The real reason Australian apartment prices are surging

Apartment prices are rising faster than house prices in most capital cities as more home buyers are forced to compromise on the type of property they purchase due to affordability constraints and restricted borrowing capacity. More owner-occupiers are deciding their budgets are too stretched and they would rather buy a high–quality strata home instead of a house requiring renovations.

Additionally, growing demand from investors due to rising rents, low vacancy rates and ongoing capital growth is also pushing up apartment prices. Investors now represent 37.1 percent of the value of new loans to property buyers, according to the Australian Bureau of Statistics (ABS). This is the highest level in eight years. The number of loans issued to investors has increased by almost 25 percent over the past year.

First home buyers are also adding to demand for units, with support from the Bank of Mum and Dad a key factor allowing some young buyers to purchase their first homes when, historically, higher interest rates would normally dampen demand from starter buyers on strict budgets.

CoreLogic’s research director, Tim Lawless, said units had outperformed in every capital city over the past three months except Darwin and Canberra, where greater supply of medium to high–density housing meant less competition per property and a reduction in median prices over the period.

“With stretched housing affordability, lower borrowing capacity and a lift in both investor and first home buyer activity, it’s not surprising to see the unit sector outperforming for a change,” he said.

Mr Lawless explained that most cities now have a median house value that is at least 1.5 times that of apartments. Choosing apartments over houses means buyers may have more choice over how much debt they are willing to take on and could also buy in more attractive lifestyle locations.

Increasing demand for apartments is being met with ongoing restricted supply in the new apartment market. In its latest monthly market report, CoreLogic said the supply of newly built homes remained insufficient relative to population growth. ABS data shows approvals for strata-title properties have fallen 22.1 percent over the 12 months to June.

Over the three months to July 31, CoreLogic data shows apartment values grew by 1.4 percent in Sydney vs. 1.1 percent for houses. Units rose 5.8 percent in Brisbane vs. 3.4 percent for houses. In Adelaide, unit values rose 7.1 percent vs. 4.7 percent for houses. In Perth, apartment prices rose 6.4 percent vs. 6.2 percent for houses. Hobart apartment prices rose 2.2 percent while house prices fell 1.5 percent. In Melbourne, apartments outperformed houses but the median values of both fell. Unit prices fell 0.2 percent while house prices fell 1.2 percent.

Overall, the national median dwelling price lifted 0.5 percent in June, which was the 18th consecutive month of growth. However, CoreLogic noted in its report that “it is clear momentum is leaving the cycle and conditions are becoming more diverse”. The market is very strong in Perth, Brisbane and Adelaide and weak in Melbourne, Hobart and Darwin, where overall median dwelling values fell over the past three months. The pace of property price growth has also “slowed markedly” in Sydney as the number of listings for sale returns to normal levels.

Mr Lawless said supply was the key differentiating factor in the performance of Australia’s capital city markets. “The number of homes for sale in Brisbane, Adelaide and Perth is more than 30 percent below average for this time of the year, while weaker markets like Melbourne and Hobart are recording advertised supply well above average levels,” he said.