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.
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.
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.
But there are some submarkets that are likely to be actively looking at apartments.
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.
- Also read:Boom to bust: What makes property prices rise and fall
- Also read:Latest property price forecasts for 2024 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:Sydney property market forecast for 2024
- Also read:This week’s Australian Property Market Update – Latest Data, State by State November 28th, 2023
- Also read:The Boom and Bust of our Property Cycles: A Journey Through the Investor’s Mind
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.
- 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.
- 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.
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.
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.