Apartment sales pick up, but new projects haven’t – yet
Apartment sales in Brisbane are surging 55 per cent year on year, they are up in Sydney with a 20 per cent gain and are crawling along at 9.7 per cent in Melbourne, where the state government announced stamp duty cuts last month to get unsold stock moving.
For the construction sector that powers much of the country’s economy, the current sales volumes, seen in data provided to The Australian Financial Review by CoreLogic, are a crucial pointer to where the pipeline of future apartment development lies.
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Going up? Sales of existing apartments are picking up, which points to more demand for new homes. Bloomberg
“Developers will gain confidence when they see a rising established unit market,” said Louis Christopher, an economist and the managing director of consultancy SQM Research. “They will gain confidence they will be able to get the presales and get the projects away. It is a critical component towards forward supply.”
As Australia gets used to living with COVID-19 and investors reconsider an apartment sector they have all but deserted over the past year, there are signs that life is coming back into the pipeline of the economically significant high-rise industry. In Victoria alone it accounts for 3.4 per cent of the economy, according to developer body UDIA.
It is a confusing picture because while a look out the window of many Melbourne office buildings shows cranes and activity still ticking over, much of that is the delayed completion of work held up by last year’s lockdown. Once those are completed, there are few new projects to come.
At the same time, apartment vacancy rates are coming down, with the number of empty rental apartments in Brisbane and Sydney more than halving last month from their COVID-19-induced peaks last year. Even the Melbourne CBD has improved.
Social-distancing requirements and lockdown conditions over the past 14 months boosted demand for more spacious homes with attached land, but the price gap that had widened between detached houses and apartments had likely hit its limit, said CoreLogic analyst Eliza Owen.
“It is possible that the gap between growth rates across houses and units could narrow due to higher unaffordability constraints across the house segment,” Ms Owen said.
Borrowing by investors is also picking up, particularly as first-home buyer lending wanes with the end of the federal government’s HomeBuilder stimulus program. This could also boost new apartment developments.
“High growth rates in the value of secured finance for investment property purchases could also further support the unit market,” Ms Owen said.
While the sales growth in Gold Coast and Sunshine Coast adds to the strength of Brisbane’s outlook, much uncertainty surrounds the future of the apartment sector in the two cities that together account for nearly two-thirds of the country’s unit pipeline.
The market north of Tweed Heads was the first to go into oversupply, the first to weaken and is now further advanced in its recovery than the rest of the eastern seaboard.
You have an existing and significant buyer base in Australia. You’ve got a large localised market here.
— Louis Christopher, managing director, SQM Research
Separate SQM figures to mid-June show asking rents on apartments in Brisbane are up 2.8 per cent year on year, while they are down 5.1 per cent in Sydney and a whopping 11 per cent in Melbourne.
Rising rents, like sale prices, are another factor that draws investors and buyers back and stimulates new development. The CoreLogic figures show Sydney unit values rose 5.3 per cent over the three months to May. Melbourne units rose 3.6 per cent and those in Brisbane gained 3.2 per cent.
Brisbane apartment completions peaked around 2018 and the market, with little new stock since then, had seen demand pick up from interstate migration as well as the pandemic boost from domestic holidaymakers, said Angie Zigomanis, director of research and strategy at consultancy Charter Keck Cramer.
South-eastern Queensland was also more resilient to the shock loss of immigrants from the national picture, Mr Zigomanis said.
“South-east Queensland has been less reliant on immigration than Sydney and Melbourne … so it doesn’t get as big a demand shock,” he said. “Also, it gets a demand boost from domestic migration.”
Sydney’s apartment market was picking up faster than Melbourne, in part because it had less land for greenfield detached house developments to take away demand for new units, Mr Zigomanis said.
“It’s partly also a supply thing,” he said. “You don’t necessarily get that outlet for people wanting to go to the housing estates. The apartment market’s benefiting in that respect.”
Sydney’s development recovery could be boosted if proposals to replace stamp duty with land taxes went ahead, Mr Christopher said.
“That could be a real game-changer,” he said. “Foreign investors have historically made up a large component of the off-the-plan property market and they have been missed, no question, but demand will still be stimulated by the stamp duty changes.”
The largest two cities’ pipelines need stimulating. This month, commercial real estate agency JLL published research showing Victorian apartments under construction have almost halved from their 2019 peak to 9995 and Sydney apartments under construction have sunk nearly two-thirds from their 2018 peak to 6120.
Apartment settlements, which peaked at more than 40,000 in 2018, will shrink to 10,000 by 2024 unless investors return in a meaningful way, consultancy Urbis said last month.
There are concerns around investment, however.
“The biggest immediate risk now is if we see [financial regulator] APRA intervening in the lending market and putting restrictions on investment lending similar to what we had in 2015-17,” Mr Christopher said.
Mr Zigomanis downplayed these concerns.
“It’s not about controlling house prices but about financial stability,” he said. “Until it can be shown people aren’t being prudent as borrowers, then APRA and the RBA are happy to leave things as they are.”
But even if investors’ ability to fund the market is unchecked, will domestic investors alone be able to provide enough of a boost? Mr Christopher is optimistic.
“You have an existing and significant buyer base in Australia,” he said. “You’ve got a large localised market here.”
Mr Zigomanis, however, said the reopening of international borders was crucial to push investment back up to its previous levels, to buy unsold stock and stimulate new development.
“There are pockets that domestic demand can correct,” he said. “If you’re looking at central city areas or around universities, I suspect that most are contingent on international borders reopening – if you want to soak them up at any great pace.”
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