Apartment Market Holds Firm Under Demand Stress

Australia capital city apartment market remains resilient, despite the amount of stock under construction falling 10,000 units over the last two quarters.

Falling investment demand was the takeaway from JLL’s latest Apartment Market report, as APRA’s crackdown on apartment lending and the withdrawal of foreign investors slows investor demand in the housing market.

JLL head of residential research Leigh Warner said such a move has risked a serious slow-down of overseas activity while state and federal government imposts are enforced.

“It appears that foreign investors that have already invested are still settling sales at present, albeit often over a longer than normal period.

“It is clear new offshore demand has fallen sharply and this is particularly impacting some larger CBD projects and projects by foreign developers,” Warner said.

“The peak in supply was in 2017 and we expect around 25 per cent less stock to be delivered in 2018.

"While this stock due to complete over the next twelve months will still test the market in a slower demand environment, the reduction in supply levels will go some way towards ensuring that the major markets do not move far into oversupply and that it is a relatively soft landing for the apartment market.”

JLL head of residential research Leigh Warner

Sydney is experiencing a tougher development lending environment now and slow pre-sales rates were likely to see a very high portion of planned projects delayed or abandoned, particularly those larger projects specifically targeting at offshore buyers.

Warner said that despite concerns, foreign investors are still settling sales at present, albeit often over a longer than normal period.

Tight development finance conditions and slower pre-sale rates are seeing a self-regulation of supply pipelines and far less projects move into construction.

The amount of stock under construction across the five major capital city markets (Sydney, Melbourne, Brisbane, Perth and Adelaide) at the end of the 2017 third quarter fell to 39,760 apartments, shrinking around 10,000 apartments since July 2017.

[Related reading: Investor Lending Falls to Lowest Level in 2 Years]

Despite these challenges, Warner reckons the markets are still showing resilience to this environment of slowing demand and strong supply additions.

“On the demand front, underlying demand growth remains robust due to strong population growth across most of the country. This is particularly the case for Melbourne, where the region’s population growth remains very strong and continues to surprise in its ability to soak up strong new supply additions.

“Sydney too is holding up relatively well in the face of significantly slower Chinese demand than it has enjoyed over recent years. Apartment prices have flattened off and are falling in some locations where supply is particularly concentrated.”

Australian home loan values rose 2.3 per cent in November following October figures, putting the total value of dwellings over $33.507 million; owner-occupied housing value rose to 2.7 per cent and investment housing 1.5 per cent.