Oversupply of inner Sydney apartments could push prices down

by Julia Corderoy26 Aug 2014
The boom in the inner Sydney apartment market is set to continue on the back of strong investor demand – fuelled by low vacancy rates, further price growth, high rental yields and low interest rates. However, the boom could see the inner Sydney apartment market be tipped into oversupply, according to new forecasting.

A new report by BIS Shrapnel has said high levels of off-the-plan sales in the next year to two years will continue causing new inner Sydney apartment completions to reach a historic peak by 2017.

Currently, there are 5,800 apartments in inner Sydney under construction. The anticipated peak of 4,500 new apartments expected to be completed in 2016/17 is on par with the previous 1999/2000 peak, however, the average supply forecast of over 3,800 new inner Sydney apartments per year over three years will be a record.

Senior manager of residential property and the report author, Angie Zigomanis said the promise of a robust residential property market in Sydney will see investor demand remain strong.

“In the absence of any negative news in relation to the Sydney residential market, investor demand is likely to remain buoyant,” said Zigomanis. “Vacancy rates will remain relatively tight in the short term until the upturn in new construction translates to completions, while low interest rates and low or volatile returns for other investment classes are expected to continue to encourage investors into residential property.”

The report says that while occupier demand is also likely to grow, it is unlikely to keep pace with the record level of new apartments to be completed over the next three years. As such, rental growth is likely to slow, seeing a decrease in rental yields. 

While declining rental yields are sustainable in the low interest rate environment, the market is likely to witness a decline in apartment prices once interest rate policy enters a tightening phase, according to Zigomanis.

“Landlords of newly-completed apartments will have to be more competitive to attract tenants over existing stock, while owners of older apartments may have to discount to attract tenants from neighbouring suburbs,” Zigomanis said. “The decline in rental returns and increase in mortgage servicing costs will reduce the amount the purchasers will be willing to pay for an apartment and many owners who bought at, or close to, the top of the market could experience losses if they sold into the downturn.”

Vacancy rates are not expected to reach the levels of the mid-2000s downturn following the last apartment market boom, according to the report.