New Rules Too Late To Stop Melbourne CBD Oversupply

The Melbourne CBD apartment market is heading for an oversupply that will cause property values to drop and hurt investors.

And unfortunately it’s too late for the new laws set to clamp down on Melbourne CBD’s skyscrapers to stop the predicted drop in inner city apartment prices over the next few years.

Planning Minister Richard Wynne announced that the government will limit the height of future towers to 24 floors unless open space offsets are provided. city apartment urban

But these stricter new density regulations won’t stop a “correction” for inner city apartment prices according to BIS Shrapnel managing director Robert Mellor.

These planning approvals were still coming through the pipeline and would keep adding to the apartment supply, Mr Mellor said.

“This financial year we will reach an oversupply,” he said. In the next financial year, 2016/2017 he said there would be a “significant excess” of apartments.

Of course there’s nothing new about this – earlier this year Michael Yardney wrote why he was concerned by the looming oversupply of Melbourne high rise towers

Melbourne has brought a huge volume of apartment stock on line in the past couple of years

Recently we’ve been building about 60,000 apartments a year.

That’s about twice the average level of the past ten years.

And it’s created a growing over-supply of inner city apartments, verging on a glut.

But a lot of this explosion has not been driven to meet resident needs, instead…

A lot has to do with foreign investment

The current CBD apartment boom is being fuelled by foreign investment at two levels:

1. At the retail level overseas individuals are restricted to buying new or off the plan properties and boy are they buying up all those new high rise monoliths.

However many local investors are also buying into these new apartments blocks and they’re likely to be burned by long vacancy periods and falling property values.

2. At the wholesale level overseas developers with deep pockets are snaring large development sites ahead of local developers and it seems like their appetite for property can’t currently be satisfied – there are multiple bidders for any high rise development site offered for sale in the Sydney or Melbourne property markets.

With nearly all the projects pre-sold, there is little evidence of purely speculative property development by foreign investors.

However some have been caught with their pants down, having paid large sums for development sites on the assumption that they could build skyscrapers.

In some ways history repeats itself…

If you look back at the history of Docklands in Melbourne  you will find the developers overcommitted to apartment developments which then created a significant oversupply that continues to this day.

Many investors who bought in the Docklands have had little, if any capital growth for up to a decade, and while today there  are few vacant properties, in the past there were long periods of vacancies and this is likely to recur again as an oversupply of high-rise  towers in the adjoining CBD will compete for tenants.

In short…

Avoid investing in the Melbourne CBD or surrounding suburbs.

And if you have bought off the plan, see if there is a way that you can get out of your contract and use your money more efficiently elsewhere, otherwise you could be waiting a long, long time to see the capital and rental growth you’re probably expecting

Want more of this type of information?

Kate Forbes


Kate Forbes is a National Director Property Strategy at Metropole. She has 15 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a chartered financial analyst (CFA).

'New Rules Too Late To Stop Melbourne CBD Oversupply' have 5 comments

  1. September 18, 2015 @ 9:01 am PhillD

    To the point article, thank you. And sobering advice to people thinking of buying into this market or committed to buy.


    • September 18, 2015 @ 4:36 pm Kate Cull

      Thanks Philld, it certainly is sobering. Add in that many of the purchasers may be unable to settle and the situation looks even more dire.


  2. September 18, 2015 @ 7:32 pm George

    Yes, happening in Sydney too though not right next to the CBD. And yes, the Asians have been the main buyers. They will be burned two ways. Firstly as discussed in the article and secondly by the collapsing AUD. Some much for preservation of their wealth.


  3. September 21, 2015 @ 6:34 pm patricias

    I am anxious of my off the plan apartment(inner city ) that I purchased in 2012 in E 589 elizabeths street.I am a foreigner and wanted to use this investment for my children education in Aust. Right now I have been lucky to have a tenant. Pls advise what it would be like in 3 years time.What should my immediate course of action be to avoid and financial constrains.


    • September 21, 2015 @ 7:00 pm Michael Yardney

      I understand your concern – I would also be worried – that end of town has a few too many developments in the pipeline. You ask what it will be like in 3 years time – that’s hard to predict but none of the experts i know suggest it will be better – they all have the same concerns


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