No risk of inner-Melbourne apartment oversupply until 2013: ANZ

The unprecedented supply pipeline of inner-Melbourne residential apartments is potentially destabilising but the market will correct its own excesses, according to an ANZ report.

The ANZ’s senior economist for property research, Ange Montalti, envisages reassessment of project viability by developers, with their bankers to act as a key lever, to minimise market oversupply.

But Mr Montalti predicted inner-Melbourne apartment prices would continue to be volatile given the emerging residential precinct was not yet mature.

The report, Growing Pains for Inner-Melbourne Apartment Market, noted prices fell by 14% during 2003-04, and by about 7% after the global financial crisis, but then recovered to new highs.

Inner-Melbourne prices collapsed 9% in late 2010, but regained some of this lost ground in early 2011, lifting 5% since January, it said.

''Such volatility is par for the course in this market,'' Mr Montalti said.

The report notes Melbourne building approvals have breached historical peaks, in stark contrast to other capital cities which have generally held within their ‘two-decade’ range.

Victorian dwelling completions are set to run higher than underlying requirements in 2011 and 2012 for the first time in several years.

At face value, such strength suggests a degree of overshoot and unsustainability, it noted.

Vacancies were likely to be volatile as more stock was built, but this would be shorter- rather than longer-term.

Mr Montalti said higher interest rates and a more subdued housing sentiment would create headwinds for the inner-city apartment market.

He said a sentiment-driven 'correction’ currently under way was critical to minimising the potential oversupply.

The most vulnerable period will be 2013, with peak volumes of about 5000-7000 apartments and the product mix shifting mainly to high-rise complexes of 25 storeys or more.

The report noted Melbourne building approvals had surpassed historic peaks, supported by strong jobs growth and a period of under-building (2007-09) that suggested pent-up demand existed.

''The current boom therefore reflects elements of catch-up and should not alone raise undue concern about potential market fallout,'' he said.

Inner-Melbourne was at the centre of the building boom, with approvals running four times higher in the nine months to March 2011 compared with trend levels in recent years.