Apartment pre-sales and prices set to rise: JLL
A difficult apartment development environment across Australia will mean under-supply levels worsen over the next few years and this lack of available stock will force buyers into the pre-commitment market and to pay more for off-the-plan apartments to compensate for higher construction costs.
That's the view from real estate services firm JLL, whose Apartment Market Overview: Australia Q1 2024 Report found apartment supply levels were already falling well short of underlying demand and the situation will only worsen as demand continues to rise and supply stays moderate.
Leigh Warner, JLL’s Head of Residential Research – Australia, said there are many factors supporting growth in apartment demand across Australia.
“Affordability is now being stretched in all our major cities. While it has been the case for a long time that buyers would have to start their housing journey and often stay in an apartment longer in Sydney because of affordability, the rest of the country is rapidly catching up and this is boosting underlying demand for apartments relative to the past,” Warner said.
“But this trend is being accelerated by current borrowing conditions. Borrowing capacity for most buyers has dropped enormously over the past 18 months and with dwelling prices continuing to rise over this period it has pushed detached houses well beyond the capacity of most first home buyers and indeed many investors.”
Despite positive underlying demand trends, we are building fewer apartments rather than more and conditions remain tough for developers, JLL’s Head of Residential Development Valuations, Bill Fatouros, says.
“Developers have faced one hurdle after another over recent years,” Fatouros said.
“First it was the dramatic slowing of domestic and foreign investor demand denting off-the-plan sales, then we had COVID hit and just as demand prospects improved recently, construction costs sky-rocketed and dented project feasibilities. But at some point, the worm has to turn quickly. There is now very little existing apartment stock available for sale and this means buyers will have no option but to buy off-the-plan and to pay the higher prices required to justify higher build costs."
JLL’s report notes that this is already happening at the higher end of the market for luxury boutique projects where downsizers have continued to drive strong demand.
“Downsizers have generally already done very well out of the housing market and the large amounts of equity they have accumulated means rising interest rates have not had the same impacts, Fatouros added.
Downsizers have been discerning buyers willing to pay the higher prices necessary to compensate for higher build costs in order to secure exactly what they want.
“We firmly believe it is inevitable that the same will happen across the broader apartment market and that a jump in pricing will have to happen to make mass-market projects viable. The recent acceleration in existing apartment price growth in many markets suggests this is getting closer to fruition."
Affordability the only constraint on rental growth
JLL’s report also highlights that with very little mass-market apartment stock being developed, there will not be any real supply relief for the already tight rental market where vacancy is already sitting at around one per cent across Australia.
“There are more Build-to-Rent (BTR) completions due over the next few years, particularly in Melbourne, but the numbers are still small compared to the drop in the overall apartment supply level and it will do very little to alleviate rental market pressures – even in Melbourne,” Warner said.
“The only real constraint we can see on rental growth over the foreseeable future is affordability. This is already being tested in some markets and we are already seeing tentative evidence of a slowing from the break-neck speed of the last few years. But over the medium-term we expect wage growth to become the speed limit for rental growth."
