This article is from the Australian Property Journal archive
THE apartment market in 2024 will continue to be defined by the widening gap between demand and supply with projects that will deliver the much needed stock facing feasibility hurdles, compounded by difficulties in finding reputable and financially stable builders in the current climate.
According to Charter Keck Cramer’s State of the Market report for H2 2023, while conditions remain challenged across sub-markets, 2024 should see a positive change in the right direction by mid-year.
The RBA’s cycle of rate rises since May 2022 has had a significant impact on the housing market, resulting in reduced confidence and limited price growth for apartments.
With the recent steep decline in inflation, further hikes are unlikely but cuts aren’t expected until at least mid-2024.
“It’s our view that the RBA went too far with rate rises, particularly that November rate rise. [The] RBA should cut rates now because Australia is different to overseas markets like the US, the housing system is far more connected to the economy,” said Richard Temlett, national executive director at Charter Keck Cramer.
“Cutting rates now and then also bringing back incentives will then stimulate that supply response.”
In 2024, mitigating risk through project design will be a crucial factor in performance outcomes for apartment projects.
Project development with a primary focus on maximising yield and revenue potential will be riskier in the current market than developments that are well thought out projects which take note of shift in buyers from investors to owner occupiers.
“Maximising site potential, yield and revenue is considered a less sophisticated and riskier mindset in the current market where most purchasers have become price sensitive and more savvy when making purchase decisions,” read the report.
“Market dynamics have shifted and with affordability issues of greater prevalence and owner occupiers now the primary off the plan buyer group developer thinking needs to continue evolving.”
Chart Keck Cramer is forecasting that projects will either sink or swim in the same precinct based on whether they adequately meet target market requirements and whether—crucially—they are delivered by a reputable builder.
This will also be a factor in incentivising downsizers, a market which has stagnated across some cities.
The report notes that downsizing has become less attractive due to the cost of a new apartment in many sub-markets rising to the point that a move is no longer financially attractive, part curly when combined with stamp duty.
“By removing stamp duty, whether you remover and you replaced with an annual land tax like the New South Wales government did for six months last year, or removing it all together to get the market moving and to get turnover of stock is absolutely essential,” added Temlett.
“Buyers should be given an option either paying step duty up front or paying annual land tax. That’s a smart and fair way because stamp duty is a significant cost up front that most people quite simply can’t afford.”
This year the “cascade” effect will continue to play out across the apartment market.
This is defined as the compromises made by occupiers regarding the type of housing, number of bedrooms, location, type of tenure and number of people per household in exchange for affordability and available stock.
This is a reversal of the 2020-2022 period where lowered rents saw many renters take up larger spaces with fewer occupants, absorbing the rental stock that was left available during the first years of the pandemic.
The cascade effect is also present in the purchase market and is one of the reasons purchase prices and rents will remain elevated through this cycle.
“BTS apartments represent the most affordable dwelling typology (particularly for buyers) and as resident expectations recalibrate due to household budget constraints, there is considered enhanced opportunity for apartment projects to receive increased demand,” read the report.
“This can also be assumed for renters outpriced from more expensive and larger dwelling typologies.”
Sydney
In 2023, the apartment development market was subdued in Sydney, with just 8.3k completions, which is around one-third of the city’s annual supply requirements.
Likewise, just 6.3k apartments were launched over the year, which sits 31% below the previous low seen in the first years of the pandemic.
With supply is low, many local buyer segments have been locked out of the market due to affordability constraints. While investor returns have grown due to elevated and continued rental growth.
Apartment completions over the 2024-26 period are currently forecast at 11,400 per annum, a 37% increase on 2023 but still way below the decade average of 18,100 per annum.
Melbourne
Melbourne’s apartment market was incredibly weak throughout 2023, with just 2,600 apartments launched, the lowest level since 2009 and down 60% on 2022 and nowhere near approaching the decade average of 11,600 per annum.
There were 7,600 apartment completions over the year, down 6.8% on 2022 and well below the 10-year average of 13,500 per annum.
