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Are Apartments the Future of the Australian Housing Market?

By Lisa Mackenzie

Australia’s population increased by almost 2.9 million from 2012 to 2016, at a rate of over 720,000 per year. According to the latest census data, there are now 24.4 million people who call this country home.

Population increases of around 1.6 per cent per year, every year, may be brilliant for our nation’s economy and diversity. However, they can also create challenges for our housing market. More people means more housing, and although we’ve got plenty land to spare in rural areas, our cities are running out of space fast.

Apartments are one possible solution. Higher dwelling density allows us to put more housing in the areas we really need it – big capital cities like Melbourne, Sydney and Brisbane. Despite this, talk of an apartment bubble has been rife recently, casting doubt on what really is in the future of the Australian housing market.

Proportion of Australians living in apartments increasing

Although we’ve got plenty land to spare in rural areas, our cities are running out of space fast.

Fifty years ago, you and your family might have been able to purchase vacant land right near Sydney’s centre, and built your own property with no more than a couple hundred thousand in the bank. Fast forward to 2017 – there’s no vacant land left within several kilometers of the city, and detached houses in the area will most likely set you back well over $1 million.

The story’s the same in many of our other capital cities. If you want to live in the city, an apartment is simply the most affordable option (and often the only one). That explains why the proportion of Australians living in apartments and other mid to high density residential dwellings, increased from 21 to 26 per cent over the four years to 2016, according to census data.

Considering current trends, it’s extremely likely that that number will keep growing over the next decade as our city’s populations continue to grow.

The rise and fall of apartment construction

In 2009, something clicked and the Australian construction and development industry began building high density apartments at an unprecedented rate, Reserve Bank of Australia data shows. In early 2009 apartments made up roughly 15 per cent of total residential building approvals, but by 2015 that percentage more than doubled to 35 per cent.

This huge growth was driven in large by construction in our biggest cities – Sydney, Melbourne and Brisbane. More recently, however, talk of an apartment oversupply in Melbourne, Sydney and Brisbane has become more and more prevalent.

Australian Bureau of Statistics data substantiates these concerns, showing that dwelling approvals for private sector dwellings excluding houses (which includes apartments) has decreased by 31.3 per cent over the year to May. In the month of April alone apartment approvals fell by over 12 per cent. This suggests that apartment oversupply is real, and that we’re unlikely to see apartment construction reach such impressive heights in the near future.

Market trends and future predictions

Symptoms of oversupply are showing in the average values changes for apartments in each of our capital cities, CoreLogic RP Data shows. The values of apartments in Sydney and Melbourne only increased by 4.5 per cent and 2.3 per cent, respectively over the year to 30 June, whereas the average house value in both cities increased by over 13 per cent.

The same is true in Brisbane, Darwin and Adelaide, where the average value of apartments has actually decreased over the past year. In fact, the average value of an apartment in Darwin dropped by almost 10.5 per cent over that period.

However, considering the large drop in apartment approvals over last year as well as Australia’s constant population increases, it’s highly possible that this trend will reverse eventually. As the rate of apartment construction slows and population causes continual increases in demand, the balance of supply and demand will shift. If this does happen apartment values will begin to increase, or continue to increase at a higher rate.

Regardless of price trends, it’s extremely likely that a higher proportion of Australians will live in apartments as the years go by. Thanks to constant population increases, and the simple economics of supply and demand, high density dwellings will always be on the rise here in Australia.

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