Lockdowns risk to short-term apartment recovery
But are unlikely to change the strong medium-term market outlook
AUSTRALIA, 1 September 2021 –Just as the apartment market had started to join the wider housing market boom, current lockdowns threaten to deflate sentiment and stifle the near-term recovery. However, this does not change the prospect that once borders re-open demand will likely far exceed moderate apartment supply and a rapidly improving market balance will support a strong medium-term market outlook.
JLL’s Head of Residential Research - Australia, Leigh Warner said, “The apartment market took a lot longer to join the general housing market rebound that was undoubtedly led by owner-occupiers taking advantage of low interest rates and fiscal incentives. For apartments, investor demand is still important and was initially more subdued, while residual unsold stock in recently completed projects was affecting new pre-sales, particularly in Melbourne and Sydney.”
“But investor demand had clearly picked up in 2021 and this demand had started to flow through to the apartment market. Rapid rises in detached housing prices has also helped push more owner occupier demand towards more the affordable apartment market,” said Mr Warner.
However, JLL’s latest National Apartment Market Report highlights that current lockdowns, particularly the extended NSW lockdown, are a big risk to short-term market sentiment and momentum. It has also likely significantly changed the immediate outlook for regulatory measures to control recent rampant house price growth.
“Rampant price growth and investors returning to the market had already seen regulators flag the prospect of renewed macro-prudential policy measures like those used between 2014 and 2018 to slow the market,” said Mr Warner.
“But now it appears there is a much finer balance for regulators – act too early in a market that could now be slowing of its own accord and risk an over-correction but wait too long and if the market keeps running regulators risk it getting out of control and excessively speculative. The margin for error appears narrow.”
According to JLL, developers had started to become a lot more confident about the next apartment cycle, but long project lead times mean that this cycle is still some years off. Across the markets JLL monitor, apartment completions in 2021 are expected to be around 17,900. This is slightly above the level of 2020 (15,170) but is somewhat inflated by some major projects due in 2020 being pushed into 2021 due to COVID restrictions.
However, completions are expected to fall sharply to around 10,500 in 2022 and recent slow project commencements mean supply will likely stay moderate 2023 and 2024.
Mr Warner said, “It is fairly clear that demand is going to rebound strongly when borders re-open, particularly in Sydney and Melbourne which are much more exposed to migration and foreign students. But in the short-term, people are likely to continue to flee the larger cities as soon as they are able to, which will continue to benefit regional areas, other capitals and particularly South East Queensland.”
“From a rental market perspective, vacancy is already low outside of Sydney and Melbourne and rental growth is building rapidly. Even in Sydney and Melbourne, vacancy is falling, and rents are starting to grow. Consequently, we expect that all markets will tighten significantly when borders re-open and we anticipate a very strong period of rental growth over at least the next few years,” said Mr Warner.
Market by Market
Sydney
Demand for Sydney apartments has improved in 2021, particularly for smaller owner-occupier focused projects. Investor demand was also starting to recover, but the cities extended lockdown is a risk to market momentum.
“Leading into lockdown there had been some more positive signs of improvement in Sydney’s apartment market. However, with no end in sight for current restrictions, it remains to be seen if confidence towards the recovery can be maintained,” said Bill Fatouros, Senior Director – Valuation Advisory.
Melbourne
The Melbourne apartment market has shown some recent signs of improvement and more owner occupier focused stock is performing strongly, but the market is still struggling to absorb residual investor stock from the last construction cycle.
“The owner occupier apartment market in the suburbs remains healthy, but investor stock in and around the CBD remains much more subdued and the market is not likely to fully return to health until after borders re-open,” said Chris Smirnakos, Senior Director – Valuation Advisory.
Brisbane
The Brisbane apartment market now has a lot of tailwinds behind it that should see its recovery gain pace quickly over the next few years. Demand prospects are buoyed by an improving local economic outlook, increasing interstate migration and over the medium-term by a likely strong recovery in overseas migration.
“Winning the 2032 Olympic Games is a major confidence boost for Brisbane and should support the housing market through the direct economic activity and jobs created and indirectly via raising Brisbane’s global profile and long-term migration rates,” said Troy Linnane, Senior Director – Valuation Advisory.
Perth
Momentum is already building fast in Perth’s apartment market and we expect this to continue for some time yet.
“Perth’s long-awaited apartment market recovery has continued to gather momentum. General confidence remains high and job creation is starting to draw people back into the region,” said Craig Carroll, Director – Valuation Advisory.
Adelaide
Adelaide’s apartment market has held up well to COVID-19 and a relatively large supply pipeline in 2020 and over recent years. The rental market is tight.
“Despite a short recent lockdown, SA has managed to stay relatively COVID-free which has helped local economic activity and seen the state’s net interstate migration turn positive for the first time since the early-2000s,” said Tracy Gornall, Senior Director – Valuation and Advisory.
Canberra
The ACT economy and labour market have been strong through COVID but are being tested by a current lockdown and the spread of Sydney’s COVID outbreak. Nevertheless, the apartment market is starting to join the broader housing recovery.
“While the apartment market has certainly lagged the broader strength in the Canberra housing market, apartment demand is improving and increasing pricing pressures are supporting a shift in demand back to infill medium-density projects,” said Marcus Hon, Senior Director – Valuation and Advisory.
Gold Coast
Strong levels of lifestyle-driven migration are boosting the Gold Coast’s housing market and the recovery is well ahead of the other major markets.
“The Gold Coast apartment market is well into an expansion phase on the back of strong local population growth. Robust demand from locals, SEQ and interstate buyers have all boosted development sales rates, while existing housing market demand is booming,” said John Muchall, Director – Valuation and Advisory.
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