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‘Two-speed property market’: Apartment prices to stay low for years

·3-min read
View of Sydney in cloudy weather - full frame horizontal composition - Potts Point district and other
Apartment prices will rise again one day, and house prices will fall as affordability tightens. (Source: Getty)

Australia’s apartment prices are likely to remain in the doldrums for years, with the ‘two-speed property market’ unlikely to correct itself until 2022 or beyond, property experts have said.

While the house prices are firmly in an upswing, unit prices in some areas have dropped by double digit percentages in what many have described as a “split” in the overall property market.

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Capital city house prices (9.1 per cent) rose three times faster than apartment prices (3.1 per cent) in the six months to March, according to CoreLogic figures.

A confluence of factors have occurred at once to drive up the value of standalone homes while at the same time sending apartment prices falling.

COVID has been a key trigger in the ‘split’ with the closure of international borders shutting out international workers students, a group that typically drives demand for apartments.

At the same time, Australians are demanding more living space, as lockdowns force people to work from and spend more time at home.

Recent NAB research showed that a home office or work area had become the most important factor for Aussies when choosing a home, followed by close proximity to local amenities such as shops and restaurants.

“Prior to COVID-19, more Australians were trading space for place – they were embracing apartment living trading their backyards for balconies and courtyards in inner city locations,” Metropole Strategists CEO Michael Yardney told Yahoo Finance.

“But now everything is different. The ‘place’ people want to be is a lifestyle neighbourhood where all amenities are in easy walk or drive rather than living in congested CBD locations.”

Investor demand has also dried up, with units generally more popular with investor buyers, CoreLogic research director Tim Lawless said.

“Investor participation in the housing market has been tracking around record lows, comprising just 24 per cent of mortgage demand in February, up from a record low of 23 per cent a month earlier,” he told Yahoo Finance.

“This weak demand alongside high supply levels is the central reason why unit values are under-performing.”

And high supply levels will stick around for some time, Lawless added, with some 45,000 units still under construction across NSW and Victoria at the end of last year.

According to University of Adelaide professor Peter Koulizos, we won’t see apartment prices rise again until the international travel ban is lifted – and even then, people’s tastes for larger homes will stick around.

“Apartments will take a long time to recover because even though international students will return in 2022, if not earlier, people's preference for living in larger dwellings will not change anytime soon,” he said.

‘Seeds of a reversal’ coming: Economist

The net effect is that there is currently a shortage of houses, and an excess supply of apartments – but this won’t last forever.

“This divergence happens over the housing cycle but it tends to revert once people release they can buy a lovely apartment that is relatively cheap compared to an expensive house,” independent economist Stephen Koukoulas said.

AMP Capital chief economist Shane Oliver shared similar sentiments. “At some point the surge in house building versus unit building will lead to an oversupply of the former relative to the latter,” he said.

“Deteriorating affordability will eventually push some buyers back to units, which will then see units start to do better than houses. There is a fair way to go to get to that though.”

Koukoulas and Oliver have already indicated that the synchronised property upswing may be reaching its peak.

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