The Experts

Angie Zigomanis
+ About Angie Zigomanis

ANGIE ZIGOMANIS - B. - Business (Property) – Senior Manager, Residential Property

Angie heads up BIS Shrapnel’s Residential Property Unit, and is responsible for the majority of BIS Shrapnel’s residential market studies including reports such as Residential Property Prospects: Australian Capital Cities, Inner City Apartments, and The Outlook for Residential Land. Angie also undertakes private client work in the residential and related sectors, as well as workshops and presentations to facilitate business planning and budgeting.

Do we have an apartment oversupply problem?

Wednesday, January 18, 2017

By Angie Zigomanis

New dwelling construction nationally has gone from strength to strength over the past four years.

A record 229,560 new dwellings commenced in 2015/16. That’s 58% above the 145,350 dwellings commenced at the start of the cycle in 2011/12.

Moreover, the 2015/16 record beat the previous high of 187,150 dwellings in calendar 1994 by a sizeable 23%.

This compares with BIS Shrapnel estimates of underlying demand for around 164,000 new dwellings per annum (based on population growth) over the decade to 2015/16. It’s also a record over a ten-year period, and a cumulative undersupply of dwellings has consequently existed for much of this period.

However, new dwelling commencements have exceeded underlying demand over the past four financial years, and the dwelling shortage has been progressively eroded. With dwelling starts likely to remain above underlying demand in 2016/17, the pipeline of dwelling building is expected to result in the Australian market tipping into oversupply.

Dwelling supply strong across all states

Dwelling supply has been strong across all states. There is already an oversupply, or expected to be an oversupply, in all states except New South Wales, where the decade of underbuilding was so severe that dwelling construction needs to be sustained for a number of years before the market shifts back to balance.

Any oversupply will not be uniform across dwelling types. There has been a steady change in the composition of new dwelling activity over the past 20 years. In the 1994 record, house commencements (127,850 dwellings) exceeded unit commencements (59,300 dwellings) by a factor of more than 2 to 1 (68% of total dwellings to 32%). By 2011/12 units accounted for 38% of new dwelling commencements, reflecting an increasing preference toward unit living.

Shift towards units ramps up

From a construction perspective, the shift towards units has ramped up. While new house commencements rose by 29% to 115,150 dwellings between 2011/12 and 2015/16, new unit commencements rose by a massive 105% to 114,000 dwellings.

In just four years, the unit share of total dwelling supply increased to 50%. New house commencements have remained below previous peaks, while new unit starts are close to double their previous highs.

Investors driving apartment supply

Rather than reflecting more owner-occupiers opting to live in units, the record apartment supply has been driven by investors, who typically favour low-maintenance apartment stock.

Investors accounted for 41% of total residential finance at the start of the upturn in 2011/12 (which was around the average through the 2000s), but peaked in 2014/15 at 51% of total residential lending. Investors have been attracted by the steady returns in residential property relative to equities and stronger yields relative to fixed income returns. Negative gearing benefits are also a factor.

For an off-the-plan investor, the lag from the purchase to dwelling completion (often two to three years) means their dwelling can be completed in a different market to when it was purchased. Off-the-plan purchasers will face competition for tenants as the pipeline of apartments is progressively completed. Rental discounts or other incentives will be required to attract tenants, as we have already seen in the Perth market. This will, in turn, affect yields and values.

Regions most at risk are highlighted in the table below.

Units (or other dwellings) over the last four years comprise a higher percentage of total dwelling commencements than the long-term 15-year average in every state.

The biggest increase in share has occurred in Victoria and Queensland. With these markets on track to tip into aggregate oversupply in the next year or two, the highest risk is in the unit/apartment sector. Moreover, it will be in precincts where new supply, and therefore competition for tenants and purchaser, will be greatest. In both Melbourne and Brisbane, we are talking mainly about the central city apartment markets, where the greatest concentration of new apartments is being added. Other apartment markets also have some degree of risk depending on localised supply, although the biggest challenges will be in central Brisbane and Melbourne.

The long lag in adding to apartment supply has been a large cause of the emerging oversupply in the apartment market, but this lag will also be a factor behind the market recovery. The two to three year period from purchase to completion means supply will again initially struggle to keep up when the excess stock is eventually absorbed, setting the scene for investors to take advantage of a rebound in rents and prices until the next round of apartment completions come through.

Unit (other dwelling) share of total dwelling commencements