The outlook for Sydney's apartment market improved in recent months, but a price rebound appears unlikely, according to the latest report from JLL.

Instead of a sharp rebound, a stabilisation in prices is expected for Sydney’s unit market due to the balancing out of demand and supply, the report said.

The market’s housing demand has already recovered from the weak period between 2018 and the first half of this year. The recent improvement was supported by auction clearance rates picking up significantly and the recovery in housing-finance approvals.

"Market sentiment and activity has clearly picked up since mid-2019, on the back of lower interest rates and easier credit conditions," the study said.

While the total value of financing commitments for owner-occupiers in New South Wales declined by 13.8% over the year to August, it quickly increased over the past three months, supported by the resilient first-home buyer segment.

On the other hand, investment financing remained muted, but JLL expects this to improve as investors take advantage of lower rates and loosened credit conditions.

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Demand likely to rise

Sydney's population is set to grow even with caps on overseas migration and policy settings pushing migrants to other areas. This could boost the demand for units in the city, according to the study.

In fact, the population growth is quickly absorbing recent strong completions. This comes at a time when supply levels are on the downtrend.

"Added to that is the growing demand for apartment living from baby boomers looking to downsize. These will see underlying demand for housing exceed supply levels and eventually create a shortfall of supply in Sydney again," JLL said.

Prices poised to grow gradually

Figures from CoreLogic show that the median unit price in Greater Sydney stood at $699,100 as of September. While this represents a year-on-year decline of 4.1%, monthly and quarterly data showed respective growths of 1.1% and 3.3%.

JLL said the low interest rates will support dwelling prices in the short term. However, the recent return to growth would likely peter out as more property listings in the existing market emerge.

"Beyond this, Sydney is likely to face an extended period of below-inflation price growth, as wages slowly catch up. At some point in the cycle, interest rates will also start to rise from current record lows and this will constrain price growth," JLL said.

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What about off-the-plan units?

The reputation of off-the-plan developments has been tainted by recent concerns about safety, which triggered increased scrutiny on building quality.

"Capital values for off-the-plan apartments are likely to continue to face pressure, particularly following the recent spate of defected apartments, which will make buyers more cautious and selective," the study said.

In the shorter term, developers are expected to offer incentives and concessions, particularly to first-home buyers. In the medium-term, however, price growth in this segment will likely remain moderate as incomes catch up.