Demand for apartments in inner Sydney could weaken

Demand for apartments in inner Sydney is likely to weaken due to a combination of factors, including the banks responding to APRA’s crackdown on lending and foreign buyers getting hit with extra levies, according to new analysis from BIS Oxford Economics.

Skyrocketing prices have also pushed yields to long-term lows. Figures from CoreLogic last week show that apartment values fell 2.7% over May, which is faster than the 1% fall in detached houses in the city.  

However, demand for apartments is unlikely to completely disappear, as foreign investors continue to favour Australia’s stable political environment, while local investors continue to benefit from low interest rates and remain wary of uncertain returns from other asset classes.

Much of the focus on the increase in apartment construction has been on Melbourne and Brisbane, and many analysts have warned that the looming oversupply of apartments could put downward pressure on prices in both capitals.

In contrast, new apartment supply in Sydney has already peaked at 3,698 completions in 2015, declining to 2,521 in 2016. This would likely remain broadly steady at 2,352 in 2016-17, according to BIS Research.

From 2013 onwards, demand from apartment buyers in inner Sydney strengthened as mortgage rates fell and the economy picked up. This led to solid capital growth and helped fuel demand. The buoyant conditions boosted off-the-plan sales, enabling more projects to reach pre-commitment thresholds to borrow funds and initiate building. This in turn led to an increase in apartment construction, according to BIS Research.

New apartment supply in inner Sydney is set to soar over the three years to 2019-20, with completions averaging 4,650 apartments a year over the period.

Vacancy rates have been tight for more than a decade, after dipping below the balanced market rate of 3% in inner Sydney in June 2005, as demand outstripped construction for much of this time.  

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