This article is from the Australian Property Journal archive
AMID a national housing crisis, apartment undersupply levels are set to worsen over the next few years, and will force buyers into the pre-commitment market and to pay more for off-the-plan apartments to compensate for higher construction costs, JLL is forecasting.
JLL’s Apartment Market Overview: Australia Q1 2024 Report found apartment supply levels were already falling well short of underlying demand, reflected in ultra-low vacancy rates across the country, surging rents and record-high prices.
“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,” said Leigh Warner, JLL’s head of residential research – Australia.
“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.”
But despite the positive underlying demand trends, less apartments are being built as conditions remain tough for developers. Over recent years they have faced a dramatic slowing of domestic and foreign investor demand denting off-the-plan sales, the COVID shake-up, labour shortages, and construction costs skyrocketing, denting project feasibilities.
Growth in national construction costs continued to stabilise in the first quarter of 2024, CoreLogic’s Cordell Construction Cost Index shows, but costs are still a whopping 27.6% higher than at the start of the pandemic.
Meanwhile, Last week’s federal budget included a $91 million investment to increase the building and construction workforce numbers.
JLL data shows the trough in national inner city apartment supply was in 2022, but completions remained moderate through 2023 and the March quarter of 2024. Just over 12,000 apartments are likely to complete in 2024 – well below average.
JLL’s head of residential development valuations, Bill Fatouros said 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.”
The 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 said.
“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 suggest this is getting closer to fruition.”
With very little mass-market apartment stock being developed, there will not be any real supply relief for the already tight rental market, said JLL.
“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.
“Build-to-rent projects have an advantage of no selling period and the pipeline of BTR projects has grown over recent years. However, higher bond yields have made investors a little more cautious towards backing new BTR projects since mid-2023, but hopefully this will settle and more BTR projects will commence once new foreign investor tax legislation comes into effect on 1st July.”
“The only real constraint we can see on rental growth over the foreseeable future is affordability,” he said, and that over the medium-term JLL expects “wage growth to become the speed limit for rental growth”.
Relief in terms of supply boost is theoretically on the way, with 1.2 million “well-located” homes to be built across the country over five years from July as part of national cabinet’s National Housing Accord. However, a broad-ranging report by the Albanese government’s National Housing Supply and Affordability Council tabled this month said the target will not be reached, and the target has already been considered farfetched by analysts amid severe labour shortages, as well as current low approval rates and planning red tape.
