It seems that with every new property boom in Australia’s major cities, a new construction craze commences.
Around 10 years ago when real estate was going gangbusters, high-rise apartment developers flooded a number of ‘big ticket’ markets with their offerings, most notably across Melbourne’s CBD precincts.
Buoyed by the good times when real estate is rocking n’ rolling, large construction consortiums – both local and overseas – crank up the wrecking balls (did you just get a mental picture of Miley Cyrus?) and start quickly erecting multi-storey monoliths on very compact CBD land parcels.
They go where the money is after all.
Fast forward through another property cycle and of course, we’re back there again. This time though, due to the historically low interest rate environment this boom coincides with, or was caused by (depending who you talk to), today’s building activity is on a whole new scale.
Do we need it all?
Let’s face it; we seem to live in a world where one of something is never enough. No longer is it about keeping up with the Jones’s, but more like surpassing them in the accumulation of ‘stuff’ to prove your worth as a human being.
Some would argue the same goes for multi-national developers trying to sell their wares to a market that often consists of a disproportionately large number of OTP property investors.
When is enough, enough?
According to industry analysts, Melbourne’s inner city rental market is set to reach saturation point very soon, with a glut of empty new shoeboxes…err…apartments set to send vacancy rates soaring.
While many argue that we need a lot more accommodation to support our rapidly growing population, so what’s all the fuss about? Others suggest it’s really not that simple.
Of significant concern is the vast amount of overseas purchasers, particularly Chinese investors, snapping up this new stock and thereby creating a massive imbalance in the rental property food chain.
“It is easier to match assets to a global pool of purchasers, where capital is able and willing to be deployed, than match those same assets with occupiers in the local rental market,” noted Charter Keck Kramer analyst Jonathan Mayes in a recent report.
“Developers can clear their stock because of the appetite from international purchasers, but in the rental market there is not that same capacity. It’s not as easy.”
The old supply and demand dilemma
Yet again, this reflects the underlying fundamental that ultimately determines whether markets prosper, flat line or falter entirely – the amount of willing participants on either side of the game.
And herein lies the conundrum.
Because on the one hand, you have an insatiable investor appetite to feed from overseas purchasers who have the means to keep paying what are generally inflated OTP apartment prices.
But on the other, you end up over-supplying the very localised rental market. I’m betting you won’t find many tenants who are too willing to pay your rent from abroad.
“Australian housing represents a store of wealth that is underpinned by confidence in domestic institutions (property rights, freehold title and transparent markets, among others) which foreign purchasers may pay a relative premium for, but which domestic participants expect and therefore do not attribute any additional value towards,” says Mayes.
Of course one could argue that it’s not ‘expectation’ that sets the benchmark for rents in local markets, but what tenants can actually afford to pay and are prepared to pay to live in a particular location.
Regardless of semantics, research suggests that the rental market is being oversupplied broadly across Australia’s major population hubs right now, but to an acute degree in Melbourne.
According to BIS Shrapnel associate director Kim Hawtrey, “There won’t be a slump or a bloodbath because population growth, while slowing, is still strong and the Victorian economy still reasonably good.
“But I would not be investing in an apartment in Melbourne. I’d be looking at detached houses or medium density townhouses. There’s very much a need for more detached houses.”
In the short term, the bigger worry is what might happen to rental yields.
Vacancy rates for Melbourne CBD are currently trending at above 4%, which is undesirably high by industry standards and twice as much as those for Sydney.
Local investors elbowed out of contention
Domain Group economist Andrew Wilson says offshore investors, who often don’t require financing, are currently crowding local investors out of the market.
And it’s unlikely any negative press regarding rental vacancy rates and returns will dampen their enthusiasm for the Melbourne OTP apartment market.
“For offshore buyers, it’s not a question of a property providing a yield. For them the yield is built into the premium they get on their capital from the lower dollar and the lower cost of capital. Some won’t even engage with the rental market,” says Wilson.
“It’s good news for developers, because it offsets the perception of oversupply. But the Melbourne market certainly is oversupplied from a local perspective.”
Sydney gaining ground
While a good deal of new residential housing is set to hit inner city Sydney over coming years, it won’t be to the same extent as Melbourne and what’s more, the population in the Harbour City is undergoing its own substantial boom at this time.
Wilson says there’s nowhere near enough accommodation being produced, with net migration into NSW currently running at 60,000 per annum. Additionally, the strong local economy is enticing interstate jobseekers into a rental market that – due to incredibly high property entry prices – is already seriously oversubscribed.
This is evident from reports of slowly rising yields and ever tightening vacancy rates, which are currently sitting at 1.8%.
“Sydney will more likely than not remain under-supplied in terms of property, with affordability still being a major factor,” says Wilson.
HIA economist Harley Dale has laughed of suggestions of a looming ‘tsunami of new housing’ across Sydney, saying that while the 50,000 plus new dwellings currently under construction in NSW has set a twenty-year record, it’s still not enough to plug the gap.
“We need to build close to 60,000 dwellings in NSW this year, and then we need to do that for another year, and arguably two, before we’ll come close to taking care of the shortage. We have a long way to go to completely alleviate that shortage that’s been allowed to build up.”
Still not convinced that Sydney might be ripe for the apartment picking? Why not ask the experts?
“Sydney is the only apartment market you can feel reasonably safe about investing in,” says Hawtrey.
If you’d like further expert insights into Australia’s most talked about housing market, why not join us at our upcoming seminar on the 21st October, where you’ll have first hand access to a Sydney property strategist’s market knowledge and experience.
Look out for your invitation, coming to an Inbox near you soon.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).