Apartment Supply

A key reason why fundamental problems in the housing market are never solved is because people seek to treat the symptoms rather than the cause.

This is true in business and in life, as much as it is in the housing market. It makes little sense to take medication for high blood pressure if the underlying cause is that you&rsquo;re overweight because you have a bad diet and you don&rsquo;t exercise.

People who hover around the sidelines of the real estate industry, sniping at things they don&rsquo;t like, are highly prone to demanding actions on the symptoms of a perceived problem when they should be addressing the underlying causes of the symptoms.

Treating symptoms, while ignoring causes, has a tendency to make problems worse. Right now, we have spectators to the housing market demanding controls on landlords because rents are rising.

Other spectators want draconian measures from regulatory authorities because prices are rising, bringing howls of outrage about housing affordability.

In both cases, their targets are investors, always a popular choice as scapegoats when there&rsquo;s growth in housing markets and it&rsquo;s characterised in media as a crisis.

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The natural impulse of the sideline whingers is to demand a crackdown aimed at investors, because they&rsquo;re always seen as the villains.

The reality for the issue of rapidly rising rents is that we need to be encouraging investors, not attacking them.

The symptoms of the problem are rising rents, but the cause is a chronic shortage of rental properties.

In my four decades of researching and writing about housing markets, I&rsquo;ve never seen vacancies so low in so many places.

Anyone genuine in their concerns (rather than having a whinge or grandstanding for political reasons) should be asking why we have such a shortage and how we can fix that fundamental problem.

Rental control is a quick fix medicine to treat the symptoms, while ignoring the underlying market health issues. It will make the problem worse by exacerbating the fundamental problem, which is that Australians have been massively discouraged from becoming investors.

Rental vacancies are a function of the activity of property investors. When people buy dwellings and make them available for rental in large numbers, there are ample properties for everyone who wants or needs to be a tenant, and rents are likely to be stable.

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But investors have been largely absent from the market in recent years. There has been a growing raft of disincentives to property investment over the past five or six years &ndash; including a series of negative measures by APRA, negative changes to depreciation rules and menacing political rhetoric at the last two federal elections, notably from the ALP which has been intent on scrapping negative gearing and increasing capital gains tax.

We&rsquo;ve also had state governments discouraging investors by hitting them with new taxes, fees and charges. The impact of all those different milestone events since 2015 has been a profound discouragement to investment. Some sections of media have characterised property investment as something akin to a criminal activity, abetted by politicians who have claimed the average investor is a rich greedy bastard who owns 15 or 20 properties and is ripping off the system &ndash; a blatant lie (the official data shows 75% of investors have average incomes and own only one or two properties) but lapped up by a careless media.

The short-term consequences include a rental shortage crisis and the long-term outcomes include fewer Australians who will be self-funded in retirement and will need to be supported in growing numbers by taxpayers. If governments respond to the twits on the sidelines and enforce controls on rental levels, rather than allow market forces to set them, that will be yet another disincentive to investors &ndash; and the problem will get worse.

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Limiting how much a tenant has to pay in rent is worthless if the prospective tenant can&rsquo;t find a vacant property at any price. That&rsquo;s the reality at the moment. There are so few vacant properties that there are dozens of applicants for every listing and people who desperately need a home keep missing out. Rents are rising because people are offering more than the asking rent in an effort to out-bid their competitors, not because landlords are asking extortionate rents.

And, as an aside, increasingly businesses can&rsquo;t fill job vacancies because willing applicants can&rsquo;t find anywhere to live. The only answer to this problem is to increase the supply of rental properties. And that means introducing measures that encourage property investors.

That will elicit further howls of indignation from the chattering economists and other sideline snipers, but it&rsquo;s the only way to fix this problem.

