Top 10 Unit Oversupply Areas in Australia

Property markets around Australia are facing headwinds, in fact they are facing challenges from many directions.

But as always our markets are fragmented.

Some areas are performing well, especially established suburbs in our capital cities and some regional locations.

While other segments of our property markets are best avoided.

RiskWise CEO Doron Peleg said property investors should be extra cautious of the high degree of risk associated with off-the-plan units, that has further increased due to the COVID-19.

The equity risk, being the risk for price reduction that already had been high prior to the COVID-19, has further increased as investor activity is lower, and their awareness of the risks associated with rental apartments has increased.

COVID-19 has also increased materially the cash flow risk, as vacancy rates are at an all-time high peaking in May at 16.2 percent.

In June they dropped slightly to 13.8 percent according to SQM Research

The most risky locations

The table below lists the riskiest areas in the country in terms of oversupply, based not only on the supply itself but also on low demand for rental apartments, in relation to that supply.

Pete Wargent said that units, particularly off-the-plan purchases, still carried a high level of risk of significant price reductions.

"Areas with high unit oversupply carry ‘a very high risk’ and this is still a major issue in some property markets, for example in Melbourne’s CBD, while the same city simultaneously has an undersupply of family-appropriate properties."

Mr Peleg of RiskWise explained that..

"The high-profile issues around cladding and defects has created enormous ‘reputational damage’ across the entire industry and because of this, investors have lost interest in high-rise unit developments and were turning to “safer” house-and-land packages suitable for families."

Rents are slumping in these locations

Rental values have also slumped across the country, according to CoreLogic falling 0.5 percent in the June quarter - the sharpest decline in two years. In addition, unit rents have been hit the hardest with falls in both Sydney and Melbourne of 2 percent over the past three months.

Mr. Peleg said investors buying rental apartments unsuitable for families were taking an enormous gamble, with both equity and cash flow risk expected to materially increase.

Serviceability is also a major factor for investors who rely on a stable rental income to cover the costs associated with property and particularly the mortgage.

Pete Wargent noted that uncertainty in the economy has been heightened in 2020, and that buying into oversupplied areas at a time when the international borders are effectively shut this would only serve to compound risks saying:

"Rental markets have been weak for inner-city apartments due to the absence of international students and tourists, and that where possible buyers should look towards more supply-constrained markets and assets with a genuine scarcity value.

Over the medium to longer term, it’s the land value component of the asset that does the heavy lifting for you and, therefore, buyers should look for a high land-to-asset ratio.

The unit oversupply issue has been with us for some years now, and outperformance has mainly been in family appropriate dwelling types in markets where demand is consistent and new supply has been restricted.

For example buying new apartments in outer suburban areas like Rouse Hill Sydney make no sense.

“While it may be nice to have a shiny new kitchen and bathroom, there is a significant downside price risk as the supply of land for further development is plentiful. Investors and home buyers are far better off seeking apartments in locations where land supply is very low and demand for property high,”.

“In a market where prices are declining, there is a settlement risk for the buyer if they discover that the value paid for the unit has declined significantly.

“Say the purchase price was $650,000 some two years ago, but at settlement the bank valuation came in at $585,000 (i.e. 10 per cent lower), then the purchaser has to find an additional $65,000 to settle the property.

“This could be a serious problem for some cash-strapped buyers.”

He recommended seeking independent advice and guidance from a local expert buyer’s agent who understood the dynamics of the local property market.

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About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.