Skip to navigationSkip to contentSkip to footerHelp using this website - Accessibility statement
Advertisement

Interest rate rises likely to spur apartment demand

Subscribe to gift this article

Gift 5 articles to anyone you choose each month when you subscribe.

Subscribe now

Already a subscriber?

Rising interest rates are expected to boost the apartment sector, as higher mortgage costs encourage buyers to accelerate the push into cheaper units, developers and investors say.

Demand will probably shift from detached houses to apartments as more people are priced out of the market for standalone homes and find their borrowing power “dramatically” reduced because of higher mortgage rates, JLL’s senior director of research, Leigh Warner, said.

Demand for apartments is expected to pick up as interest rates rise. 

“The price gap between the houses and units is so massive that more buyers are now eyeing the apartment market,” Mr Warner said.

“The interest rate increases will only accelerate this trend towards high-density housing, so I think it’s possible that higher rates end up being a net positive for the sector as it attracts more buyers.”

The median unit price in Sydney is $830,534, which is $586,426 – or 41 per cent – below the median house price, according to CoreLogic’s data.

Advertisement

Melbourne median unit price is $370,255 or 37 per cent below the median house price, while the price gap between houses and units in Brisbane is $392,365 or 45 per cent.

Crown Group chief executive Iwan Sunito said apartments were now undervalued compared to houses, which made them a more viable and attractive option for many buyers.

“I expect to see more buyers choosing apartments after such a huge rise in house prices since the start of COVID-19,” Mr Sunito said.

“The current price gap between detached houses and units is around 41 per cent in Sydney, and many developers have not lifted their prices yet to reflect the rise in construction costs, so buyers are still getting in at a good price point.”

Turning point

Maxwell Shifman, the president of the Urban Development Institute of Australia lobby group, said there would be renewed interest in the apartment sector as people reconsider what they can afford.

Advertisement

“Whenever you see substantial growth in established housing, you do start to have people look more at the apartment market,” he said.

The borrowing market may be at a turning point. Official figures on Wednesday showed new investor loan commitments in March rose to a high of $11.7 billion, but this might not last, economists warned.

The 2.9 per cent month-on-month rise in new investment lending outstripped the 1.6 per cent total increase in home loans and was greater than the 0.9 per cent gain in new owner-occupier lending, which rose to $21.6 billion.

The single largest increase was in new loan commitments to first home buyers, which jumped 5.9 per cent to $5.1 billion, after two months of decline.

Lending was now likely to decline in both volume and the value of loans as a result of rising interest rates, BIS Oxford Economics senior economist Maree Kilroy said.

Advertisement

“The increase is set to be the first of several, with the cash rate expected to reach at least 1 per cent by the end of the year,” Ms Kilroy said.

“The national average new mortgage size has surged 17 per cent over the past year, rising to near $600,000. We are likely at the peak in average loan size, with monthly house price growth now having turned negative in the key markets of Sydney and Melbourne.”

Investor loans would also probably decline, JPMorgan economist Jack Stinson said.

“Investor loan growth has an endogenous relationship with price growth, with loan growth increasing as house prices increase,” Mr Stinson said.

Advertisement

“Going forward, investor loan growth of today’s magnitude should become increasingly hard to maintain as house price growth slows further.”

Rising interest rates will also hurt developers’ borrowing capacity, which could cause delays and reduce the viability of their projects, Mr Shifman said.

“The irony is that we may end up with fewer viable projects and those that do go ahead will have to be more expensive on average,” he said.

“The rising costs of materials and labour will force developers to charge more because there’s only so much increase in costs that they can absorb.”

Nila Sweeney writes on property from our Sydney newsroom. Email Nila at nila.sweeney@afr.com.au
Michael Bleby covers commercial and residential property, with a focus on housing and finance, construction, design & architecture. He also dabbles in the business of sport. Michael is based in Melbourne. Connect with Michael on Twitter. Email Michael at mbleby@afr.com

Subscribe to gift this article

Gift 5 articles to anyone you choose each month when you subscribe.

Subscribe now

Already a subscriber?

Read More

Latest In Residential

Fetching latest articles

Most Viewed In Property