Rental control is a quick fix medicine to treat the symptoms, It will make the problem worse by exacerbating the fundamental problem, which is that Australians have been massively discouraged from becoming investors

terryryder

Why is there a housing shortage and why will government controls make it worse? Hotspotting's Terry Ryder

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Nationally, current supply pipelines based on what is under construction and being marketed suggests supply will fall by around 20% over 2018 and by around the same amount again in 2019, according to JLL.
JLL’s latest Apartment Market reports for 1Q18 highlights that Australia’s major apartment markets are at very different stages of the cycle, but all markets are dealing with slower investor demand and tighter development lending conditions.
These factors have resulted in a thinning out of supply pipelines in all markets and means inner city apartment supply will fall in 2018 and 2019 from the highs of 2017.
JLL data suggests that around 26,600 new apartments completed in 2017 across inner city areas monitored in Sydney, Melbourne, Brisbane, Perth and Adelaide.
Click here <a href="https://www.propertyobserver.com.au/images/2018/5/16/pipeline.jpg" target="_blank">to enlarge.</a>
 
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/5/16/pipeline.jpg" alt="">
Current supply pipelines based on what is under construction and being marketed suggests supply will fall by around 20% over 2018 and by around the same amount again in 2019.
Leigh Warner, JLL’s head of residential research in Australia, says ultimately the shift in development focus is a good thing.
“There is no doubt that with slower investor demand it is now a very challenging environment for developers to meet pre-sales hurdles and progress the very large CBD and near-CBD projects that have typified this cycle," Warner said.
"Many of these projects have already been postponed to later cycles, abandoned, changed to alternative uses, or substantially redesigned to be a more manageable size in the current market.”
Nevertheless, development is not stopping and JLL’s reports highlights that the focus of developers in most markets has shifted from high-density to more medium-density projects, often in suburban infill locations and with high quality finishes to target the owner-occupier market.
“The decline in the inner city supply pipeline will be a much needed breather for most of our major markets and help them absorb the strong level of supply added over the past few years. But at the same time, strong population growth and the need to densify our cities, mean that we do need to keep building apartments or else supply will fall behind demand once more and price pressures will continue to plague our major cities.”
JLL’s 1Q18 reports continue to show large differences in where pricing and fundamentals are across the market. Sydney and Melbourne continue to both record low rental vacancy in spite of recent strong supply levels, but Sydney has shown more evidence of slowing apartment price and rental growth over recent months. 
“Sentiment has clearly softened in the Sydney market and the market appears to be stalling now. However, Melbourne keeps on chugging on and showing remarkable resilience to recent supply levels. There is some moderate pressure on re-sale values in and around the CBD where recent supply has been particularly strong, but overall Melbourne’s strong population growth appears to be still cushioning the market from wider downward pressure.”
The reports also highlight that the Brisbane’s market appears to be stabilising after the worst of the supply wave is over and prices start to flatten out after 12-18 months of decline. Perth prices continue to fall, but there is also increasing evidence that it has passed the worst. This is evident in a recent rise in inner city apartment approvals, particularly for luxury apartments aimed at the owner-occupier market, which shows developers are gaining more confidence to start preparing for the next cycle.
Adelaide and Canberra are slightly less progressed in the current cycle and prices are still growing solidly despite elevated development activity. Momentum has slowed slightly in both markets over recent months, but the short-term outlook remains solid.
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jonathanchancellor-7SQnKwU6yx

