Apartment oversupply in the Melbourne market could be coming to an end with a booming population and a slowdown in the number of new residential buildings in the capital, according to a report by Domain.

Data from agents suggest that Melbourne’s premium apartment market could be facing undersupply soon due to more buyers opting for high-rise homes in the city.

Domain reported that while demand at the top end of the market is increasing, apartment prices in the CBD have encountered issues as the market cools. Median CBD price has dropped by 2.9% over the past year and 2.5% over the past five years. 

A recent boom in new apartment construction played a significant role in declining apartment prices. However, the pace of building was slowing, according to Domain Economist Trent Wiltshire.

“Over the next couple of years, apartment construction in Melbourne’s CBD and inner suburbs is expected to decline,” he said. “Melbourne has had very strong population growth, 119,400 people last year [according to ABS figures], which has meant there is also very strong ongoing demand for apartments and units. As population growth is expected to remain strong, this should soak up any unsold apartments.”

Demand for premium apartments in the CBD had climbed over the past 12 to 18 months, according to Sam Nathan, Colliers International Residential (Victoria) director.

Nathan said that with a short supply of three-bedroom apartments larger than 200 square metres, savvy buyers were searching for the right property. These purchasers are fully aware that a finite number of apartments could be built in the CBD.

Many of the new apartment builds had been created with investors, including foreign investors, in mind. These consumers are those who want to snap up a property in the CBD, said Angie Zigomanis, associate director with research firm BIS Oxford Economics.

“I think if you’re looking for a higher-quality sort of apartment or an apartment with more amenities … this round of construction has not been reflective of that,” he said.

In addition, international students are buying and renting apartments. This behaviour is boosting the apartment market. Other investors, meanwhile, were buying and then renting them out through short-term rental platforms like Airbnb.

The next few years would provide a challenge for the CBD market’s prices, with several significant new projects entering the market, according to Zigomanis.

“I think getting decent capital growth has always been a challenge because you’re competing against new stock,” he said.