Units will catch a lift from the housing shortage too.
I think one of the interesting dynamics we’re going to see with the exploding housing shortage is a lot of pressure at the bottom end of the market.
This is where it’s going to be felt most keenly.
Partly that’s because the shortage is in part being driven by record levels of immigration, and new-arrivals tend to buy in at the bottom of the market. They’re looking for entry level homes.
But it’s also an artefact of the painful situation renters will be in, as the rental market gets more and more competitive. They’ll be desperate to get out.
Now, when we’re talking entry-level, we’re often talking apartments, and that’s the best place to see it in the data.
And new analysis reckons that both unit rents and prices are set to pop 30% over the next five years.
That forecast is based on analysis by real estate firm CBRE, which modelled the impact of a massive undersupply of dwellings relative to future demand and found that the current average apartment vacancy rate of 1.8 per cent will reduce to just 0.8 per cent by 2028.
Following an examination of 53 apartment precincts in its Apartment Rent and Vacancy Outlook report, CBRE forecast median rents for two-bedroom apartments across these precincts to grow by $120 per week (or 26 per cent) between 2023-2028.
The highest growth of more than 30 per cent is expected to occur in five markets: Sydney’s eastern suburbs, Parramatta, Melbourne’s northern suburbs, Perth City and almost all precincts in Brisbane.
“At the start of 2013 just four precincts in Australia had an average rent of over $600 per week for two-bedroom apartments, being the Sydney and Perth CBDs, Sydney’s eastern suburbs and Sydney’s Lower North Shore,” said CBRE’s Pacific head of research Sameer Chopra.
“By June this had grown to 20 precincts, and by 2028 we expect 38 precincts – or over 70 per cent of Australia’s two-bedroom apartments – to have a rent exceeding $600 per week.”
What to blame for this lift in rents and prices?
The housing shortage. (And if you’re sick of hearing about the housing shortage already, you’re in for a rough trot over the next decade.)
It’s there in the detached housing market, and it’s there in the unit market.
To prevent a fall in vacancy rates and a corresponding spike in rents, CBRE calculated about 75,000 new apartments need to be delivered every year to keep pace with population growth.
While 80,000 apartments are due to be delivered in 2026, supply will fall to as low as about 60,000 in 2024 and 2027 – 40 per cent below the previous peak in 2017 and near decade lows – meaning that over the five-year period supply will be insufficient to keep pace with demand.
So, I still have reservations about high-rise relative to detached housing.
But nevertheless, over the next five years, the unit market should perform strongly.
JG.