Inner city apartment supply past the peak: JLL

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The supply of new capital city apartments is set to dry up over the next three years as completions plunge.
They are expected to plunge from their present levels in Sydney by 81 per cent and in Melbourne by 75 per cent.
New projects are tipped to be delayed or cancelled because of poor demand following the pandemic slowdown.
The forecasts were made in the <a href="https://charterkc.com.au/research/state-of-the-market/" target="_blank" rel="noopener noreferrer">State of the Market for Residential Apartments report</a> by consultancy firm Charter Keck Cramer.
It also expects a sharp decline in the number of completed apartments in Brisbane, where supply is forecast to slump as much as 90 per cent by 2023.
Charter Keck Cramer director of residential research and strategy Angie Zigomanis said the expected drop in apartment completions could help stem the slide in apartment prices and rents.
"The apartment market could see a relief from lower supply and starts, which will place upward pressure on rents, yields and prices, and in turn should kick-start off-the-plan demand," Mr Zigomanis said.
"If a quick recovery in net overseas migration to pre-COVID levels occurs, the sharp reduction in new dwelling completions from FY2022 is likely to cause a significant dwelling deficiency to re-emerge.
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"However, if net overseas migration inflows and population growth continue to remain weak, then the Melbourne and Sydney apartment markets could be subdued for some time."
The report noted Victoria's recent share of the national total suggested that its net inflow of overseas migrants will fall dramatically from a peak of 91,000 in FY2017, to 11,000 in FY2021.
"On these numbers, the requirement for new dwellings in Melbourne is expected to more than halve from a peak of 57,500 new dwellings in FY2017 to an estimated 27,200 in FY2021."
The supply of new apartments has continued to flow this year through the pandemic, the report noted.
A total of 17,100 apartments were being completed in Melbourne – the third highest on record.
In Sydney, 22,500 apartments were being finished.
It is 5000 in Brisbane.
But the pipeline is diminishing quickly, with project launches and commencement falling sharply.
Only 5300 apartments started marketing in Sydney – an 84 per cent drop from the 2016 high and its lowest level since 2010.
The number of apartments starting construction has tumbled by more than half (57 per cent) to 9200 – the lowest commencements in nine years.
In Melbourne, 12,500 new apartments began construction – a slight increase from a year ago. Only 5600 apartments were being released for sale, which was the lowest number of launches recorded over the past decade.
The time it took to deliver new apartments from launch has blown out as slower sales volumes and more onerous requirements to secure finance has held up projects.
The lag in Sydney has pushed out to an average of 18 months compared to eight months in 2011 and 2016. In Melbourne, the delay widened to an average of 20 months from nine months in 2009.
Historically, larger projects take longer to proceed from launch to construction, however the time frame has converged, highlighting the difficulties in achieving pre-sales and obtaining finance across the board, Mr Zigomanis said.
The report noted the Sydney owner occupier market is holding up, supported by low interest rates, which have improved affordability for those with jobs.
"First home-buyer demand is being encouraged by stamp duty concessions.
"In turn, this is supporting demand for affordable apartments that are suitable for owner occupiers. Both upgraders and downsizes remain active where they are transacting within the same market."
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j.ballantyne1990-6AQqhLzZaK

Price drop to be stemmed as apartment supply set to plunge given COVID-19 pause

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BIS Oxford Economics has reversed its forecast that Melbourne will suffer a surplus of apartments.
Faster-than-expected population growth now meant the city would be in balance or potentially face an undersupply as recent census figures showed the state had 109,000 more people than previously expected.
"If you translate that into households, it's close to 35,000 extra households in Melbourne," BIS managing director Robert Mellor told The Australian Financial Review.  
"We thought it would get to a 20,000 excess [of apartments] in Victoria by 2018. We're now saying in 2018 the market has still got an undersupply of about 2000 dwellings. We're talking a 20,000 turnaround."
The findings reflect other census figures showing the proportion of students rose to 27 per cent of demand for inner city apartments in 2016, up from 20 per cent five years earlier, Mr Mellor said.
BIS forecasts apartment commencements in Victoria have shrunk from its 2015 peak of nearly 19,800 to a likely 2021 trough of 7200. 
"It'll start picking up more significantly from 2021-22 and beyond," Mr Mellor said.
"At this stage, we're not predicting the next boom will be as big as the current boom."
BIS says Sydney and Brisbane will also suffer a decline in new housing starts, but that Sydney's reduction would be less severe in relative terms and Brisbane was already in a position of oversupply that would take some years to absorb. 
New high-rise housing starts in NSW were likely to near-halve from its estimated 2017 peak of nearly 32,000 to just over 16,000 in 2020.
Queensland would see commencements drop by more than two-thirds from more than 15,000 in 2016 to just over 4,000 by 2020, BIS forecasts.
The lack of new supply down the track would push rents higher and provide more of an incentive for institutional investors to back the built-to-rent sector, Mr Mellor said.
BIS Oxford Economics had warned of a 15,000-apartment glut in the Victorian capital two and a half years ago.
It repeated the warning last year.
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BIS now forecasts no Melbourne apartment oversupply

