Key takeaways
Apartments are currently driving value growth in the Australian property market, with new-build apartment prices projected to rise by 23% by 2026 due to a significant supply shortage.
New apartments are commanding substantial premiums over older stock due to better amenities like security, gardens, and gyms. The premium is 16% for one-bedroom, 30% for two-bedroom, and 45% for three-bedroom apartments.
Rising construction costs, stringent planning rules, and labour shortages are constraining new apartment developments, leading to a severe undersupply. This undersupply is most acute in urban centres like Sydney, Melbourne, and Brisbane.
Demand for apartments is being bolstered by the return of international students and increased immigration, as these groups typically favour apartment living for its affordability and proximity to city amenities.
Construction costs are increasing globally, and developers are being forced to raise prices or delay projects, exacerbating the supply shortage. Apartments will likely become more expensive as this trend continues.
CBRE predicts rents will grow by 25% by 2029, with two-bedroom apartments expected to cost over $600 per week across 90% of Australian precincts. Demand for new apartments will exceed supply, worsening the vacancy rate.
While new apartments will rise in price, established apartments, which are priced significantly below replacement costs, represent a strong investment opportunity. Investors should avoid high-rise towers but focus on well-located, family-friendly established apartments.
Australians are increasingly opting for apartment living over houses due to affordability constraints and lifestyle changes. However, this shift will come at a price, with apartment values growing faster than house values in many capital cities.
The Australian property market is once again proving its resilience, but this time, it’s not the usual suspects like houses or premium properties driving value growth—it’s apartments.
According to new CBRE research, new-build apartment prices are forecast to grow 23% by 2026 as supply tightens to around 45% below pre-pandemic completion rates over the next five years.
CBRE’s Pacific Head of Research Sameer Chopra said newly built apartments are commanding a premium price compared to older stock.
“These premiums are justified by changing consumer expectations around amenities, like building security, lift access, flooring to rooftop gardens and gyms, which typically come with newer builds,” Mr Chopra said.
New one-bedroom apartments are delivering a 16% premium compared to older apartments, new two-bedroom apartments are at a 30% premium and it’s a 45% increase for newly built three-bedroom apartments.
Of course, this means that established apartments are priced considerably below replacement cost today, which, in my mind, means they have substantial intrinsic value.
The perfect storm: limited supply meets growing demand
CBRE’s report sheds light on the factors likely to contribute to this significant price growth.
Australia is facing a critical housing supply issue, with new apartment developments slowing down in recent years.
Rising construction costs, stringent planning regulations, and labour shortages have all contributed to this bottleneck.
As a result, we’re looking at a substantial undersupply of new apartments in urban centres, particularly in Sydney, Melbourne, and Brisbane—cities where demand for apartment living remains strong.
Adding to this demand is the rebound in immigration and the return of international students post-pandemic.
Both of these groups tend to favour apartments over houses for their affordability and proximity to amenities.
With new apartment completions expected to fall short, demand will likely outstrip supply, putting upward pressure on prices.
In markets like Sydney and Melbourne, where land availability is limited, new apartments offer one of the few remaining entry points for those wanting proximity to city centres and employment hubs.
Escalating construction costs drive prices higher
The CBRE report points to another critical factor: the continued rise in construction costs.
Over the past few years, building materials and labour costs have increased considerably.
This inflation in construction inputs isn’t a temporary phenomenon—it’s part of a broader global trend affected by supply chain issues, trade restrictions, and heightened demand for infrastructure and housing projects worldwide.
For developers, this translates to higher costs per unit, which ultimately gets passed on to buyers.
Developers face no choice but to raise their prices without a corresponding increase in development incentives or planning efficiencies.
These rising costs have forced many developers to shelve or delay projects, exacerbating the supply shortage and creating a feedback loop where fewer available apartments drive prices higher.
Obviously, developers will only start constructing these projects when once they become financially Bible and that won’t occur until the cost of established apartments rises substantially, narrowing the gap in price between new and established apartments.
- Also read:This week’s Australian Property Market Update – Latest Data, State by State November 5th 2024
- Also read:How long will Australia’s rental crisis last?
- Also read:House prices vs Inflation in Australia 2024
- Also read:Melbourne property market forecast for 2025
- Also read:Sydney property market forecast for 2025
Rents will keep growing strongly
The CBRE report forecasts rents will grow by 25% ($170 per week) in 59 suburbs of Australian capital cities between 2024 and 2029.
By 2029, the rent for a two-bedroom apartment is predicted to exceed $600 per week across 90% of precincts.
In terms of supply, delivery of new apartments is expected to be around 50,000 per year from 2025 to 2029, but population growth is expected to require an apartment supply of approximately 75,000 per year to avoid further falls in vacancy.
In Sydney, apartment delivery is expected to average 12,100 per year from 2025 to 2029, with demand for stock averaging 30,00 per year across the next five years.
In the next three years, city-wide vacancy is expected to fall from 2.2% to 1.5%.
In Melbourne, apartment delivery is forecast to average 8,700 per year for 2025 – 2029, nearly 35% lower than in Sydney.
Demand for stock is likely to average 37,000 per year over the next five years.
City-wide vacancy is expected to fall from 1.8% to 1.4% over the next three years.
Why this is a trend to watch closely
The anticipated rise in new apartment prices by 2026 isn’t just a market prediction; it indicates how Australia’s housing landscape is evolving.
Apartments are becoming an increasingly essential part of our urban fabric, driven by affordability constraints, demographic shifts, and lifestyle changes.
Put simply… many Australians are trading backyards for balconies.
As affordability continues to be a challenge for many Australians, and the availability of new land dwindles, apartments offer an accessible and sustainable solution to housing demand.
But as the CBRE report indicates, this solution will come with a price—quite literally.
A window of opportunity with established apartments
There is no doubt the price of new apartments is going to increase significantly, but that doesn't necessarily make them good investments.
In fact, I would avoid apartments in large high-rise towers with all the strata costs and levies involved as well as concerns about quality.
However, currently, there is a window of opportunity to buy family-friendly established apartments in good locations significantly below their replacement cost.
In fact, in many of our capitals, apartments are growing in value faster than houses at present.
By carefully selecting locations and the right type of apartment, investors can take advantage of the shifts in Australian real estate.
And remember, in times of rising demand and limited supply, the properties that offer both quality and value tend to stand the test of time.
