Apartment living isn’t for everyone. For many people within Australia and in countries such as the United Kingdom the United State of America, apartments represent confined city living that isn’t aligned with the archetypal family lifestyle. For others, they’re convenient, safe and highly practical. Real estate agents for instance often refer to the apartment market as the housing markets poor cousin – high in stock, volatile and with a price ceiling that can rarely be raised. The housing market on the other hand is deemed more liquid and therefore much more attractive to many investors. And while a home can be enhanced to add value e.g. extending the existing structure, adding new ones or updating the yard, apartments offer limited potential to improve upon.
What they do allow is for families, couples and individuals to maintain proximity to the city and live a comfortable life they desire without having to save and sacrifice to afford a home. If placed in the right suburb and correctly planned for, apartments can alleviate pressure on the housing market and provide residents with better access to urban amenities. Always expanding towards the fringes of large cities is expensive and can lead to less than favourable social outcomes, but does the world really need more apartments?
Given the affordability issues that the younger generation face these days in Australia and around the world, more apartments may sound like an easy fix. That is until you consider that there’s an estimated 25,500 apartments to be completed in Sydney this calendar year, 17,090 in Melbourne and 10,300 in Brisbane. Taking into account Australia’s growing population, Sydney and Melbourne should have little trouble absorbing any new stock. Brisbane on the other is currently suffering an oversaturation of apartments – but we’ll get to that later.
The problem occurs when there is a surplus of apartments built that don’t account for a steep yet gradual drop in buyer confidence, experienced by markets approaching the backend of a property cycle peak. Seasonally adjusted building permit data released by the Australian Bureau of Statistics shows private apartment approvals jumped by 20% in June across Australia, indicating there is still a lingering demand for more dwellings. This however does little to quell forecasts that the apartment market in Sydney, Melbourne and Brisbane will be highly congested over the next 3 years. Given Australian apartment market prediction, there may be a lot of empty apartments and just as many picky buyers. It’s clear that there needs to be a better solution that meets not just our current housing needs, but also future ones.
Apartment markets in Australia, more specifically in Sydney, Melbourne and Brisbane, are already experiencing an oversupply of new stock and an undersupply of willing buyers respective to their market conditions. Small apartments, which appeal to investors (primarily), temporary migrants, young singles and couples, are the biggest contributor towards the oversaturation of the apartment market in these cities. These apartments are largely sub-50 square metre apartments under $500,000 that attract purchasers looking to rent in the short term. They fall into a limited bracket, however constitutes a large slice of the pie for new apartments coming on the apartment market in Australia. The key driver of demand in coming years will be from young households looking to grow their family. They will need two or three bedroom units, which developers have not focused on over the past few years. It’s generally accepted that apartment completions lag starts by 1 to 2 years, meaning the developing oversupply will continue to build into 2017 and 2018 with completions most likely nearly doubling across the eastern states.
One of the main drivers for Sydney’s apartment market over the last few years was overseas investors’ primarily from China. In June there was a bump in activity from international property hunters as they tried to beat the incoming 8% stamp duty surcharge. Tighter lending restrictions, ramped up in the last few months, have also put the squeeze on domestic buyers. Despite many market commentators’ predictions, Sydney’s will hold out against a significant glut for the foreseeable future aided by low interest rates and at 1.5% population growth rate. This is to Sydney isn’t catastrophically oversupplied with units yet but it’s a looming issue and something investors and builders should be conscious of.
In the previous 12 months the Melbourne apartment market has been gradually diverging from the housing market. The price gap is widening and apartment resale prices in the CBD are looking flat. The apartment market has however fared better in this time period than anticipated. BIS forecasted that the market would experience a weighty decrease in activity much earlier, predicting that there would be an excess of 20,000 apartments across the state of Victoria by 2018. This figure has now been revised to 2,000 due to the rate of population growth Melbourne is experiencing. Inner city suburbs with older apartments are still receiving good demand, as are apartments in more affluent areas due to a limited amount of stock.
Out of the big 3 performers on the East Coast, Brisbane is the city with an apartment market correcting faster than anticipated. 2015 into 2016 was when the most activity surrounding unit construction occurred in the inner city. In the past 12 months however, unit prices have fallen across Brisbane, as have construction approvals. There’s also been speculation of a potential 10 percent fall in rents by the end of the year. Going back to what we said earlier about the bubble caused by small apartments; some 1 bedroom apartments sold for $450,000 at the peak of this cycle. Those same properties are now being valued at as little as $320,000. Recent REIQ figures state 2,300 new apartments came on to the Brisbane market in the first quarter of 2015. In the first quarter of 2017, that number was just 260. It’s clear to see that developers are aware of the problem they’re facing.
You may be wondering why we’re looking at markets in other countries, namely the apartment market in the UK and the apartment market in the USA. Well, the main reason is that by looking at where these countries sit on the property cycle, we can get an insight into how their apartment markets perform under different situations. Of course, we can’t blanket compare each country, and there will be some regions and cities within the UK and USA that are performing better or worse than the national average. What we want to do is get a snapshot of their current condition. Perhaps we’ll even be able to discern the trajectory of the Australian apartment market to some degree?
The apartment market in the UK is suffering from effects caused by a rather turbulent yet-to-be-decided future and a more punitive tax landscape for investors. Right now, it’s country that’s more or less 4 to 5 years ahead of the Australian property market. And while house prices have undoubtedly risen since 2014, there’s still a lack of vitality in the apartment sector. The only saving grace right now may be mortgage rates, which are as low as they’ve ever been. These rates however aren’t tipped to last, and hints from the Bank of England regarding the raising of borrowing costs for the first time in a decade are already having an impact on consumers. High-end apartments in London are also feeling the pinch, with some reducing their asking price by £1.5 million (2,555,850AUD) since they were put on the market in a sign that demand for luxury homes is ailing.
Across the Atlantic we have the apartment markets in the USA. Currently their property market is on the up and up, with prices rising 5.8 percent in the 12 months to June and now standing 4.3 percent higher than the pre-crisis peak. Current figures say that 4.6 million new apartments are needed by 2030 to meet the demand for rental living and keep prices in check. While there’s optimism in the air, affordability for millennials is still problem across the majority of the country’s cities, similar to the east coast of Australia. This has spurred apartment construction to a 20 year high, however many of those are purchased by investors and converted into rental stock. After a slow post-recession period, the market started rebounding in 2012 and by 2014 new supply had amounted to more than 237,000 units delivered in one year, well above historical averages. Between 1997 and 2006, annual completions averaged 212,740 units. It’s not a hard stretch to imagine the US running into the same issue Australia is having right now, with many major cities overcompensating for demand and ending up with a backlog of empty level apartment buildings.