New research suggests that prices in Australia’s unit market set to rise

Australia’s housing market has begun cooling from its peak, with rising interest rates, increasing inflation, higher construction costs, low vacancy rates, and increasing rental prices weighing on the market.

There is a lot of discussion about how these various factors are affecting the housing market, but what about the apartment market?

Analysis by Charter Keck Cramer’s of how these trends are playing out in the apartment markets in Sydney, Melbourne, and Brisbane suggests that demand for apartments may be about to surge and that the mismatch between supply and demand will likely force unit prices to rise.

Here’s why.

Apartment supply is low

Firstly, Charter Keck Cramer’s data shows that the number of apartment projects launched ‘for sale’ to the market is substantially below their respective 10-year average in Sydney and Melbourne, and marginally below the 10-year average in Brisbane.

This is important because it represents developer sentiment.

After all, a developer will typically only launch a project to market when they’re confident they can achieve sufficient presales to get contribution funding.

There are several apartment projects, however, that were launched (or pre-sold) based on pre-COVID-19 revenues but which are now no longer financially feasible due to the increased construction and materials costs.

There are also numerous projects that have development approval but are not being launched to market.

Understandably, many developers are afraid to push prices given current market conditions, Charter Keck Cramer explained in their recent market update.

Submarkets

But there are some submarkets that are likely to be actively looking at apartments.

These include:

1. Downsizers

Downsizers and right sizers are a market segment that will be actively looking for apartments.

Households are ageing and many are seeking to (or will be forced to) downsize or ‘rightsize’ in the short to medium term as their living preferences and housing requirements change.

Also noteworthy is that many households in this particular market segment don’t need finance given they have paid off (or have significant equity in) their family home and are therefore less affected by rising interest rates, the report explained.

And at the same time, many of these households have been able to enjoy significant price increases in their existing dwelling during the pandemic property surge alone.

In other words, the price gap between apartments and houses is such that even if house prices decrease by -10% and apartment prices increase by +10% they are better off than before COVID-19.

Finally, thanks to the recently announced amendments to the “downsizer scheme” for Australians aged 55+, the pool of downsizers has also potentially increased.

2. Investors will return

Supply and demand pressures in the rental market, owing to declining vacancy rates, have seen weekly rental prices storm higher.

Given interest rates are now rising, investors will likely begin to look for assets to use as a hedge against inflation and rising rates.

And as residential rents grow in an inflationary environment, apartments have the potential to achieve this goal, the report claims.

3. First home buyers are incentivised

From the first home owners' grant to a first home deposit scheme, there are now several initiatives in place to incentivise first home buyers to get onto the property ladder.

And with house prices still at sky-high prices, the apartment market offers a more feasible option for newcomers.

“Many of these buyers have now been priced out of the established housing market and with their lending capacity diminished it is anticipated that demand from them stands to be driven into the apartment market,” the Charter Keck Cramer report said.

Sure interest rates are increasing, they are still low by historical standards and many households have saved money for a deposit during the lockdown.

Apartment prices will increase

Charter Keck Cramer anticipates that as the pressure and mismatch between supply and demand continue to build, prices will be forced to increase.

And that it will be the downsizers, right sizers, and investor buyer segments of the market that will be able to respond quickest to market changes.

The bottom line

Townhouses, villa units, and family-friendly apartments will be great investments over the next decade, especially considering their current affordable entry price compared to houses.

My advice to investors is to avoid:

• Packed high-rise apartment towers
• Locations right in the thick of the CBD – they’re over-supplied and have low growth drivers.
• Highly-featured complexes with lots of shared spaces that are expensive to maintain, like lifts, pools, and gyms

Instead, I suggest you look for larger apartments and units in middle-ring suburbs, which are close to good schools, parks, and cafes.

Throw in some good public transport links, and you’ve got the ideal investment for the Australian family of the future.

About Michael Yardney Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.