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Apartment Values

Will apartment values surge like rents?

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Apartment values are set to rise as soon as the value drivers align like they have with the rental market. The capital market and rental market however have different drivers.

It seems logical that if apartment rents are rising, then investment buyers will pile into the market and bid up the price. Investment buyers however, are a relatively small buyer segment compared to owner occupiers.

Apartment investors have up to 4 drivers when looking to buy.

  1. Net annual return (rent less costs).
  2. Likely capital growth.
  3. Tax benefits.
  4. Housing security for their children.

They will also compare the long-term benefits of apartment investing to other asset classes like shares or managed funds. Rising rents are certainly catching the eye of apartment investors but rising interest rates are off setting some of the return gains at the moment. Conversely, owner occupiers must live somewhere, so they don’t always have the luxury of buying or not. Unless they continue to rent but as rental rates continue to rise, it tips the balance more and more in favour of buying.

The recent rental market growth is due to several factors but a major factor is the sudden influx of migrants. Net overseas migration to Australia is forecast to be 400,000 this financial year and 1.5 million over the next 5 years. 70% of immigrants settle in Melbourne or Sydney.

Charter Keck Cramer (CKC) forecast this migration surge will create a need for 175,000 new apartments over the next 10 years. That is 17,500 per year. CKC apartment supply forecasts show a significant shortage of new apartments relative to demand over the next 3 years with less than 50% of that demand being built. Challenges in the building industry as well as Victoria’s slow and uncertain planning approval process will delay that supply timeline further.

When people settle in a new country, they rent first and then buy after 2 or 4 years. The current rental demand surge should therefore convert to buyer demand over the next few years.

This suggests that apartment values will surge once todays immigrants are more settled. When they do want to buy, the supply level of new apartments is unlikely to be sufficient, putting upward pressure on apartment values.

There are 5 main factors that drive apartment values.

  1. Employment market / Job security.
  2. The availability and cost of credit (interest rates & liquidity)
  3. The supply of apartments for sale (new or existing)
  4. Relative level of buyer demand.
  5. The strength of the household balance sheet / size of deposit.

Economic commentators are suggesting interest rates will start to taper in 2024. If the employment market holds up and deposit savings are managed (despite cost of living pressures), the supply and demand metrics are certain to be favourable to an apartment value surge through 2024 – 26.

What we have all learned, is that unforeseen factors tend to disrupt markets and catch everyone unaware. No one predicted the GFC, Covid, Ukraine war. These left field events create knock on impacts and disruptions that undo the conventional wisdom on market direction.

So, unforeseen events aside… we can expect the surge in rents to convert to higher capital values over the next 2-4 years driven mainly by net migration into Australia.

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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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