Below is another excerpt from today’s Financial Stability Review (FSR), released by the RBA, which warns of a budding apartment glut, particularly in Melbourne:
Another risk arising from robust investor activity is that speculative demand could lead to an excessive increase in construction activity and future supply overhang. While dwelling construction has risen strongly over the past year or so, driven by low interest rates and rising housing prices, at this stage there is little to suggest that oversupply is in prospect at the national level. Nonetheless, at the local level some areas look more vulnerable (Graph 3.3):
The risk of oversupply appears most evident in inner-city Melbourne, where the level of high-rise apartment construction has been elevated fora number of years. The rental market already looks fairly soft, with relatively high vacancy rates and little growth in rents. And given the strength in approvals of late, and the time lags between approval and completion, significant new supply will continue to come on line over the next few years. Liaison suggests that a large amount of activity has been driven by foreign developers and foreign investors, with some of these developments consisting of smaller-sized apartments targeted at international students. These apartments may be difficult to sell in the secondary market if investors’ expectations of future student demand are not met, which could place downward pressure on prices, including in the broader Melbourne apartment market.
More recently, there has been a strong increase in higher-density dwelling approvals in inner-city Brisbane. Some reports suggest that the vacancy rate has started to drift higher and that growth in rents has slowed of late. In liaison, banks and other firms have conveyed some concern about possible future oversupply in this market.
Personally, I don’t view Melbourne’s apartment ‘glut’ as a concern, given it should help to place downward pressure on prices and rents, whilst providing renters with greater choice (albeit in the inner-city only).
In fact, I would be more concerned if the price boom elicited minimal supply response, as has been the case in Sydney.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