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Rouse Hill is the Sydney suburb which has seen the most dramatic decline in its unit listings.
Investar suggests stock for sale had decreased by 66 percent, from 86 units this time last year to its current 29 offerings.
Cumberland Green off the plan offerings are for sale.
A two bedroom apartment - currently on the market - is a new Windsor Road offering which is priced at $670,000. 
<a href="https://www.realestate.com.au/property-apartment-nsw-rouse+hill-127148522" target="_blank">The 828 Windsor Road</a> apartment came with one carport space (pictured above).
The two bedrooms apartment range from $670,000 to $730,000 and its three bedrooms apartment range from $740,000 to $810,000.
There was an two bedroom apartment sold last year for $700,000.
<a href="https://www.realestate.com.au/sold/property-apartment-nsw-rouse+hill-125963874" target="_blank">The 47 Main Street apartment</a> located on the third floor of the New Rouse Hill Town Centre. 
Investar puts it the suburb median rental at $550.
The median unit price sits on<a href="https://www.urban.com.au/news/3351-rouse-hill-nsw" target="_blank"> $809,000</a>, according to CoreLogic. 
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Rouse Hill sees big decrease in apartment supply

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The Gold Coast is bright spot for apartment sales, with 33% increase in apartment sales compared to last quarter, according to Urbis’ latest Apartment Essentials report.   Research by the property consultants found that in Q1 2018 sales were buoyed by the recent Commonwealth Games excitement.
There have been nine new project launches, equating to over 1,000 new apartments.
Apartment approvals dropped in the quarter to 1,385, the third consecutive drop since mid-2017.
However, compared to Brisbane where only just over 300 apartments were approved in the quarter, the pipeline of supply continues to build, National Director of Property Economics and Research at Urbis, Clinton Ostwald noted.
Some 65 per cent of sales were the two-bedroom, two-bathroom product.
The weighted average sale price was recorded at $729,856.
In late 2017 the Gold Coast weighted average sale price across the four precincts registered $619,737 in the December quarter.
The Gold Coast Central Precinct recorded the highest weighted average sale price at $731,786, due to its higher level of high rise developments selling.
The most affordable precinct was the Coastal Fringe Precinct, which recorded a weighted average sale price of $537,013 in late 2017. The Coastal Fringe Precinct was also the top selling precinct during the quarter, registering 37% of total sales, and also the top selling precinct for 2017.
A recent Urbis advisory calculated owner occupier sales dominated in the Gold Coast, making up 54% of sales respectively.
The Gold Coast apartment market performance, with the recent Commonwealth Games stimulating project launches and the local apartment market, will be tested, Mr Ostwald said, adding it would be interesting to see how long the Commonwealth Games uplift would continue for as this market is likely to have benefited to the additional exposure. 
By contrast inner Brisbane apartments are still primarily a product aimed at investors, and this was represented in the data with 43% of sales being to foreign investor buyers.
Urbis senior Consultant Lynda Campbell said recently there are currently 22 projects yielding over 2,000 apartments which could potentially launch across the Gold Coast in the first half of 2018.
“A quarter of these are in the Southern Beaches Precinct, which has gone from being one of the most undersupplied markets to now having the second highest level of future supply and the highest level of active supply."
*Coastal Fringe suburbs include Arundel, Parkwood, Molendinar, Ashmore, Benowa, Bundall, Carrara, Robina, Clear Island Waters, Merrimac and Varsity Lakes. *North Shore suburbs include Biggera Waters, Coombabah, Helensvale, Hollywell, Hope Island, Paradise Point and Runaway Bay. *Gold Coast Central suburbs include Labrador, Southport, Main Beach, Surfers Paradise and Broadbeach and Broadbeach Waters. *Southern Beaches suburbs include Bilinga, Burleigh Heads, Burleigh Waters, Casuarina, Coolangatta, Currumbin, Kingscliff, Kirra, Mermaid Beach, Mermaid Waters, Miami, Palm Beach, Tugun and Tweed Heads.
 
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Gold Coast new apartment sales averaging $730,000

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Just 2,300 units are planned for completion and settlement in FY19 by Frasers Property Australia, compared to over 3,000 units settled during FY18.
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On the residential front in Australia, 2,200 units are planned for release in the upcoming financial year (“FY19”), compared to over 1,800 units released in FY18.
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Fraser Property Australia's residential development profit growth has meanwhile slowed with the downturn in the housing market seeing the developer turn more reliant on commercial properties.
The business posted a 42.5 per cent increase in development profit before interest and tax for the year ended September, but which was smaller than last year's profit growth of 122 per cent.
Frasers Property Australia chief executive Rod Fehring told shareholders the company's recommendation of private home loan lenders to its apartment buyers has helped reduce defaults on apartment purchases.
It noted buyer preparation for funding was being set up twice as early. 
Speaking at parent company Frasers Centrepoint's annual results in Singapore on Friday, Fehring said settlements of apartments remained on track with a low "default rate", mainly because of the use of private lenders to buyers to obtain funding.
 
