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Time to buy apartments

Is it time to buy or sell apartments?

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We often discuss the best time to buy or sell apartments. Property remains a long-term investment and therefore longer-term trends should trump short term issues.

Everyone has their own reasons to buy or sell property. Investment apartments tend to be more about financial drivers than lifestyle considerations. Also, apartment return metrics are different to houses. Apartments enjoy a slightly higher income to value ratio than houses but have a slightly lower capital return (value appreciation) than a house. This is due mainly to the relative proportion of land contained in each one.

Long term trend A – Population Growth (Demand)

There is no more important long-term trend to watch in the apartment market than population growth.

Here are the recent stats for 12 months to March ‘23.

  • Net population growth in Australia – 563,200 people – 80% from migration.
  • Net population growth in Victoria – 161,700 people – 85% from migration.
  • Victoria is attracting almost 30% of all overseas immigration into Australia.

These numbers are some of the highest on record and are well above pre-covid numbers which were about 475,000 p.a. into Australia.  Source – Australian Bureau of Statistics.

A lot of this influx is from overseas students. While some students return home after study, they have discovered Melbourne and they or their family may return to live. Many current Australians came to Melbourne from overseas to study and fell in love with the town (and someone else I suspect). This has created the rich cultural diversity that makes Melbourne so vibrant.

An overwhelming majority of overseas migration is from Asian countries. When people move countries, they rent first and buy later. This helps them get settled before buying the type of property they like and in the area they want to live. Asian cultures are comfortable with apartment living and have embraced it in Melbourne.

This all points to a continued high demand for apartments to both rent and buy for many years to come.

Long term trend B – Apartment Construction (Supply)

Based on the demand for housing (both detached and apartments) Victoria is going to need a sharp lift in housing supply. Victorian Government forward planning (Plan Melbourne) estimates the apartment component of the new housing supply needs will be around 18,000 new apartments each year. According to Charter Keck Cramer, in 2023 – 24 we are forecast to build about 10,000 new apartments per year. The following 2 years are predicted to be similar.

The current challenges for new construction of apartments has been well documented here and elsewhere. Construction costs remain high. Labour is expensive and scarce. Presale of apartments (required to secure finance) is difficult with reluctant and price sensitive off-the-plan buyers.

This week, Richard Tremlett – National Executive Director – Research at Charter Keck Cramer (CKC) briefed industry leaders on the apartment market. Richard stated that if the State Government’s recently announced housing plan was to meet their ambitious housing target of 800,000 new homes in 10 years, we would need about 20,000 to 25,000 new apartments completed every year for 10 years. At the very peak of Melbourne’s apartment construction cycle in 2017, about 21,000 apartments were completed.

The strong likelihood therefore, is without significant government incentives new apartment construction will significantly lag demand for the next 5-6 years. Even if new apartment construction suddenly started now, it would take 2 years to deliver them.

CKC are a leading research house and prepare insightful and market leading analysis on the apartment market. This includes the build-to-sell and build-to-rent apartment sectors.

How with this play out?

The contrast of turbo charged apartment demand and lacklustre supply is stark. Even bizarre.

The rapid rise in interest rates have put some buyers off. We all got use to low interest rates which felt like the norm. As former RBA Governor Ian Macfarlane stated, the current cash rate is more like the norm and the previous low rates were the abnormality.

There is a price gap between the cost of constructing a new apartment project (which comprises a multitude of inputs including time and risk) and the price buyers will pay. The size and style of the apartment and the way in which they buy it (off-the-plan vs completed) is also a challenge for new projects.

There is too much demand pressure without supply. Something must give.

To make new apartment construction feasible and meet the insatiable demand one of two things need to happen (or some of each)

  1. The cost of new construction and labour needs to come down, or
  2. The price or value of apartments need to rise.

It is a pretty safe bet that construction costs won’t come down which just leaves option 2. Apartment prices will rise. This may be both investment buyers capitalising on higher rent, and occupiers buying a place to live. We have already seen rents grow sharply over the last 12 months.

Like all markets there are sub-markets within the broader market. Some locations and apartment types will be more popular than others. Generally larger apartments on transport nodes will be preferred by home buyers. Smaller inner-city apartment tend to be popular rental accommodation.

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Written by a 4th generation real estate agent Apartments Made Easy gives you the tools and tells you all you need to know about how to buy, sell, own, lease, and manage your apartment successfully.

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