condo units would often change hands like pork bellies -- and other dangerously volatile commodities -- many times before construction was complete. For a couple of years, condo investments seemed to have no where to go but up.

In the 10-years prior to the Miami condo boom, 7,000 condo units were built. At the peak of the boom, a total of 55,000 new units were announced. This is a LOT of units: enough apartments to fill 275 separate buildings with 200 units each for a city about twice the size of Austin. When the bubble burst, 22,000 were still under construction. The bubble ended badly with steep price declines, a lack of market liquidity for condo owners, and bankruptcy for some large-scale projects.

Will the same thing happen in Austin? The answer is that it is very unlikely. While future condo demand, prices, and appreciation (or depreciation) remain an absolute mystery, the market forces in Austin are very different from the market forces that drove the Miami condo bubble.

The problem in Miami was that prices were driven up by speculators who had no intent to live in the units they owned. Their hope was to sell the contract for a profit as soon as possible to another buyer. With too many investors and not enough real buyers, the cycle eventually ended. As investors pulled out and prices started to drop, speculators stopped investing in condos, significantly lowering demand. With a large supply of units and relatively few real buyers, prices continue to drop today. Like all declining real estate markets, many real buyers wait out the fall, waiting for the bottom to buy again.

So why won't the same thing happen in Austin? Developers have learned from the Miami example and put significant protections in place to protect themselves from speculators. When someone buys multiple units and goes bankrupt, developers are often left to pay the price -- as a result, they have a strong incentive to carefully screen investors.

For example, most major projects in Austin include the following investor safeguards:

- No flip provisions that prohibit owners from selling their contracts or units until after construction is completed. At projects like 360, some contracts limit owners from selling until 6 months after closing.

- Limitations on leasing units: Many projects require special deeds for investors who plan to rent their units to others. In some projects, these deeds are limited to 25% of the buildings units.

- Most projects that offer special deeds for investors that permit renting also require higher deposit requirements. Often, initial deposits are twice as high for investors as they are for owner occupants.

Together, these requirements make it less attractive for investors to speculatively invest on downtown Austin condo units in the same way that they did during the southern Florida condo bubble. In addition, the condo financing market has also changed significantly in the last 6 months, making it much harder for investors to borrow money for speculative units that they do not intend to occupy. Finally, while the rate of condo development in Austin is unprecedented by historical standards, it is far below the rate of development in Miami. During he Miami boom, 24.4 units were planned per 1,000 population. In Austin, the equivalent rate is 5.6 per 1,000 population, including thousands of units in projects that may never be built.

While nobody knows if Austin condo units will be a good or a bad investment, it's a healthy fact that many of the larger projects have protections in place to protect against Miami-style speculation.