The word on the street is to expect significant falls in the value of Melbourne CBD apartments over the next 12 months.
The demand for apartment living has shrunk - few foreign students, no overseas travellers and Melbourne’s declining population all point to a looming crunch in apartment values.
One city agent predicts that next year, prices for B and C Grade apartments could fall by up to 30%. However, A Grade apartments (those suitable for owner occupiers), may only fall between 5 - 10%. At present, Student Accommodation Units are almost unsalable, as tenants are few and outgoings are high.
Vacancy rates for city apartments is now over 25% with some apartments being empty for over 6 months. Rents have progressively fallen by around 30% over the year. This is traditionally the time when renters vacate and return in January/February. However, its expected that next year this may not happen.
At the moment, it is very much a renter’s market. Existing tenants are moving to larger units for less rent in the same building. New tenants are ‘shopping’ between landlords’ asking for lower and lower rents. It is a ‘race to the bottom’ for landlords to secure a tenant.
The good news is that values of city apartments appear to be holding up to date, due to record low interest rates and limited stock. However, unless rents recover and supply remains tight, then prices are expected to fall.
Another supply driver is the number of new apartments that fail to settle on completion. Developers keep this number a closely guarded secret. Anecdotally, the number is around 30%. This would suggest a massive overhang of unsold properties. As values fall, this number will only increase as purchasers see the value of their apartments decline and either can’t borrow, or are happy to lose their deposit rather than overpay for a property.
Landlords are feeling the pinch, especially those who are highly geared. As property values fall, banks will force owners to sell, which will only increase the number of properties for sale. Once the moratorium on debt repayments finish early next year, properties will be forced onto the market.
Record low interest rates gives borrowers some protection, but capital losses, lower rentals, increased supply and low demand will take its toll on this section of the property market. This is likely to become evident in the second quarter of next year.
So if you are in the market for a city apartment, keeping the cheque book closed for the time being looks like a good option.
Robert Allanadale
Director