Melbourne Apartment Market Demand Overshadowed by 2017 Supply

Melbourne's apartment market has displayed resilience against its peaking supply, as it processes the large volume of apartment completions due in 2017.

In a Melbourne apartment market overview from property consultancy JLL, 9,000 apartments were completed in inner-Melbourne this year, with 79 per cent of these completions occurring in the Melbourne City precinct.
During this year's third quarter alone, the completion of three major towers added over 1,600 apartments to the CBD precinct. A further 9,100 apartments are under construction in Melbourne city, equating to 61 per cent of all inner-Melbourne apartments under construction.

JLL head of residential research Leigh Warner said despite increased Chinese capital controls and tighter investor lending conditions from local banks, minimal settlement issues have been reported in recent completions.

[Related reading: Australia’s Largest Urban Renewal Area Targets Sustainability Initiatives]"Rents and apartment prices are still growing and the market is showing remarkable resilience to all these headwinds at present.

While Melbourne is in the eye of this storm right now as supply peaks, there is a substantial amount of supply still due to complete in this cycle and we do expect re-sale prices and rental growth to remain under downward pressure in the short-term."

[Related reading: Victorian Government Creates New Suburb on CBD’s Edge]Warner said the focus of developers undoubtedly shifted.

"While investor demand remains subdued, attention has turned to projects much more oriented to owner-occupiers. Strong population growth is still supporting robust demand from owner occupiers.”

Highlighting the market’s resilience, the JLL Report shows that annual apartment price-growth picked back up to 2.0 per cent in the second quarter, after slowing in the second half of 2016. Additionally, the rental market remains tight. Inner-Melbourne rental vacancy fell to 1.9 per cent in August 2017, down from 2.3 per cent in August 2016.

Apartment rents across greater Melbourne also continued to grow in the 12-months to the second quarter. Two-bedroom apartments experienced the strongest annual growth of 5.0 per cent over the year to second quarter 2017, above their five-year average of 2.6 per cent.

In Sydney, the inner-city apartment market also remained remarkably resilient in face of a large construction boom, with prices continuing to increase and a still tight rental market.

Despite development approvals falling almost 23 per cent, the Sydney supply boom is reaching a crescendo and as many as 3,200 apartments will complete in the final quarter of 2017, this will further test the market.

Rental vacancy across inner-Sydney remained at a very low 2.2 per cent in September 2017, while strong rental growth of 6.1 per cent was recorded over the 2016/17 financial year for two-bedroom apartments and 3.8 per cent for one-bedroom apartments.

Approximately 4,500 new apartments were completed in inner-Sydney to date in 2017, with the total count expected to reach 7,800 by year-end.

Despite lending restrictions and some downward price pressures in small pockets of the market, JLL's report suggested there has been no evidence of an increase in settlement defaults.

Sydney properties settling are still generally holding a substantial equity buffer given substantial capital value growth in this cycle. Consequently, both domestic and foreign buyers are finding ways to settle, even if the process take a little longer than normal.