Melbourne’s apartment market will stay undersupplied well into 2018

 Mark Pomeroy, CEO of Pomeroy Pacific, shares his in depth analysis for the upcoming year and highlights some of the challenges and opportunities that will be present in the market.

 Global advisory firm BIS Oxford Economics (BIS) recently concluded that, as Melbourne’s population is growing faster than expected, the city may be facing an under-supply of apartments.

This revised forecast which followed the consultancies previous warnings of an apartment glut in the Melbourne market – is based on census figures showing the state has 109,000 more people than previously anticipated.
Several experts have been quick to warn this could lead to a serious housing issue for the city many tip to become Australia’s largest within ten years.

Mark Pomeroy, CEO of Pomeroy Pacific, Melbourne’s leading development advisory and project management firm, is clear about the challenges facing new development projects and believes many unfortunately won’t proceed.

He agrees with many commentators that foreign and local investors are out of the market due to stamp duty changes and banks pulling back on lending to this market.

Mark believes the impact of foreign stamp duty taxes (now 12% for foreigners) and the new rule requiring investors to pay stamp duty on the purchase price of apartments when buying off the plan can’t be overestimated.

“This very significant change has removed Melbourne’s competitive advantage and the motivation for purchasers to buy off the plan. Without off the plan sales, projects will not achieve their minimum pre-sale requirements, he stated.”

As a consequence, they will not proceed. He flagged that while the slowdown in larger scale projects will result in more stock designed for downsizers, this does not actually address the current, fundamental challenge of housing diversity at affordable prices or even rental availability at affordable prices.

Mark also drew attention to the significant concerns created by Better Apartment Design Standards (BADS). He stressed BADS has created improvements by mandating minimum standards for apartments, however, the recent height and set back regulations make it difficult for developers to provide the smaller investor focused apartment. This has also considerably dampened supply.

“In my view, the BADS and mandatory controls need to be more discretionary and should be considered on a case by case basis. There is no question that changes were required, however, those changes needed to allow for a diversity in the products provided, he said.”

Mark feels this particularly applies to the well-designed smaller apartments, desirable to investors. Allowing this product to enter the market will support rental growth and affordability.

“Right now, with investors out of the market, the availability of rental properties is drying up, pushing rentals higher and making it harder for renters to save for their own home,” he cautioned.

With investors no longer an option, developers are now focused on different opportunities. Many are concentrating on larger scale upmarket apartment projects aimed towards owner occupiers, mainly downsizers. Townhouse projects for first home buyers and downsizers continue to show potential and house and land packages are holding their own.

Right now the industry is experiencing upward pressure on land prices as developers are banking on stable construction costs and strong buyer demand. Mark declared this makes understanding all the key market drivers and controlling risk more vital than ever.

“While the demand shown by downsizers is increasing, achieving sales still takes time and buyers have choice. So, there is a real risk developers may find the land they are purchasing becomes too expensive to achieve bank funding after sales have been achieved and construction costs become finalised, he said.”

Unlike the last 5 years, Mark believes developers will no longer be saved by a rising market. They will have one chance to get it right and if they choose the wrong site, pay too much or sell too cheaply, real losses are likely to follow. Therefore, we are likely to see an increase in developer defaults in the upcoming months.

“We are entering a much more sophisticated market. Smart, nimble and cashed up developers will continue to find and extract value from the market while others will become victims of it, he said.”

While agreeing with the challenges and opportunities presented by a growing population he cautioned against too many assumptions.

“More and more people doesn’t necessarily mean they will suddenly start raising families in a 65sq metre, two bedroom apartment,” he said.

“The demand is for a genuine variety in the size and style of apartments. This market wants larger apartments but is not yet prepared or able to pay for them in a broader market context. However, we know at some point the increase in prices for house and land lots will push people back into city living. The developers who get the product mix right will be in a good position.”

Official figures for July 2017 showed approvals of new apartments, townhouses and semi-detached dwellings in Victoria – which accounted for 28 per cent of the national total – have fallen on a yearly basis for the past 15 months.

If the lower Victorian apartment growth forecast i.e. no oversupply, is correct, there will be far less risk of a severe downturn in housing prices and the downturn in residential construction will be shallower than forecasted.

So there are positives. There is still likely to be a multi-unit housing construction downturn but if BIS is correct, it won’t be as severe as forecast. The challenge remains for legislators to correct the balance and bring investors back into the market. For developers, the ongoing task is to overcome current restrictions, manage risk and deliver the right apartment supply for Melbourne’s ever increasing population.