Sydney and Melbourne apartment price drop is good news for first home buyers
Thousands of units are expected to flood the market in the coming months as landlords experience mortgage distress and look to sell up quickly.
Thousands of investors are planning to offload apartments in Sydney and Melbourne in the coming months, according to a new survey, as unit values also take a dive in capital cities.
The owners of over 2000 units in Melbourne and more than 2200 flats in Sydney intend to list their property, potentially flooding markets that are already grappling with oversupply, a survey conducted by Digital Finance Analytics shows.
Landlords with rental apartments in Sydney and Melbourne’s central business districts are expected to be a major part of the exodus due to the mortgage repayment holiday ending in March resulting in cash flow issues.
This trend is backed up by a recent ME bank survey that showed 23 per cent of investors are wanting to sell their property in the next 12 months, compared with only 11 per cent of owner occupiers.
Border closures bite
So what’s the reason for the mass exodus? Investors are finding it hard to fill apartments, as Australia’s international borders remain slammed shut. It’s creating high vacancy rates and competition, forcing landlords to take reduced rent with drops of up to 30 or 40 per cent, meaning some CBD landlords are struggling to even cover their costs, according to Andrew Wilson, chief economist of Archistar.
He said the closure of borders had also dampened the travel market meaning thousands of apartments that were used for short term stays like AirBnb had also hit the market, exacerbating the problem.
It will mean a drop in prices for units that go up for sale, he added.
“It will be interesting to see if more stress sales will be coming on to the market from investors given high vacancy rates and the end of mortgage rates holiday,” he said.
It’s not a pretty picture for unit prices, which have tumbled in the past year with Sydney and Melbourne the worst hit in Australia, according to CoreLogic data.
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While the CBD has been one of the hardest impacted, it’s not the only area either.
The median price of a Parramatta unit has dropped by 3 per cent to $574,963 in the year to 31 March, found CoreLogic, compared to Australia’s median apartment price rising by 2.3 per cent.
It's an even starker contrast for units when compared to median house prices in Australia, which have soared by 7.4 per cent to $643,203.
Apartments are in oversupply right now, according to Tim Lawless head of research at CoreLogic, with 45,000 units currently being built in NSW and Victoria.
“There is still a lot under construction and it’s yet to settle and complete at time when demand for units is relatively low and to top that off all that new supply is coming into a market that had a shock from a rental perspective with borders closed,” he told news.com.au.
“Inner city apartments aren’t being filled and vacancies are high. Some units are down in rental prices by 15 to 20 per cent in Sydney precincts.”
Steep price drops in surprising suburbs
Certain suburbs in Sydney and Melbourne have taken a battering in apartment prices in the 12 months to 31 March, CoreLogic research found.
Northern Sydney suburbs were particularly impacted such as in St Leonards where the median value of an apartment is $1.02 million, which has dived by 8.4 per cent in the last year, while Chatswood also experienced the same percentage drop with apartments valued at $1.03 million.
In Lane Cove, the median value dropped by 6.3 per cent to $834,000 and it was almost identical in Arncliffe with a 6.2 per cent decrease to $701,000.
Over in the inner west, Croydon also took one of the biggest hits with an 8.1 per cent drop to $733,000.
Macquarie Park, Lane Cove North, Marsfield, Haymarket and Wolli Creek also experienced decreases in median values of between 5 to 6 per cent.
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Melbourne impact
The drops were even higher in Melbourne with a 9.7 per cent annual fall in Moonee Ponds, which now has a median value of $566,000 and Ascot Vale had the same decrease with $570,000 value.
Over in Kew, there was an 8.2 per cent drop to a value of $769,0000, while Essendon had a 7.8 per cent fall to a value of $577,000 and Glen Iris saw a drop in 7.2 per cent fall to $731,000 value.
These Melbourne suburbs have had quite a bit of new apartment stock built and there is more to come and lack appeal to most buyers, explained Wendy Chamberlain, who runs Melbourne-based Chamberlain Property Advocates.
“Newer apartments in new blocks or larger towers generally tend to have smaller rooms, particularly bedrooms. Some bedrooms don’t even have their own window, just ‘referred light’ and higher owners corporation fees,” she told news.com.au.
“There is also no scarcity, as they can be “cookie cutter” – your apartment is just the same as a lot of others in the same block. When I speak with real estate agents if I am looking for an apartment for a client, most have a lot of newer apartments available. The older apartment stock can be harder to find and tends to be more expensive.”
She added that the issue with apartments right in the CBD or in Docklands and Southbank is many are housed in towers with lots of other residents and units surrounding them.
“Some have particularly high owners corporation fees due to the amenities. Things like 24 hour concierge, pools, gyms, lifts, electric gates, loads of downlights and so forth all cost money to run. This cost is passed onto the owners via their annual owners corporation fees,” she said.
Another issue with the larger towers in these inner CBD areas, some with more than 300 apartments, is banks don’t like to have too much exposure in any one tower, she explained.
“If you’re considering buying in a large tower, make sure that your bank will lend on that building,” she said. “Banks ‘blackball’ certain postcodes and either won’t lend or will lend you less money. Be aware of this before you commit to buy.”
