Newer apartment prices to climb by 23 per cent by 2026
Nila Sweeney Reporter
Oct 7, 2024 – 6.40pm
Prices for newer apartments could jump by more than 20 per cent by the end of 2026, fuelled by lower interest rates and shrinking supply, according to CBRE.
Rents are also predicted to increase by 25 per cent in total over the next five years as vacancies tighten.
Premiums for three-bedroom apartments, such as those in MYKA in Perth are sitting around 45 per cent higher than older stock.
Sameer Chopra, CBRE’s head of research, Pacific, said the high costs of construction and shortage of new apartments would justify the expected rise in new apartment values, supporting the typical premium in price over older apartments.
“Apartment values have not kept pace with construction costs in the past five years,” he said.
“That disparity is currently at 23 per cent. We expect this gap to close out and revert to a premium.
“But for the gap to close out quickly, we need interest rate cuts. This will significantly boost prices and supply.”
Future supply of apartments is expected to hit 50,000 each year between 2025 and 2029, well under the 75,000 homes needed to meet the country’s population growth.
Mr Chopra said tight lending conditions and sluggish price growth in the existing apartment market have weighed on the future supply pipeline.
“If interest rate cuts are smaller than expected or delayed further, we will not get new supply, which is already hovering at near decade lows, until 2030,” he said.
“In our view, apartment values will need to accelerate significantly higher to entice developers. This will only occur once interest rates drop.”
Tim Gurner, founder of Gurner Group said the boom in apartment prices was imminent.
“It is coming, whether it’s in the next 12, 18 or 24 months, I’m certain that it’s coming and that it’s going to be even bigger than people are expecting,” he said.
“We’ve never seen such a critical undersupply of housing in this country, and when you combine that with record demand fuelled by population growth then you’ve got a perfect storm.
“People will look back at this time right now as the best moment to buy in 10 to 20 years. The market is depressed due to negativity, but that will turn, and it will turn fast.”
Mr Chopra said the large premiums of newly built apartments showed there was a scope for further price increases.
Newly built one-bedroom apartments typically trade at 16 per cent premium over older stock, while two-bedders command a 30 per cent premium.
The larger three-bedroom apartments are currently fetching 45 per cent higher prices compared to the older stock.
Gary Dempsey, founder of Gary Dempsey Developments who focuses on the premium end of the Perth market said buyers were willing to pay for the right type of property.
“My budget for the latest project, the MYKA development in Scarborough Beach, has nearly doubled to $50 million since I started doing the feasibility studies two years ago, because of high construction costs,” he said.
“But this is turning out to be one of the most profitable projects I’ve done because of strong demand and low supply.
“The entry price is $3.5 million, which shows that values in the premium end of the Perth market are beginning to be more reflective of construction costs, which has a direct impact on the feasibility of projects of this nature allowing them to go ahead.”
However, for the broader market, those higher premiums make the existing apartment stock more attractive to home buyers and investors, according to Nerida Conisbee, Ray White chief economist.
“I can easily see prices for new apartments increasing by more than 20 per cent over the next two years to cover the sharp increase in construction costs,” she said.
“The problem we have now is that prices haven’t risen that much for older apartment stock, so people are being pushed into buying them because they are much cheaper compared to the new builds.
“At some point that gap in pricing will narrow as prices for older stock rise because of higher demand.
“This will lift prices for new apartments and make building more viable. But at the moment, that difference is quite wide, so the ability to get apartment projects off the ground is not viable.”
Rents are also expected to increase by more than 25 per cent or by $170 a week over the next five years across the major precincts in the capital cities.
Those include Sydney CBD, eastern suburbs and Liverpool areas. In Melbourne, apartment rents are set to jump across the CBD, inner east, south-east including Bayside, north, east and the south-west.
Apartment rents in Brisbane’s CBD, inner areas, south-east and the south are also forecast to post a 25 per cent increase over the next five years.
CBRE is predicting that capital city vacancy rates will fall further to 1.2 per cent by 2029 from 1.9 per cent in 2024.
The sharpest fall in apartment vacancy rates is forecast to occur in Sydney’s eastern suburbs and lower north shore, inner Brisbane, CBD and the south-east as well as Melbourne’s inner east and south-east suburbs including Bayside.
Nila Sweeney writes on property from our Sydney newsroom. Email Nila at nila.sweeney@afr.com.au