Episode Details

Over the past few years I have observed a strong trend of investment-grade house prices growing stronger than apartments. It is true that all markets move in cycles and all cycles come to an end, eventually. It’s my thesis that several factors (such as the fall in the volume of new apartments, contraction of borrowing capacity and high population growth) are conspiring to create a growth cycle for older-style, investment-grade apartments.

Supply of new build apartments drying up, fast

Development approvals for new apartments has been falling dramatically over the past few years. In Sydney, the volume of new apartments approved for construction has more than halved since its peak in 2016. In Melbourne, approvals have fallen nearly 40% in the last 18 months. The Brisbane apartment market is almost non-existing with less than a quarter of the volume compared to the peak in 2016.

Major residential developments typically have a lead time of at least 18 to 24 months (i.e. planning through to construction). Therefore, if this trend continues, there will be a massive supply-shortage of apartments within the next few years. There is still some pipeline stock to come onto the market, however, once those properties are completed, supply is expected to fall.

New-build apartments aren’t constructed with the secondary market in mind

Purchasing a new build apartment and an establish apartment are materially different things.

Typically, a brand-new apartment purchaser is influenced by things such as apartment finish and building amenities such as theatre rooms, pools and gyms. In the beginning, these buildings are all shiny and new and present very well. However, they tend to wear and tear quickly and these largely superficial attributes become far less persuasive (and costly to maintain).

Conversely, established apartment buyers rarely focus on these factors – mainly because older style apartments rarely offer such amenities. Instead, these buyers tend to focus on factors such as location, privacy, soundproofing, natural light, smaller blocks (fewer tenants) and so on.

Understandably, when you compare a brand-new apartment to an established apartment, the shiny new object gets all the attention. However, because a newer apartment is no longer shiny after 3 to 5 years of wear and tear, an older-style apartment starts to look comparatively more attractive.

Borrowing capacity is diminished

It has been very well documented that borrowing capacity has contracted significantly over the past few years. This means a property buyer’s purchasing power is less which forces them choose between two options. First, an apartment in a nice, blue-chip suburb close to everything. Or, second, a house in the outer suburbs. Many people will choose the first option. Consequently, I predict the reduction of borrowing capacity will force more property buyers into the apartment market.

Houses are too expensive for many people

Approximately ten years ago it was possible to purchase an investment-grade house in Melbourne for around $800,000. However, today, you need over $1 million. Therefore, if your budget is $800,000 you have two options. You can purchase an apartment, not a house. Or you can find a house in an adjoining, non-investment-grade suburb (i.e. compromise on the investment’s quality).

With house prices continuing to increase, an increasing number of property buyers will be forced into the apartment market.

Cladding and building quality issues make new apartments harder to sell

Building quality issues in a few Sydney apartment complexes (e.g.