Melbourne apartment boom goes bananas

By Leith van Onselen

The Melbourne housing construction boom is set to continue, with an article today in Property Observer claiming that a record number of apartments will be completed in Melbourne in 2012 and 2013, followed by a slump in construction activity:

Apartment construction in Melbourne is likely to peak in 2013 with as many as 14,000 apartments being completed, according to forecasts by consulting and valuations firm Charter Keck Cramer (CKC).

However, in 2014 the great spurt in the apartment construction, which kicked off in 2011, will at least halve and possibly fall as low as just 4,000 apartments, taking the market back to average annual rate achieved from 2000 to 2011, the firm says.

In total, about 31,000 apartments are set to be completed or commence construction between now and 2014, with most of these to be built in the inner city.

Around 7,500 apartments will be built within 10 kilometres of the city, more than 4,400 in the middle to outer ring, and only 800 in the outer-growth areas.

Since 2010 apartment construction in Melbourne has risen steeply, with 5,000 constructed in 2010 and nearly 8,000 constructed in 2011 – compared with the annual average of just over 4,000.

Most of this has been with a 2.5-kilometre radius of the CBD. About 9,000 apartments are under construction currently…

Robert Papaleo, head of research at CKC, says up until 2015 there will be no shortage of apartments available in the market, but the question remains: “will there be enough owner-occupier demand”.

“To date the product has been well received, but we now have a softer rental market and population growth is slowing,” he tells Property Observer.

CKC’s analysis is supported by the Australian Bureau of Statistics dwelling approvals data, which shows a surge in apartment approvals in 2010 and early 2011, followed by a drop-off in approvals more recently (see below chart). Given the significant time lag from approval to completion, its stands to reason that these apartments will hit the market in 2012 and 2013, followed by a slump in activity.

So it looks like Australia’s most oversupplied housing market – Melbourne – is set to get much worse. Don’t say I didn’t warn you!

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Unconventional Economist
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  1. Is there a planning advantage at the centre of this, it seems odd that everyone is going mental in Melbourne but that other centres building is subdued unless it is easier to develop in melbourne vs. other capitals. Given MB’s previous investigations of planning vs. boom busts in the US perhaps an article is warranted?

    • Hi Rob. I wrote an article comparing Melbourne with Miami last year (here) that touches on some of these issues. Basically, there are two types of planning constraints in operation in Australia. The Sydney (UK, coastal California) approach, where construction is more or less precluded altogether. And the Melbourne (Miami, Arizona, Nevada, Irish) approach, where planning constraints significantly slow (but don’t stop) development, causing new supply to be added long after the market has peaked.

      In my view, both approaches are bad and make for an unresponsive market. However, Melbourne’s is worse for prices as it is more likely to cause vicious booms/busts as new supply continues to get added during the downturn, accentuating price declines.

      • So the slow planning response causes the price to spike, which signals an incorrect (inflated) level of demand to developers, who end up building too much, too late. Kind of like turning up to a party with a couple of slabs, just as the last guests are leaving..

      • “Melbourne’s is worse for prices as it is more likely to cause vicious booms/busts…”

        Indeed. The price mechanism is supposed to provide negative feedback to stabilize the market. But if you introduce a delay, there will be a frequency at which the delay is equivalent to inversion of the feedback, which then becomes positive, causing oscillations at that frequency if the feedback is strong enough. Engineers study this problem and take steps to avoid it. Mainstream economics, mired as they are in static models, are coming from behind.

  2. How dare you claim to have identified this issue in previous articles.

    I am personally offended.

    • BubbleyMEMBER

      Run to Darwin! We have desperate shortage of housing up here.

      Seriously get your Melbourne property builders up here if they want to make a dollar. We have cash and want to spend it.

      Why build in an over supplied area when there are places like Darwin, the Pilbara and Mackay?

      Places with an under supply and where the properties will actually sell, rather than send the developers broke.

      • Darwin has a very steep cost of living with everyday items and utilities much more expensive than what southerners are used to. Added to that is the horrible, unbearable build-up weather every spring and the isolation from the rest of the country. There’s lots of migration to the NT from the South but people simply don’t stay that long for all these reasons.

        Melbourne on the other hand has a lot of amenity depite the crowding – lots of public transport, culture and nightlife (especially if you are young and single) that Darwin simply can’t match. There’s good reasons why thousands of people move here every month, even it is being ruined by excess population –

  3. What percentage of those under construction are likely to be presold (at peak of boom prices)?

    Suspect we will see an increasing number of insolvent developers…

    • bullion, my brother is involved in one of the big ones going up at the moment, he reckons these things are still selling – not to confident about the future though

    • A large proportion MUST be sold off the plan (typically >50%) to secure funding for before construction can begin. I suspect the pre-sales to date have come from overseas (likely asian) investors.

      However, recent proposed changes to CGT concessions for overseas investors have made Australian property less attractive so overseas investment should slow.

      I expect that 1 in 3 approvals won’t proceed to the construction stage due to lack of interest from purchasers / investors (for the reason outlined above + end of FHB grant in VIC + economic downturn in VIC).

  4. There are still some hopeful people out there – I have seen rental ads with fantasy weekly asking rents for newly built apartments shoe boxes in South Yarra (specifically, some new devs on Claremont street).

    Inevitably,TP: Edit – come on Mav – will simply quote those “asking” rents in the APM stats and spruik that rents are heading to the moon.