Over the 2024 period, 9,500 apartment completions are forecast, which is up 16% on 2023.
Brisbane
Conditions in the Brisbane apartment market in 2023 were some of the most challenging on record with just 1,100 apartments launched, which is 7.6% below the decade average.
While many recently launched projects in Brisbane are successfully achieving strong sales results, these projects are priced at the upper end of the market, while other local buyer segments cannot accept the high price point required to offset increased build costs.
Over the year, there were 2,200 apartment completions which is up 70% on 2022 levels but more than half the 10-year average of 4,800 per annum.
Forecast apartment completions for will be somewhat improved, up 11% to 2,600 per annum.
“Melbourne and Brisbane are chronically, chronically undersupplied and it’s going to take a couple of years in a best case scenario, even if all the incentives were introduced and interest rates are cut, for projects to actually get built,” said Temlett.
“The housing and rental crisis is going to continue for least the next couple of years. Probably even longer.”
Gold Coast
Compared to other cities in 2023, the Gold Coast’s apartment market results were far more positive with strong sales and ongoing sales growth.
Many recently launched projects on the Gold Coast are achieving strong sales and pricing results, particularly those with well-regarded builders.
This is a result of a large sum of purchases coming from interstate and looking for lifestyle purchases at premium price points.
However, apartment launches remained constrained over 2023, down 68% to 1,000, which is more than half the 10-year average of 2,100.
Apartment completions came in at 1,500, which was up 1.8% on the previous year but somewhat below the 10-year average of 1,400 per annum.
The 2024-2026 period is expected to see elevated completions at 2,400 per annum, a 43% improvement on 2023.
Perth
Perth’s apartment market remains challenging, with both interstate and international migration levels combining with pre-existing supply issues to make for a very imbalanced market.
Perth saw a decade low level of apartment launches at just 400, down 81% on 2022 and way below the 10-year average of 1,900 per annum. While the rental vacancy rate was at just 05%.
Likewise, Perth saw just 700 apartment completions over 2023, though this was stable on 2022 levels it was less than half the 10-year average of 1,800 per annum.
Perth is forecast to see 2,100 apartment completions over the 2024-2026 period, which would be an increase of 195% on 2023.
“The apartment markets are at different points in the cycle. You’ve got WA for example, where there is a huge amount of demand and there’s quite a bit of supply,” added Temlett.
“It has been incentivised with things like off-the-plan incentives, that’s the only state that actually has off-the-plan incentives for foreign buyers.”
Adelaide
Despite positive fundamentals, apartment market conditions were difficult over 2023 with activity undermined by supply constraints.
Adelaide saw just 200 apartment launches in 2023, down 76% on 2022 and sitting below the decade-average off 900 per annum. This with Adelaide’s vacancy rate at just 0.6%.
Over the year, apartment completions were up 13.5% to 400 or half the 10-year average of 800 per annum.
Adelaide is forecast to see 650 per annum apartment completions in over 2024-2026, which is up 54% on 2023.
Canberra
Australia’s capital city apartment market showed more positive indicators over the year, with strong demand during the early years of the pandemic beefing up commencements and completions.
At the same time, market headwinds saw launches contract to 1,100 apartments for the year, the lowest since 2013, down 40% on 2022 and half the 10-year average of 2,200 per annum.
Apartment completions were down 26% to 1,700, sitting below the 10-year average of 1,900.
With forecast apartment completions for 2024-2026 down 7% on 2023 at 1,800 per annum.
“One of the biggest things we are calling on the government to do is bring back off-the-plan incentives for foreign investors in particular, and also investors. Because they typically buy off-the-plan and they’ll buy new off the plan apartments,” said Temlett.
“[The government] is nowhere near those aspirational housing targets. They’re going to have to incentivise, they have to bring back foreign investments, foreign capital, and the apartment market’s going to have to do a massive amount of that heavy lifting.”
“The government needs to make decisions now and that will flow through in a couple of years’ time. The longer they delay these decisions, the longer the housing and rental crisis is going to continue,” concluded Temlett.
