Major capital city apartment markets continue to hold up well to supply wave

Regional variation between markets continues, but further headwinds will likely slow all markets

October 25, 2017

JLL's latest Apartment Market  Indicators reports for 3Q 2017 suggest that the major capital city markets are weathering the storm of strong supply levels well to date, particularly Sydney and Melbourne. JLL expects some further slowing in all markets as APRA's macro-prudential measures and Chinese capital restrictions further temper investor demand and supply completions remain strong for at least the next few quarters.

JLL's Head of Residential Research - Australia, Leigh Warner said, "The good news for all markets is that supply pipelines do appear to be self-regulating, with slower pre-sales rates and tighter bank lending criteria both contributing to many projects being delayed or abandoned all together. We saw far fewer projects progress to construction in the third quarter of 2017 across the country and particularly the larger projects that are harder to meet pre-sale hurdles.

"This tempering of supply should support medium-term market balance and ensure that all markets avoid slipping into a position of severe over-supply. Nevertheless, in the short-term, supply completions will remain high for a few quarters yet and this will likely see a softening in rental markets and further slowing in price growth," Mr Warner said.

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 40,680 apartments from 49,657 apartments at the end of the previous quarter. 

"The supply pipeline is falling away most dramatically in those markets where supply fears are greatest and banks are most cautious about, particularly Brisbane," said Mr Warner. "Perth's issues have been demand focused as much as supply, with population growth slowing dramatically since the end of the mining boom. However, we expect that both Brisbane and Perth will edge towards a trough in the next couple of quarters and improved economic and population growth in both markets will help soak up surplus supply relatively quickly.

"Sydney and Melbourne on the other hand have shown remarkable resilience to date for supply levels, with low rental vacancy and solid rental growth the strongest indication that market balance remains relatively healthy in both markets. Sydney has been making up for a decade of under-supply, while extremely strong population growth has kept market balance in check in Melbourne. Nevertheless, we do expect both markets to moderate further in coming quarters, with supply levels remaining high and investor demand slowing further," Mr Warner said.

Despite the headwinds of slowing investor sales rates and tighter lending conditions, there remains no evidence of mass settlement failure within any of the major apartment markets. 

"Settlement periods have been protracted in many instances, but settlement failure rates remain fairly normal, particularly for high quality projects. In those instances where settlement failure has occurred, developers have had sufficient settlements to pay off their debt obligations and have looked to rent out and slowly sell down any remaining residual stock," said Mr Warner.  

While most apartment markets are now 'late cycle' and moderating, market conditions do vary widely in terms of the position in the cycle according to JLL.