Apartment glut looms in major Aussie cities

Apartment blocks under construction in a Sydney suburb. Economist Shane Oliver from AMP Capital expects apartment prices in parts of Sydney and Melbourne to fall by about 15 per cent to 20 per cent over the next two years.
Apartment blocks under construction in a Sydney suburb. Economist Shane Oliver from AMP Capital expects apartment prices in parts of Sydney and Melbourne to fall by about 15 per cent to 20 per cent over the next two years.PHOTO: BLOOMBERG

Experts warn of oversupply in Melbourne, Sydney as high prices put houses out of reach

For decades, it was known as the "great Australian dream" - owning a house with a garden in the suburbs on a quarter-acre block. But the dream appears to be coming to an end.

In the two largest cities of Sydney and Melbourne, high prices and strong demand for properties in the inner city or near railway stations have led to a dramatic shift away from houses to apartments.

The central bank and analysts have warned of a looming "apartment glut" which could deflate the nation's soaring property market.

Economist Shane Oliver from AMP Capital told The Straits Times that apartment prices in parts of Sydney and Melbourne are likely to fall by about 15 to 20 per cent over the next two years.

The falls could cause a broader decline across the market, even though some areas, especially in Sydney, still have an undersupply of housing.

"We have a huge spike in supply of apartments over the next couple of years, often in fairly concentrated areas," he said. "It will cause an indigestion problem."

Property prices have soared in Australia in recent years, spurred by record-low interest rates and a wave of foreign investment, particularly from China. Average home prices rose by about 7.5 per cent in the past year, according to CoreLogic. The median house and apartment prices in Sydney are A$1.1 million (S$1.16 million) and A$686,000 respectively, while in Melbourne, they are A$774,000 and A$467,000 respectively.

Although the Reserve Bank is not predicting a crash, it warned last month that the property market was at risk from an oversupply of apartments.

"These risks appear greatest in inner-city Brisbane and Melbourne, where new supply is largest relative to existing dwelling stock," the central bank said.

In the past three years, apartment building has made up about half of all residential property being built and has begun to overtake house construction.

In Melbourne's city centre, about 18,000 apartments are set to be completed over the next 18 months, up from a historical average of 1,500 every 18 months.

Urban studies expert Dallas Rogers from Western Sydney University said the shift to apartments has been sparked by the lack of affordable houses. Another factor has been federal rules which require offshore buyers to purchase new homes only - a requirement which encourages developers to sell new units to budding foreign investors.

"Housing is so unaffordable in Sydney that people will take anything they can get," he said.

"They are willing to live in an apartment because it is the only thing they can afford."

Dr Rogers said state governments have been trying to increase density to make sprawling cities such as Sydney and Melbourne more liveable. At the same time, overseas buyers - particularly from Asia - tended to opt for apartments because of the foreign investment rules and a desire to live close to the city centre.

Dr Oliver estimated overall property prices in Australia are overvalued by 19 to 27 per cent, but said the market is more likely to cool than crash in the coming years.

"To get a bigger fall, you would need much higher interest rates or a recession, and it is hard to see that occurring. The Reserve Bank won't jack up interest rates because it knows people have more debt than they used to."

Some other analysts have suggested the likelihood of a sharp property price drop is low, saying the apartment boom will not keep up with population increases.

A version of this article appeared in the print edition of The Straits Times on November 24, 2016, with the headline 'Apartment glut looms in major Aussie cities'. Print Edition | Subscribe