  5. The high proportion of pre-sales the banks require before agreeing finance means the losses this sector faces are already pinned onto the balance sheets of buyers.

    The ratio of structure costs to land in high rise is extreme. And, like a new car, the depreciation on these itty boxes made of ticky tacky is ruinous.

    Good luck trying to get our of a pre-sale contract. Those things are watertight.

      • Not sure how it works, but they said Oracle collapsed because of problems with settlements of presales. I think Soul was having similar issues. These are big developments. Hell even Showgirls company is in admistration! – tough times on the glitter strip!

  6. Like to see a comparison between Syd and Melb… and some explanation as to whey the discrepancy?

    • reusachtigeMEMBER

      As UE said above, the difference is that Sydney is so hard to build in nowadays that hardly anything gets built and Melbourne is slightly easier to build in therefore stuff gets done slowly and arrives way too late. This is UE’s restrictive land theory/hypothesis that he has developed himself, maybe.

    • Rio Grande!

      You should be in property.

      Muddy creeklet is more like it.

      Only thing that keeps the southerners south is the European atmosphere of all those hipster cafes.

        • Very good but it made me choke on my Goji berries. It is not just Bondi – the hipsters are on the move – sightings as far south as Cook’s river.

          One thing that we don’t yet have, is the full lycra-man on bike at cafe thing – Sydney is just too dangerous for bikes.

      • I was talking it over with my partner whether we should in the next couple of years try to move to Melbourne. Sydney too expensive/congested/trashy and besides quality of life real estate prices and lower rents are a huge factor in our decision. I wouldn’t be surprised if other people who don’t have a mortgage would be thinking of a move as well.

        • We’ve got friends who moved from Sydney to Melbourne some years back to buy a cheaper house in Melbourne. They ended up moving back to Sydney and bought a lovely place on the north shore, with a larger block, nicer house and a better price tag than what Melbourne had on offer.

          • This Darwin is too hot.
            This Melbourne is too cold.
            This Sydney is just right.
            Thanks Goldilocks.

          • LOL! I’d admit to Sydney having better value for money.
            I don’t have strong feelings about the shortage issue, although I am inclined to think that overvaluation is a nationwide problem, and shortage as such is perhaps confined to the cheapest (which is also overpriced) end of the housing spectrum.

        • Thanks for making that point. When I suggested that a shortage results in people moving away to cheaper areas, I was rubbished.
          Posters here like to laugh at me, but I am right.

          • Overvaluation makes people look at other areas I would say.
            There were plenty of houses in Melbourne at the time for them on offer, both to rent or buy, but they chose to move to Sydney because the value for money was more favourable there.

            Similarly I looked at an investment property in Germany last week, which was an apartment for sale for 20k euros, and have been looking at seaside/ lakeside living in Finland. Not because of shortage, but because of value for money again. Even “affordability” is a misleading term in my opinion.
            The problem is OVERVALUED property. Some people put up with that and pay what it takes to rent from the bank rather than from an individual, and that’s fine if it suits their needs.

          • I’d just add that the lease with a bank is typically locked in for 20-30 years, whereas the lease with an individual is short-term and enables flexibility in decision making. The dead money (rent) paid for the landlord at the present time is much, MUCH less then the dead money (interest) paid for the bank over the period of the lease term.
            And finally, if one can pay cash elsewhere, as opposed to paying dead rent or dead interest, people do weigh the options and again it has nothing to do with an overall shortage of properties available to them.
            I hope that clarifies my way of thinking Claw.

          • You’ll never be right and will not move. You are only finite on this earth. Move and be free. Or, increase your earning capacity. Management tried to lure me to Sydney, I identified Randwick, pay my rent for 3 years and send me where I want to go. ‘I will not say at this stage’.

  7. Why don’t we get something like that in Brisbane? Would love to live in an apartment on the cheap when it all comes crashing down. Beside, it make more senses to build apartment than homes on big land anyway. Anyone who played Sim City would have understood this. 😀

    • 8 blocks, in a square, with parkland in the middle…streets in a grid to allow for easy development of public transport.

      Or you can subscribe to the modern Australian estate developer method of narrow spaghetti streets that look like they were designed by preschoolers trying to draw within the lines…

      I wish our developers had played more Sim City!

      • “I wish our developers had played more Sim City!”

        Good idea. Maybe the next federal election could have a mandatory Sim City competition for all the contenders? It would provide better guidance on their intelligence, political leanings and budget sense than the Ad campaigns, KPMG Audits and a debate ever will.

  8. I imagine much apartment development planning was to take advantage of international students and families when international student numbers, and population growth, hit a peak and spike respectively.

    Additionally, constant reminders in media of supposed (runaway) population growth and immigration when in fact most of that was due to temporary entrants i.e. international students and families/dependents, who purchase apartments for both investment and living.

    However, most of the supposed runaway immigration and population growth 3-4 years ago (data spike was spurred first by change in population definition 2006, then 2008/9 by rumours of government restrictions) has dissipated due to suspending or raising the bar on both student visas and immigration; international student numbers are not expected to recover till 2020……

  9. hmmm

    not good on the oversupply front…
    But also not good for a 2013 slump, which would impact VIC construction UE (and flow ons…)

    Not looking good for VIC 🙁

  10. yeah.. I wont say that. Thanks for alerting. The area is getting depopulated I believe. Lets look.