Apartment bust to shock tens of thousands of investors, report suggests

An inevitable glut of high-rise apartments will hit “tens of thousands” of off-the-plan investors in Sydney and Melbourne, a new report claims.

The building boom has seen a surge in small apartments in high-rises, which will see an imminent “busting of the apartment bubble”, according to the Australian Population Research Institute report Sydney and Melbourne’s Housing Affordability Crisis: No End in Sight.

The report, by Bob Birrell and David McCloskey, says Melbourne, and then Sydney, will soon see obvious signs of a market replete with surplus apartments as both cities jump to about 21,000 to 22,000 apartment completions in 2016 and 2017.

In 2014 and 2015, completions totalled 13,000 to 14,000.

Industry groups dispute that there is an oversupply of apartments in Sydney and Melbourne and have slammed the report for being alarmist.

The report suggests that the apartment building boom has produced thousands of small apartments, which appeal mainly to investors, temporary migrants (especially students), and young singles and couples.

But the key driver of demand in coming years will be from young households entering into the “family formation” phase. They will need two- or three-bedroom units, which developers have been unwilling to deliver on mass in recent years.

As a result, a “time of reckoning approaches” that would most likely be caused by the “impending glut of high-rise apartments”.

These apartments are largely sub-50 square metre apartments under $500,000 that attract investor purchasers, for which there is only a “limited market for tiny apartments” but an “enormous pipeline” being built.

The “tens of thousands of investors” who bought them are likely to be the “main casualties” as they find the value of their apartment at settlement is considerably less than when they purchased, the report claims.

This could see banks unwilling to finance as expected, seeing some investors forego their deposits, and offshore investors may face difficulty transferring the required money to complete the contract.

“The resulting financial turmoil will deliver a wake-up shock to housing purchasers,” the report warns.

A downturn in house prices was not likely given the continuing shortage of detached properties but there could be a reduced demand “from investors and owner occupiers who have assumed that capital gains for dwellings were never ending,” it says.

The Australian Population Research Institute is an independent research organisation, of which Monash University’s population expert Bob Birrell is president.

However, Urban Taskforce chief executive Chris Johnson slammed the report as “alarmist” and “worried” about the changing nature of Australians’ lifestyles.

There is “definitely not” an oversupply of apartments, he said, pointing to NSW Government statistics forecasting a need of 33,200 new dwellings each year in Sydney.

“We are changing the way we live in Australia, it’s a big move from suburban lifestyle to a more urban lifestyle, often in highrises, with a different approach to amenity,” Mr Johnson said.

The requirement for families to live in houses is a “misconception”, he said.

Research undertaken between the Urban Taskforce and Research Now found families are 16 per cent to 18 per cent of apartment residents, with the figure moving upwards.

“Developers are increasingly including child care within their complexes,” he said.

“The market is calling for places closer to work, closer to public transport and the development industry is responding by providing the product needed to move our cities into something more akin to London, New York, Paris and other global cities.”

Domain Group chief economist Andrew Wilson said there was certainly a case for Melbourne being oversupplied in the Hoddle Grid and inner city areas, but said it was “anything but the case in Sydney”.

“The notion of oversupply in Sydney is completely fanciful as the underlying demand is almost insatiable,” Dr Wilson said.

“Sydney will have to get used to being a high-density city eventually and some people will have to choose an apartment instead of a house,” he said.

However, in Melbourne he warned the locals “do not embrace CBD living”.

“We’re not seeing rents fall or prices falling significantly yet, and vacancy rates have tightened in the markets … but the majority of construction is yet to come through,” he said.