A chance for first home buyers as apartment prices fall

First-home buyers will finally get a shot at owning inner city apartments amid pressure on prices.

Australia’s residential market is set to split in two, with first home buyers finally getting a shot at owning inner city apartments, while relatively strong rental yields mean that seasoned investors will look towards investments in houses.

First-home buyers willing to break with the tradition of searching for a suburban home can expect softer prices — and even lower rents — in capital city apartment markets in coming years.

Discounting is expected to be most common among high-rise “clusters” where there have ­already been rising levels of “settlement difficulties”. At the same time, signs of resilience in the spring auction season have given heart to house investors, with auction clearance rates for houses remaining above 70 per cent.

Separately, low interest rates and the government’s decision to leave negative gearing policy untouched have also sustained interest in the wider housing market.

But the outstanding opportunity in the market will be for first-home buyers, especially in 2017-18 when a flood of new apartments are expected to hit the market.

“We are looking at a market where you will see pressure on prices, and you may also see some rental yield decline … I think both markets are vulnerable,” said Nigel Stapledon, a research fellow at UNSW Business School.

“On the upside, it becomes a buyer’s market and also a renter’s market”. A string of leading economists are now forecasting falling prices for inner city apartments, with weakness expected in Brisbane, Melbourne and finally Sydney.

Most forecasts are based on the record number of apartments under construction.

Brokerage Morgan Stanley is particularly concerned about more than 100,000 units coming on to the national market by the end of next year.

“Concerns and tail risks for the apartment market are building. We estimate around 100,000 national housing oversupply will develop by 2018, but believe the industry is facing a more imminent credit crunch for settlement and development,” Morgan Stanley analyst Daniel Blake said.

Most notable is the disproportionate level of building in Brisbane, where there are more apartments being built than in Sydney.

Analysts warn the looming oversupply is less obvious than in previous cycles since this time apartment towers are so dominant in the new wave of residential development.

Apartment towers can take more than four years from commencement to completion, which creates a substantial lag in statistical data used by the sector.

“Construction is booming, but we see a sharp slowdown ahead for future apartment developments … rental conditions have deteriorated and we expect them to weaken further on the basis of sustained overbuild,” said Morgan Stanley’s Mr Blake.

Adding further gloom to the apartment sector, economist Chris Richardson of Deloitte has suggested that property could be the “worst investment” in the coming years. AMP Capital chief economist Shane Oliver does not foresee a widespread residential property crash, saying such an outcome was “unlikely”.

However, he has estimated that high-rise inner city apartment prices could fall by up to 20 per cent in the next two years.

For long-term investors the residential market remains popular, though the opportunities in the short term are largely restricted to houses, which still offer good yields on residential dwellings compared to the generational lows being paid by cash deposits.

The official cash rate is sitting at 1.5 per cent, and further rate cuts have not been ruled out by the RBA’s new governor, Philip Lowe.

In contrast, rental yields (the income from an investment property expressed as a percentage of its purchase price) of more than 4 per cent and up to 6 per cent are common in regional areas and in lower- income suburbs in the major cities.

With some prospects of modest rental growth, long-term investors believe they can make some properties pay for themselves even if a much predicted “flat price” scenario eventuates for the wider housing market.