March 9, 2023 by Dymphna

What happens if apartment construction collapse 73%?

The supply shortage is about to get a whole lot worse.

It’s a common mistake to think of the “property market” as a distinct thing.

Sometimes its useful to talk about the ‘national property market’. But there is no national market. There aren’t even capital city markets. Within cities there are suburbs marching to the beat of their own drum, and within suburbs, different streets can be doing totally different things.

Likewise, there is an apartment market and there is a detached housing market.

I tend not to focus on the apartment market so much. I just find detached housing gives you more options to play with – more ways to make money.

And I like that.

But the unit market is often a bellwether for the broader market, and so it was interesting to note last week that the unit market is headed for an epic supply crunch.

JLL’s latest apartment forecasts, for instance, have warned of a sharp slowdown in new apartment supply due to higher input costs and rising interest rates.

“Apartment supply will fall further in 2023 to low levels and stay moderate for at least several more years beyond that,”:

“This limited apartment supply pipeline means there is little relief on the horizon for renters.”

And then analysis from Charter Keck Kramer reached a similar conclusion. They estimate that around 41,200 apartments are under construction and being marketed across Australia’s capital cities in right now.

However, the consulting firm expects this to fall to 27,300 in 2024 and just 11,100 in the following year.

That’s nothing!

Richard Temlett of Charter Keck Kramer says the 73% decline in apartment supply over the next two years will put a floor under prices, as well as worsen the rental crisis as immigration ramps up.

“For established apartments that have been built, I think the supply shortage and strong demand will limit the price declines”, Temlett told The AFR.

“For new products, prices are going to have to increase, and it’ll start increasing over the course of 2023 across most projects”.

“I think the government might have underestimated the extra demand for housing as a result of increased immigration”, he said.

“Looking at lead indicators such as student visa applications, or actual overseas arrivals, they’re much higher than what the government had forecast and particularly in Melbourne, I think it’s going to be even stronger than what they’re forecasting”.

“The supply situation is going to tighten and potentially even get worse”.

The unit market is ground-zero for observing the impact of the strong rebound in immigration, since many immigrants tend to head towards apartments in the first few years.

However, where units lead, detached housing will follow.

And an epic supply crunch in apartments will worsen the overall undersupply in the broader market.

Apartments tend to be the low hanging fruit when it comes to bringing a large amount of stock on line in a relatively short time.

Without strong growth here, the housing shortage is going to get much, much worse.

And with that, prices will soar.