She has found older apartments in smaller boutique blocks are more sought after and seem to hold their value better, she added.
“Older apartments tend to be larger inside, with generous room sizes, particularly in bedrooms. Smaller boutique blocks without lifts also mean that the owners corporation fees tend to be lower and more manageable for a first home buyer,” she said.
A story of two housing markets
The drop in apartment values is certainly a different trend to what is occurring in the overall property market, said Mr Lawless.
“Looking at how much house values gained over past six months compared to unit values, there is quite a stark difference,” he said.
“If you look at capital city house values between September and March there was 9.1 per cent increase and units overall rose in value by 3.1 per cent, so house values rising about three times faster than unit values.”
While it wasn't uncommon for house values to outperform apartments in the past, Mr Lawless said there had never been such a huge gap created so quickly.
He said the pandemic had seen a shift away from high density style living, while there also wasn’t the urgency to snap up units like in the housing market.
“Naturally people don’t want to live in a high density situation during a pandemic because they are using a shared amenity or riding in a crowded lift, so this may be temporary,” he explained.
“The dynamics driving the housing market is a lot of first home buyers have a preference for lower density style housing options and there’s also the newfound popularity of remote working where people can work from home.
“This flexibility means people can find a detached property further out on the fringes of the city as no one wants to commute several hours a day, and if you only have to go into the office a couple of times of week, it makes it more practical to make that decision.”
First home buyers
But this could be good news for first home buyers looking to grab a bargain, Mr Lawless added.
“If people are buying to live, prices are low and it may be a good time to get into an inner city location as there is bit of a bargain around units, especially if people are in a good financial position, can negotiate hard and can shop around,” he explained.
But Douglas Driscoll, CEO of Sydney real estate agency Starr Partners, said the data doesn’t match the reality on the ground and there is no such thing as a bargain in the Sydney at the moment.
“Any suggestion that there are deals to be had or bargains in the Sydney market is fanciful,” he said.
“I can’t envisage that to change any time soon. I do believe however, that the market will naturally calm and level off in the second half of this calendar year. But now even places like Parramatta that is ground zero for apartments, we are not seeing any downward pressure on prices and they are holding their own.”
Yet Louis Christopher, SQM Research’s managing director has argued things could look even better for first home buyers in six months as the surplus stock situation worsens.
In Melbourne, Ms Chamberlain thinks opportunities exist for first home buyers to grab a bargain with an apartment as long as they are “ready to pounce”, as they offer a fabulous entry into the market.
She has recently helped two home buyers snap up properties, including a two bedroom apartments in Preston in a block built in 2015 with 60 other units.
Once it was confirmed the cladding was non-flammable before purchase, the client was happy to buy based on the location, nearby amenities and the affordable price point with low owners corporation fees, she said.
Another was a large three bedroom apartment in a boutique block of just six in Elwood.
She said the suburb remains very popular as it is located near the beach, has a village feel with many trendy eateries and is not too far from the CBD.
Art deco style apartments can command an additional premium and are always very much sought after, she added.
Ms Chamberlain said people must know the area well before committing to an apartment sale.
“Track the market to understand what one bedroom versus two or three bedroom apartments sell for, depending on the style of the block, the number of homes in the block, the size of the home, with/without an outdoor space, location on a main or busy road versus quiet street — these are just some things that will make a difference to the purchase price,” she said.
It is only going to be a bargain if the property holds it’s value over time and doesn’t come with a surprise down track that could blow your budget such as flammable cladding or special levies to fix issues, she added. “Remember, not every cheap property is a bargain,” she said.
Beware of newer stock
New builds have experienced a slew of bad publicity, including flammable cladding and poorly built high-rises like Opal Tower and Mascot Tower in Sydney, with some experts warning against buying apartments built in the last two decades.
Ms Chamberland agreed that cladding is huge issue for apartments, particularly from 2010 onwards.
“If a first home buyer is looking to buy a newer apartment, make sure that you obtain the necessary certifications and certificates to show that the cladding has been checked and passed as being non-flammable,” she said.
“Where flammable cladding is found, it is up to the owner of the apartment to sort the issue out, usually with some of the cost falling on the owner. Some banks will not touch an apartment in a block that has flammable cladding on it. Be aware of this.”
Around the country
But across Australia, the same story isn’t playing out with apartments.
For example, the unit market in Darwin is taking off with the median price in Leanyer jumping by 4.5 per cent to $260,021 in the past year.
Similarly in Hobart, there were no suburbs where apartment prices went backwards. Battery Point had an uptick of 5.6 per cent to $703,180.
In Canberra, only the suburbs of Forrest, Denman Prospect and Scullin experienced annual falls in their median value, while it was the same story in Perth with three suburbs — South Perth, Mount Lawly and West Perth going through a drop.
Meanwhile, Adelaide only recorded two suburbs impacted, including Prospect.
But the Queensland capital reflects a similar trend to Sydney and Melbourne with suburbs like South Brisbane experiencing a hefty annual fall of 9 per cent with a media value of $470,000 and Brisbane city dropping by 7.8 per cent to $503,000.
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