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Frasers Property Australia facing residential challenges in 2019

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Despite the rebound in housing market activity and existing dwelling prices seen over recent months, we should not be expecting a sudden rebound in the new construction apartment market, according JLL.
Conditions will remain tough for developers in the short-term, particularly in Sydney and Melbourne as the tail end of the last construction cycle is absorbed, JLL's 3Q 2019 Apartment Market Reports said.
Nevertheless they said, these challenges will see supply continue to fall sharply over the next few years and will see the major markets move into under-supply progressively over the next 12-24 months.
"The recovery in existing property demand and prices is great for confidence in the broader market," JLL’s Head of Residential Research - Australia, Leigh Warner said. 
"However, this is likely to level out a little over the next couple of quarters, as more vendors are attracted back into the market. The recovery in investor demand is also likely to stay more muted than for owner occupiers and this remains an important source of demand for the new apartment market.
"Demand for new apartments will improve somewhat, but pre-sales rates will stay relatively slow. Developers are still competing against residual un-sold stock in recently completed projects, which in many cases are heavily discounted or offering other incentives to buyers."
"The good news is that with strong population growth and new completions still falling sharply, the process of consuming this residual stock will be reasonably quick. The timing of this process will be slightly different in each market due to all having slightly different construction cycles, but by mid-2021 we expect all the major markets to be either back in, or very close to, a position of under-supply again."
JLL data showed that the number of apartments under construction in the inner-city regions of Australia’s six major capital cities fell a further 5% in 3Q19 to 37,500 apartments and was down 23% over the past year and over 30% from its peak.
However, JLL said that perhaps the strongest sign of the decline that is still to come in apartment construction is the decline in the number of apartments being actively marketed. This fell a further 19% in 3Q19, to be 42% below a year ago and around 63% below its peak level. This decline has been felt across all monitored markets, but has been most severe in Sydney where it has fallen 54% over the past year and 80% from its peak level.
According to Warner, Brisbane is likely to be first into the next cycle.
"Brisbane supply peaked way back in 2016 and is more advanced in the process of absorbing residual stock. Construction will be particularly low in 2020 and 2021. At the same time, underlying demand continues to pick up as regional population growth increases and some large inner city infrastructure projects boost economic activity and lure construction workers to the region. A tightening of the market is already evident in the rental market, where upward pressure on rents have already re-emerged."
Melbourne and Sydney are likely to take a little longer to tighten up., he said.
"Melbourne’s very strong population growth will help with consumption of stock, but construction has been very concentrated in and around the CBD and there are some very large projects recently completed or soon to complete that still have a large amount of stock to be absorbed first," said Warner.
"In comparison, Sydney’s construction cycle was much more decentralised and only reached a peak much more recently. As such, residual stock to be absorbed is more spread across the entire Greater Sydney area and will take a little longer to work through. The recent building defect issues have also affected buyer confidence in the market. With a lot more choice in the market, we think buyers will gravitate to both the best locations and to projects with more widely recognised developers and builders."
"Perth’s housing market remains soft, but there is increasing optimism that better times are ahead. Improved local economic and population growth over the next few years should boost underlying demand growth, while lower interest rates and easier credit should also lure some buyers out of the rental market that have been holding off for prices to stabilise. Similarly, apartment prices are lower than they were a decade ago in Perth and this affordability and improving market outlook may attract a little more investor interest."
"Neither Adelaide nor Canberra have historically had significant apartment markets, but apartment living has started to take off in both markets over recent years. Supply levels remain elevated in both markets, which will put some moderate pressure on pricing ahead, but solid economic prospects and improved market sentiment after the interest rate cuts and easing of credit constraints is likely to mean a shallow downturn for Adelaide and Canberra. Further, smaller owner-occupier focused stock is likely to continue to hold up well."
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