Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 164

For sale: cheaper apartments

Governments and banks have reacted to concerns over the east coast housing boom by instigating cooling measures. Tighter loan criteria, additional stamp duties, and the election debate over negative gearing are all designed to slow prices. However, as the charts below show, there’s no need to do anything: the east coast market is about to be swamped with apartments.

The UBS economics team believes there should be a moderation rather than a downturn, as the tailwinds from record low interest rates offset the headwinds of tighter banking criteria and higher taxes. What is most concerning though, is the impending supply of apartment stock.

Record unit approvals

Last year I wrote about the record number of unit approvals along the east coast, with particular concerns about the expected levels of supply in Melbourne and Brisbane. Roll forward to June 2016 and most of those approvals have turned into commencements, with around 137,000 medium density dwellings now under construction. This is about four times more than was under construction in 2000, with 88% of the national total in NSW, Victoria and Queensland. The spike in multi-storey apartments can clearly be seen below, while housing is within historical ranges.

Chart 1: Dwellings under construction in Australia

In absolute number terms, it's startling. Construction of apartments in Queensland is running at five times its levels from the year 2000, while NSW and Victoria each represent over 30% of all supply.

At the project level, supply in Queensland and Victoria is largely centred around CBDs, while NSW supply is dispersed across metropolitan areas, spreading the risk. With this supply largely hitting the market in the next year, will those who paid a 10% deposit be able to finance the settlement of the remaining 90%? As a rule of thumb, we estimate that about 70% of purchasers are local buyers (owner occupiers and investors), while about 30% are connected to foreign buyers.

Table 1: Dwellings under construction by type and state as at Dec 2000 and Dec 2015

 

 

Settlement risk

The key question is whether it’s in the purchaser’s best interest to settle and that will largely depend on price movements between the dates of the deposit payment (probably 10%) and settlement.

Using Lend Lease as a guide, it appears that anyone who bought an apartment in Sydney is ‘in the money’ and would forego strong capital gains if they walked away from the purchase. Developments such as Melbourne’s Collins Street and Brisbane’s The Yards are less conducive to gains, as shown in the chart below. While a profitable re-sale in Sydney seems highly probable, it seems less so in Melbourne and more difficult in Brisbane. Interestingly, Lend Lease’s highest default rate during the GFC was 3%, versus less than 1% at present. I must point out that the listed market developers like Lend Lease and Mirvac produce higher-quality units that would be more desirable in a re-sale market than some peers.

Financing switching from banks to mezzanine lenders

The great thing about a turning point in the cycle is that those with strong balance sheets and solid cashflows can take advantage of other groups’ weaknesses. I recently spoke to three mezzanine loan providers who said they’d never been busier. When the banks close the doors, other providers step forward and are happy to help, but it will cost more. All three have existing loans to residential developers with solid credentials who were refused construction finance from the big four banks. Two of these were working on plans to raise capital to ‘mop up’ developers who struggle. Those with strong balance sheets and cash resources such as Mirvac, Lend Lease and Stockland will increase their market share in the next two years.

The oversupply should lead to falling apartment rentals as investors compete to secure income. This will take the apartment yield (net of costs) to less than 2% or 50x price to earnings. Investors would do well to sit back and wait.

For those who wonder what happens to the traditional house and land site, weakness in apartments should have an impact. When inner city apartment rents decline, those renting on the fringes can upgrade location. Pleasingly, housing supply is not excessive and continues to be hamstrung by council approval processes. Note that the two markets (houses and apartments) are distinct with a large family on a suburban block with kids at the local school unlikely to switch to a CBD unit.

Of course, property investment is not only residential. A relatively high-yielding, liquid investment such as a REIT, with capital growth potential and expert management, should not be discounted. With our expectation of low rates and a healthy yield buffer above cash and bonds, we remain confident that investments in commercial property, in particular REITs, will continue to deliver solid returns.

 

Pat Barrett is Property Analyst at UBS Asset Management. Nothing in this document is to be taken as specific financial product advice and it does not take into account any individual investor’s investment objectives, tax and financial situation or particular needs.

 

RELATED ARTICLES

Steve Bennett on investing in direct property for the long term

Don’t treat bank shares as defensive assets

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 628

Australian investors have been pouring money into US stocks this year, just as they start to underperform the rest of the world. Is this a sign of things to come? This looks at 50 years of data to see what happens next.

  • 11 September 2025
Exchange traded products

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement

We need a better scheme to help superannuation victims

The Compensation Scheme of Last Resort fails families hit by First Guardian and Shield losses, as well as advisers who are being wrongly blamed for the saga. It’s time for a fair, faster, universal super levy solution.

Investment strategies

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Economy

How bread vs rice moulded history

Does a country's staple crop decide elements of its destiny? The second order effects of being a wheat or rice growing country could explain big differences in culture, societal norms and economic development.

Investment strategies

Small caps are catching fire - for good reason

Small caps just crashed the party like John McClane did in the movie, Die Hard - August delivered explosive gains. With valuations at historic lows, long-term investors could be set for a sequel worth watching.

Defensive growth for an age of deglobalisation, debt and disorder

Today’s new world order appears likely to lead to a lower return, higher risk investment environment. But this asset class looks especially well placed to survive, thrive, and deliver attractive returns to investors.

Economy

Will we choose a four-day working week?

The allure of a four-day week reflects a yearning for more balance in our lives. Yet the reliability of studies touting a lift in productivity is questionable and society may not be ready for such a shift anyway.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.