Is now the time to buy an inner city apartment?
Inner city apartment markets have been under the spotlight for all the wrong reasons over recent years, especially in Brisbane and Melbourne. Despite all the negative attention, the residential unit sector looks to be moving through the worst of the supply pipeline.
Here’s why: Unit construction peaked across Victoria two years ago (March 2016) when almost 48,000 units were being built and the construction cycle peaked six months later in Queensland (Sep ’16) when there was almost 32,300 units under construction.
Based on the most up to date data available, unit construction activity in Victoria has reduced by 11% since peaking and in Queensland there are 21% fewer units being built relative to the recent peak.
While the pipeline of unit supply is winding down across the most oversupplied markets, there has also been subtle improvements in many of the underlying indicators we use to monitor the health of housing markets.
Firstly, our measure of capital gains: the CoreLogic home value index, has been showing an improving trend across the unit sector of Australia’s largest cities. This doesn’t necessarily mean that unit values are rising, however in Sydney and Melbourne, unit values have been more resilient to falls and in Brisbane the rate of decline has started to ease off after almost two years of unit values trending lower.
Additionally, there has been an improvement in the proportion of off the plan valuations coming in lower than the contract price. This has been one of the key pain points for many off the plan buyers; at the time of settlement the valuation comes in lower than the contract price.
When a valuation comes in low, the lender may seek a larger deposit to maintain the loan to valuation ratio on the loan and/or the buyer is likely to be less willing to settle on the property.
Based on metadata from CoreLogic valuation platforms, in August last year, 60% of Brisbane off the plan units were settling with a valuation that was lower than the contract price.
The latest data through to the end of February shows valuations less than the contract price had reduced to 47% of off the plan unit settlements. In Melbourne this measure peaked at 54% in late 2016 and has since reduced to just 23%.
Another measure we follow closely in apartment resales. Across the Melbourne’s unit market, loss making resales have reduced from 12% of all re-sold units in June 2016 to 8% at the end of 2017. Brisbane is yet to see a peak in loss making resales, with 26% of all unit resales transacting at a loss over the December quarter of last year which is a record high. Considering that many units are selling at a price lower than what their owners originally paid, there is likely to be some bargains to be had.
Other factors likely to be providing some level of support for the unit markets in these cities include higher rental yields relative to houses, more appeal to buyers on a budget thanks to the lower entry point compared with houses and strong demand from both overseas and interstate migration in Melbourne and Brisbane.
Personally, I would still be using a high degree of caution if buying into either of these apartment markets, especially apartment stock that is focused purely on investor target markets and those that offer little in the way of differentiation.
Unit projects built by developers with a solid track record of quality developments that have a broad appeal to owner occupiers and investors and where the site is strategically located may be worth considering.
Published: Tuesday, March 20, 2018