The question that we all like to ask at this time every year is what might happen across the property market next year? I’m concentrating my thoughts on the residential apartment market. Being forthright, if not entirely original, I would agree with the general narrative that we are at a turning point in the market.
Broadly I agree 2018 will not be business as usual, although in fairness to myself and others in the sector, I don’t think that any year ever delivers to a template or a neat plan. That sort of textbook market, neatly packaged simply does not exist. There are always hurdles.
Every day the apartment market becomes more complex, more diverse and more sector focused every year as we see those changes impact the development cycle.
By suggesting 2018 will be a turning point, is not to forecast any great market correction or sharp right-hand turn, I think it’s more to do with trying to understand how all the key elements; including finance, demand, supply, prices, currency and planning plus many other factors will all interact.
There’s no neat headline to be found, but there are key elements that will all combine to deliver market expectations, or indeed some might just clash and disrupt the sector in unexpected ways.
Big Picture Issues: Before venturing into some specific and on-going topics that will impact the apartment market, there’s a list of ‘big-picture’ issues that include: the continued impact of technology touching everything from the workplace to how we open the front door to a new apartment.
Housing affordability, including build-to-rent, is an urgent issue. All aspects of finance, not only interest rates, will remain central including how useful it is for different institutions to black-list some suburbs. Tax policy will be important and how investors might be impacted.
One big issue will be planning delays, red-tape, the management and cost of infrastructure delivery. Prices in a potentially more fractured market, the rise of mixed-use developments and how varied planning incentives could be used, will impact the delivery of new projects.
Then we have retail innovation and the shifting outlook for bricks and mortar shopping as an important part of mixed-use projects. Also, the big questions of environment and sustainability. By any measure that’s a big list for any industry to deal with.
Interest rates: Recently I highlighted some research showing that our current interest rate settings were the lowest for 5000 years. For some months now we’ve been seeing warnings about the potential damage a series of official interest rate increases would inflict on the residential market, if not the entire economy.
Now there are suggestions rates might be on hold until 2019 and the continued access to loans at very competitive rates is going to remain a key driver of demand. This impacts not only owner-occupiers and investors but also developers funding new projects.
While we may soon see rate increases in the USA, mainly fueled by very strong employment numbers, locally we look set for more of the same. The high level of competition between lenders will also continue working to the market’s advantage.
A key factor will remain, tight controls on lending, which brings me back to ‘black-listing’ of some areas. Often these are suburbs that have seen a big increase in supply as a direct upshot of planning policy.
This results in a concentration of new projects and these same areas also become popular with residents and attract better facilities. Black-listing appears to defy the reality that higher-density is being encouraged towards meeting demand, and fails to see the merits of individual buyers and apartments.
Supply: The record levels of new construction appears set to slow, however there remains a big pipeline of developments still under construction.
In almost every major market there are big projects yet to be finished, some will roll-over well beyond 2018 into 2019 and 2020. Most of this stock has already been sold off the plan, and over the next few years actually finished supply, being settled and coming onto the market will peak.
This may well bring more second-hand apartments onto the market. We should consider total supply, with the hurdle being if the available supply matches buyer’s expectations.
Poorly located, inferior quality apartments will struggle to find buyers, the distinction between quality and ‘so-so’ will become much sharper.
The quality of supply will potentially cause wider price variations.
Infrastructure: Throughout 2017 we’ve seen the delivery of infrastructure gain pace and the whole country has turned into a construction site. Parts of Sydney look like a war zone and continued momentum will fuel ‘hi-viz’ employment and drive demand for housing.
We are however still very much playing catch-up and any sort of bonus from infrastructure spending that might boost the supply of new homes and improve affordability is still a long way off.
However, as we have just seen with the initial completion of part of the City-East light rail in Sydney these big projects are going to be transformative. As projects are finished areas that enjoy a direct benefit will see more demand and higher prices even beyond those already delivered just by the promise of new services.
Infrastructure investment is boosting employment and making some areas much more attractive for development.
While our cities are being smashed, and re-built, we must remember smart cities require smart technology: the NBN is a mess that must be sorted, it’s a very poor example of quality infrastructure delivery.
