Residz Team 5 min read
When viewed as a whole, the Australian apartment market doesn’t seem all that healthy.
Demand is down and prices are soft.
But a new report indicates the lack of supply, cashed-up downsizers, buyers’ reduced borrowing power, and China’s borders opening up will all combine to keep prices more resilient than houses over the next year.
JLL’s Apartment Market Overview report says there are good reasons to believe
apartments will stabilise before detached housing. Here are some of the highlights of the Q4 2022 report from research senior director Leigh Warner and senior analyst Aiden Mayne.
Headwinds remain
The report says that headwinds remain for the broader market in the near-term until it is clear where interest rates will peak.
Prices for existing apartments are “now falling in nearly all markets in line with broader housing headwinds, predominantly from rising interest rates.”
“However, a likely shift of housing demand towards apartments and the potential for population growth…could all exacerbate the medium-term supply/demand imbalance in the market, heighten rental shortages, and support pricing levels.”
Apartments simply more affordable
The report points out that the post-pandemic rise in apartment prices was not as strong as those of detached houses. As a result, apartments are comparatively affordable, and this will see demand shifting away from detached houses towards apartments.
“Affordability and lower borrowing capacity will push more buyers into apartment price points.”
New apartments are costing more
Developers are likely to pass on higher prices. The report says off-the-plan or pre-sale apartment prices are increasing, in order to make the projects feasible.
This is because, like all of us right now, cost pressures have hit developers. As a result, and with little stock in the pipeline, developers are achieving an uplift in sales rates per square metre in most markets.
Apartment supply will fall further
Higher construction and finance costs are making progressing large scale high density projects difficult, and could keep supply “moderate” for even longer.
Apartment supply will fall further in 2023 to low levels and stay “moderate” for at least several years beyond that, say the report’s authors.
‘Build-to-rent’ not yet plugging gap
Build-to-rent operators (who build apartments to rent out rather than sell to individual buyers) are filling some of the supply gap for high-density projects, say the authors, but they are also “not totally immune” to feasibility cost pressures and it will take some time for the pipeline to materially lift.
Robust demand in some parts of apartment market
The report says that while, in aggregate, apartment demand has slowed, there remains robust parts of apartment demand. In other words, it’s not one real estate market.
There is demand particularly for quality owner-occupier stock.
“This reflects the fact most downsizers are still buoyed by the recent escalation of detached house prices and are much less interest rate sensitive.”
More people arriving who need a home
Another possible shot in the arm for apartment demand is the return of migrants and foreign students.
The report mentions China’s move away from its ‘COVID zero’ policy and improvement in diplomatic relations as factors that could provide a boost to Australia in 2023 through higher tourism, foreign students and foreign investor demand for new apartments.
Investor demand uncertain
That said, investor demand is not at all certain - even if general demand is improving somewhat. Higher interest rates will have an impact, says the JLL Apartment Market Overview report.
Nevertheless, the strength of the rental market will be attractive to landlords. Rents are now around pre-COVID levels in Melbourne, but well above in other markets.
The report says rental vacancy rates were 0.5% in Greater Perth in December, 0.1% in Brisbane, 1.7% in Greater Melbourne, 0.6% in Greater Adelaide and the Gold Coast, 1.8% in Greater Sydney and Canberra.
As said earlier, foreign investors could become warmer to buying apartments in Australia.
A mixed market
In annual growth terms, prices have fallen most where median prices are highest and affordability is most stretched by rising interest rates, explains the report.
Sydney’s median unit price ($772,800) remains around 26% above the average across all capital cities in Dec, while at the other end of the spectrum Perth’s median ($406,600) is around 34% below the capital city average.
“Despite this large discrepancy in pricing across cities, the median detached house price across all capitals is still 40% higher than the median apartment and this affordability should support demand and prices moving forward as higher interest rates reduce buyers’ borrowing capacity.”
Key risks
The report’s list of 3 key risks to any improvement in the apartment market include:
Inflation fails to be contained.
Perhaps wage growth in a tight labour market could stoke inflation. Or China’s abolition of zero COVID policies could increase global production levels and drive up prices of raw commodities, with flow-on effects. If these things happen, banks may have to keep lifting interest rates, which could further dampen the housing market.
Regulatory failure - central banks squash demand too much.
The report mentions the fine line banks are walking to dampen demand and control inflation.
“The risks of this are high because household debt levels are high, and it is now unclear how much interest rates will have to rise for a given impact on demand.”
Householders are already being squeezed and the impact may be felt more than usual, it says.
Construction costs
These have squeezed apartment project feasibilities and resulted in many projects being abandoned or delayed.
“The risk is that a deepened national apartment under-supply could become so critical that large scale national intervention is needed to address the large under-supply of apartment stock.”
Summary
So, will Australia’s apartments do better, worse, or stay the same in 2023? As we saw during the pandemic, it will depend largely on economic factors, and where the apartment is situated. Quality apartments in good locations are likely to be more resilient, even robust, in these cautious times.
As Residz ambassador and real estate expert Rob Klaric says in his book “Secrets of the Property Expert”:
“If the property is well positioned, and selling at a good price, it could make a great investment.”
As always, seek expert advice, only buy what you can afford, and do your research thoroughly.
Residz can help buyers and sellers reduce the stress:
References:
JLL National Apartment Market Overview 4Q22 report
Secrets of the Property Expert, by Rob Klaric
Photo by Roberto Nickson on Unsplash