Supply wave yet to crack resilient apartment market

Slower investor demand is being felt in all markets, but price falls remain localised.

January 31, 2018

JLL's latest Apartment Market reports for 4Q 2017 illustrate that slower investor demand as a result of APRA's macro-prudential policy measures is having an impact on all major capital city apartment markets, but so too are other state and federal imposts on foreign buyers. 

However, despite slower demand, markets are still weathering the recent strong new supply additions relatively well.

JLL's Head of Residential Research - Australia, Leigh Warner said, "APRA's intention in clamping down on investor lending was always to slow the housing market down, particularly in Sydney and Melbourne. This has been successful, but the risk we are now facing is that the added imposts imposed by state governments and the Federal Government on foreign investors in residential property is slowing this important portion of demand by much more than intended.

"It appears that foreign investors that have already invested are still settling sales at present, albeit often over a longer than normal period. However, it is also clear new offshore demand has fallen sharply and this is particularly impacting some larger CBD projects and projects by foreign developers."

However, despite these challenges, Mr Warner believes the markets are still showing remarkable resilience to this environment of slowing demand and strong supply additions.

Mr Warner said, "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. Remarkably, Melbourne continues to operate at low levels of rental vacancy and is seeing rental growth, while apartment prices were still growing in late-2017.

"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, but the rental market is still tight and the market still appears relatively balanced after years of under-supply."

According to JLL, 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 3Q17 fell to 39,760 apartments, which has shrunk by around 10,000 apartments over the last two quarters.

"The peak in supply was in 2017 and we expect around 25% 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 over-supply and that it is a relatively soft landing for the apartment market," said Mr Warner.

State Apartment Market analysis:

Mr Warner also noted that, "While the large Sydney and Melbourne markets are slowing and driving overall national trends, other markets remain at very different points in the cycle. Adelaide and Canberra are less mature apartment markets, but both have seen much stronger apartment development and are slightly less progressed in the cycle than Sydney or Melbourne. In contrast, Perth and Brisbane are more advanced in the cycle and, after a very challenging 2017, both markets appear to be edging towards the trough in the cycle."

"For Brisbane, the issue has been very much about supply levels, with a considerable amount built over the past two years. However, Brisbane's supply peak was in 2016 and a particularly tough development-financing environment will mean the pipeline will drop sharply from 2018 onwards. Brisbane's population growth is also picking up after several weak years following the end of the mining boom, which should also help soak up surplus supply.

"In contrast, Perth's issues have been more about demand than supply. While development has been relatively strong, Perth's population growth and economy suffered even more than Brisbane's after the mining boom and a lack of demand has severely hampered demand. Nevertheless, the economy has started to recover and price declines have started to slow, suggesting the market is past the worst," said Mr Warner.