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The tale of two inner city apartment markets

Following their post Global Financial Crisis downturn in late 2008, the inner city apartment markets of both Sydney and Melbourne boomed in the subsequent years, in part due to investor demand and in part helped by low stock levels.

But now these 2 markets are behaving differently. And considering the large number of units in the pipeline in Melbourne as well as the very different economic conditions around the world, what’s in store for our major inner city property markets?

According to an article published in Property Observer, senior manager of BIS Shrapnel Angie Zigomanis, suggests that investors returned in their droves to the inner Melbourne market as the economic outlook improved over 2009/10, while demand in Sydney recovered at a more modest rate.

Recognising their opportunity, Melbourne developers then cranked up construction of new apartments in late 2010 and the first half of this year, with some experts suggesting new projects in the pipeline will hit the market at saturation levels.

I’d agree with this  – there are way too many inner city apartments coming on stream in Melbourne in the next few years and this will cause disappointment and financial loss for many off the plan purcahsers.

In the article BIS Shrapnel question whether these inner-city apartment market conditions are conducive for the upturn in Melbourne to be sustained and to create a further upside in Sydney.

To answer this question, Zigomanis says analysis of the population profile of inner city apartment occupants is relevant. According to Census data, in both Sydney and Melbourne the vast majority of inner city apartment occupants can be divided into three categories;

  1. students – largely from overseas,
  2. young professionals typically employed in white-collar occupations in and around the CBD and
  3.  older empty nesters who downsize when their children leave home.

The latter demographic are typically owner occupiers, while the first two make up most of the apartment market’s tenant pool.

As the Australian economy quickly recovered from the GFC, demand for inner city apartments from young professionals rebounded, after slowing somewhat as the world held its breath and waited to see what would happen as the crisis played out.

Although there has been a slight decline in overseas student numbers due to the high Aussie dollar making other countries more appealing, cheaper education options, student demand has remained relatively solid.

Prior to the GFC, Melbourne investors jumped ship and left the inner city apartment market high and dry as a large number of owners were caught out having paid top dollar for off-the-plan purchases and then seeing values decline in the sector as stock levels increased rapidly across the Docklands and Southbank precincts.

Post GFC off the plan apartment sales recovered well, while new apartment completions slowed; this occurred over 2010/11 in Sydney and in 2009/10 for Melbourne and as a result, Zigomanis says new supply for the remainder of 2011 and into 2012 will remain below Sydney’s long term average and slightly above Melbourne’s long term average.

“This will not be high enough to create a significant impact on vacancy rates,” he says. “And the environment for pre-sales from this perspective will still remain relatively positive in 2011/12, particularly if the economic environment and confidence improves.

“The challenge will emerge from 2012-13, as new apartment completions will rise well above the long term average in both Sydney and Melbourne, and this is where differences will occur across the cities.”

With off the plan sales of apartment stock currently in the pipeline for Melbourne rapidly outpacing those in Sydney, it’s anticipated that apartment completions in Melbourne will reach record levels in 2013/14.

As I said – we have a huge oversupply looming which will see inner city vacancy rates rise and rental prices fall, particularly around 2013 and 2014.

On the other hand, new apartment completions in Sydney are lagging considerably behind the long term average and although “recent pre-sales are underpinning a sharp increase in new apartment completions in 2012-13,” Zigomanis says they do not believe there will be a significant impact on vacancy rates.

“This is mainly due to the substantial latent demand created by the low construction of the previous years. As a result, further solid rental growth in Sydney is expected to come through, particularly with employment and income growth anticipated to pick up pace over 2011-12 and 2012-13,” he says.

“Finally, unless a substantial increase in new supply comes through, it is likely that new apartment supply in inner Sydney will remain in deficiency. This will continue to maintain pressure on rentals and result in upward pressure on prices over the next two to three years.”

If you’ve been following my blogs for a while you’ll know I’ve been suggesting to steer clear of new and off the plan property purchases for the last few years. There are better places to invest your money.



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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 his opinions are regularly featured in the media. Visit Metropole.com.au


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