Is it time to sell or buy apartments?

It’s not often you will hear a real estate agent say it’s not a good time to sell an apartment but here goes… 

It’s actually time to buy, or at least hold your apartment rather than sell. While prices are solid, they will get better over the next few years.

Time will decide if that is good advice or not, but it is based on analysis of the five market value drivers and where there are headed.  

Apartment values (and property values generally) are driven primarily by five factors. 

1. Employment market / Job security
2. Cost and availability of debt (interest rates) 
3. Relative supply of new apartments
4. Relative demand for apartments
5. Strength of household balance sheet. 

By understanding where each one of these are now, and where they are going over the next 3-5 years, we can forecast the direction of the apartment market. The below traffic light icons relate purely to each ones impact on apartment values. The first traffic light shows the current situation and the second traffic light forecasts the outlook.

🔴 – Pushes values down
🟡 – Values remain the same
🟢 – Pushes values up

1. Employment market / Job security 🟡➡️🟡

Acording to ABS, the unemployment rate rose to 4.2% in July 24 after hanging around 3.5% for much of 2022-23. It has been trending up since August 2023 but is still well below the 3 years prior to covid of between 5% – 6%. Employment-to-population ratio has remained relatively stable over the last 2 years hovering around 64%

If people feel less certain about their long-term employment prospects, they are less likely to lock into a large mortgage. 

Therefore job security stays on moderate or orange. It is relative stable now and is likely to stay as such over the next 3-5 years.

 

     2, Cost and availability of debt 🟡➡️🟢

The availability or liquidity of debt is positive with banks competing aggressively for property owners’ business to build their own loan book.

Interest rates feel high given 13 cash rate rises by RBA from May 22 to Nov 23. On a longer term basis, they are at a moderate level. 

Central banks of most developed countries are now reducing their cash rate (or giving a strong indication that they will). Most economists agree the next shift in the cash rate by the RBA will be down, with the only debate being when. 

The reduction is unlikely to be much, but as a signalling effect it will lift market sentiment. As the cost of debt (interest rates) comes down, people will feel more comfortable in taking on a mortgage that is more likely to get cheaper over time rather than more expensive. 

 

    3. Relative supply of new apartments 🟢➡️🟢

This is the one everyone is talking about. Government, developers, home buyers, press, etc. are all asking, “how do we build more homes?”

If there is such a housing shortage, why aren’t we building more apartments? Why isn’t the government building more social and affordable housing?

The answer is it is too expensive. Labour, materials, taxes, development risk, holding costs are collectively too high to justify building new apartments. The only feasible projects are luxury high end, large apartments in inner suburbs. 

If property development could be “off shored” it would be. Just like many manufacturing industries that have been lost in Australia because we became uncompetitive on a global market. Obviously property development can not be off shored so when the cost of new construction gets too high, it just stops. 

Charter Keck Cramer Research (CKC), forecasts we need between 15,000 – 18,000 apartments per year to meet demand. CKC also show the current supply of new “build to sell” apartments over the next two years is 10,900.  That is a shortage of about 22,000 new apartment homes over just the next 2 years. The outlook beyond that is the same. CKC calculate, apartment prices need to rise by about 15% to justify the cost of new construction. 

This is not great news for the human side of the housing shortage. From a property value perspective, (and assuming demand continues) it suggests apartment prices will rise over the next 3-5 years.

Therefore apartment supply gets two green lights.

 

    4. Relative demand for apartments 🟢➡️🟢

The demand for apartments is framed as the demand for housing generally. Apartments are an important component as they are a very efficient way of creating new housing by leveraging existing infrustructure. This saves on the need for new roads and rail. 

Demand is about immigration. Or more precisely, Net Overseas Migration (NOM). This is the net growth or decline in Australia’s population. In 2022 – 23 NOM was 523,000. That is dropping to 260,000 (or 2% of our population) in 2024-25. The ABS and Centre for Population outlook for the next 2-3 years remains at about 2% growth.  

Future NOM will be driven by government policy which needs strong migration to help sustain our economy. 

A large majority of NOM is from our Asian neighbours. Apartments are a popular housing option for new migrants. Melbourne and Sydney attract the lion share on new migrants given their offerings of education and employment. 

As migration is strong and is likely to remain so, apartment demand gets two green lights.

 

    5. Strength of household balance sheet. 🟡➡️🟡

This determines the size of deposit people need to have to buy an apartment. 

The recent rise in the cost of living and interest rates is eating its way into most people’s savings. 

Household balance sheets shot up in covid as people stopped spending. Consequently, property values in rural and regional centres spiked as people escaped the lockdown capital. Today however, budgets are stretched which is a dampener on apartment values. 

A potential emerging trend in new purchases is support from “the bank of Mum and Dad”. Many older people with strong personal savings and zero debt can help out their children or grandchildren. Also over the next 10 – 20 years there will be an enormous wealth transfer as assets from the older generation pass down to those looking to buy a home.

Government shared equity schemes also help bridge the deposit gap. Buyers who qualify for this support need only find a 5% deposit.  

Overall, the current situation is moderate with the outlook remaining stable.

The household balance sheet therefore gets two orange lights. 

Summary

In summary, the outlook of the 5 apartment value drivers is 2 balanced (orange) and 3 positive (green)  🟡🟢🟢🟢🟡

Supply and demand metrics are the main value drivers and they are both glowing green.

This is the argument for why it is time to buy or hold, and not a good time to sell.