Tax reform: The need for tax reform, at every level of the economy is moving from desirable to critical. This applies more than ever for the need to reform tax policies directly impacting property and even with a time-out being called on stamp duty, we are not likely to see major reforms in 2018.
Buyers will focus on quality: I’m sure that a big trend in 2018 will be a rise in the demand for more 2 and 3-bedroom apartments in smaller and more boutique configurations with a big emphasis on quality design, finishes and services. Fewer investors will be chasing 1-bedroom apartments.
However, boutique might not be the best word, as this trend will not be governed just by size, what I refer to is not demand for small one-off buildings of just 6-20 apartments.
The definition is much wider and extends to larger projects spread across various buildings and where the floor plates deliver for example 4-6 apartments per floor with ample lift capacity, good parking and lots of natural light. Parking will be important as it’s unrealistic to expect premium buyers to have no parking or very limited parking.
The demand for boutique projects with 2 and 3-bedrooms will be driven by a change in demographics with more repeat buyers in the market and many will be older buyers who will be attracted to mixed use buildings with a good level of local amenity. This type of development also opens the wider integration of potential retirement apartments into mixed-use planning.
For many owner-occupiers, very tall buildings will have less appeal. Investors and off-shore buyers have been driving this sector, but these buildings lack appeal to buyers moving from traditional family homes.
It’s also apparent that many buyers see scale as important in securing future capital gains. Buildings that deliver a combination of scale – functionality, privacy, good facilities nearby and quality will see values rise. For developer’s short-cuts in any of these areas will impact demand and prices.
Off-shore demand will continue: The impact of foreign buyers became a political issue in 2017 and controls have had an impact, in reality off-shore buyers, along with investors have been smashed with a sledgehammer of rules, financial levies and assigned as the “bad-guys”.
This makes little sense and similar policies in the UK for example are now fueling fears of less supply and an even less affordable housing market. There’s also a need to keep an eye on the value of the Aussie Dollar, higher interest rates in the US could put pressure on the currency and a falling currency is a plus for off-shore buyers.
Prices will moderate but not free fall: Price growth in some sectors will have to be moderate in 2018 and in select circumstances prices will fall. Developers will also offer incentives, this is nothing new and it’s simply how markets adjust and should not be seen as any sort of emergency measure, such incentives simply come and go, they always have.
I’m happy to address price and I suggest that quality developments in good locations, not always super-prime, will see apartment prices settle in a range of $15,000 – $20,000 per sqm.
Finance will remain important, repeat buyers will be sensitive to what value they get for their money and home loan structures might move away from just scraping in with a 10% deposit, buyers might be looking for a stronger starting equity, possibly with help from their superannuation of from mum and dad and interest only loans will be far less common.
Moderate buyers will be more cautious as the prospect of any sort of quick capital gain fades. Buyers will not be able to see quick gains easily made and so they will be more cautious and the sell-down time for projects will be longer, but I do not expect any heavy discounting.
Summing up: Big issues for 2018 remain affordability, (it’s a social and political issue that’s not going away) the right mix of supply, tax reform including build-to-rent incentives, the impact of off-shore buyers & developers, and above all the over burden of government red-tape.
Apartments need to deliver quality finishes with architects and builders working smartly. Smaller buildings will have added appeal for both buyers and developers. They can start construction earlier and even if not 100% sold prior to completion will appeal to owner occupiers looking to trade down in size and up in quality, but who prefer to wait for the finished product.
In prime locations, well-conceived buildings of this kind when finished can attract a premium price to the developer’s advantage.
As buyers are well-educated in what they expect, functionality is more important than ever. With the extensive demand for construction resources and labour, competition across the sector will be more intense in 2018 but retaining quality will be essential.
The demand for sites will vary, non-prime locations may well drop in value, while experienced developers, and long-term investors, with good planning skills will fuel demand for prime locations.
We are seeing a natural evolution in the apartment market cycle. Investors have been shut-down, they may well have run out of steam anyway, off-shore buyers have been hit with a barrage of regulations.
Local buyers are now a very savvy lot and quality will be key, clever design and what could be labeled livability will be important, buyers will not compromise in 2018, they understand that supply is shifting to their favour and developers need to appreciate this reality and not simply rely upon cheap finance and pent up demand to drive the market.