Inner Melbourne to see an oversupply of apartments by 2017

According to a recent report by BIS Shrapnel, 2016 Building Industry Prospects Report, both Melbourne and Brisbane will have an oversupply of apartments by 2017.

The report suggests that Melbourne will have 20,000 too many homes by next year, and this will be brought about by record levels of apartment construction during the last 18 months.

So is this something we should be worrying about?

What does an oversupply of apartments actually mean?

An oversupply of apartments, which is expected to be worst within the inner Melbourne and inner Brisbane regions, will mean that vacancy rates will be higher, making it harder for property investors to find rental tenants for their property. Oversupply of property typically occurs after a boom where developers have been competing to gain a slice of land and acquire building approval from the local council. Once their development has been approved then construction can take approximately 18 to 24 months depending on the size of the development meaning these apartments will only be completed once the market has started to slow down.

With many more new apartments coming onto the market at the same time, there will be much more competition to go up against so investors will need to try to be clever to find longer term rental tenants.

Ideally, you want to have someone renting your property from day one, as every week that goes by you are having to cover the rent yourself which can put an added strain on your finances. To prevent lengthy times of vacancy you should start advertising for rental tenants sooner rather than later, and even bring down the price of your property for the first six months to make your apartment much more attractive. You can then raise this price later on once you have tenants.

Example, you want to charge $500 per week. Over 26 weeks this would equate to $13,000. If you reduced the rent to $480 per week this would generate $12,480 over the same period, which is $520 less. Effectively this is one week’s rent you would lose. However, by charging $500 per week rent, you might not find tenants for a month meaning you would lose $2,000 instead.

Typically in an oversupplied market, you do tend to see investors bringing down the price of properties in order to compete better with those looking to fill their vacant properties, which is good news for renters as they will tend to flock to areas where rent is cheaper and more affordable. As an investor you should promote the cheaper price to begin with for the best chance of finding rental tenants for your property before everyone else catches on.

Oversupplied market good news for buyers

An oversupplied market is also good news for buyers who can also benefit from this market condition, including owner occupiers looking to hold on to a property for the long term. There tends to be greater choice for buyers and potential for negotiation and deals for a better price. Investors can also benefit, but only if they are able to cope with higher vacancy rates. The key to this is to buy in the right location, in an area which has strong demand; key amenities close by including transport, jobs, schools and hospitals and good future growth potential.

Today people want convenience and prefer to live within walking distance of all the essentials that they require including a train station, shops and schools. It therefore pays in your favour to always buy with this in mind. If you are an investor and worried about oversupply then you should consider the type of development you buy. You might find that an apartment within a high-rise development might be harder to tenant due to greater competition to go up against within the building, compared to a smaller boutique property that might only have a handful of investors.

If you do decide to buy in an oversupplied market then it is important you hold onto the property for the long term and ride this wave out. Looking back in time at various property cycles this trend happens repeatedly. Your property might decline in value for a short amount of time, but this will pick up as the population grows and the area becomes attractive again. You just need the patience to wait this out in order to see capital gain.

In spite of there being oversupplied markets, the population of Australia is expected to continue to grow from 22.3 million in 2011 to 30.5 million in 2031. The population of Melbourne in 2013 had 4.3 million people and this is expected to grow to approximately 7.7 million people by 2051 according to Plan Melbourne. This means that there will be future demand for apartments, but at this particular point in time moving into 2017 there might be an oversupply of apartments and lots more choice.

One reason why Melbourne is suffering a greater apartment undersupply is due to the fact that many more people are staying at home for longer due to housing affordability in a bid to save up for their own property. For those that do move out they tend to rent in a group in a share house rather than renting a property on their own to keep costs down. This means that fewer apartments are being rented out particularly in inner city areas such as Docklands, Southbank and South Melbourne.

However, according to the BIS Shrapnel report, Sydney will not be suffering from an oversupply of apartments in 2017 despite having gone through a property boom. Instead, the city will have an undersupply of residential housing instead.
According to BIS Shrapnel managing director Robert Mellor, “It’s so severe we won’t see an oversupply in Sydney in the next four years”.

If you are thinking about buying a property, but want to find out more about what this oversupply of apartments might mean for you then why not speak to one of our property consultants at iBuyNew. They can show you exactly what properties and suburbs are a good place to purchase your next property and what areas you should be avoiding.

Just remember, you should not let an oversupply of apartments put you off buying a property as not all areas will be prone to this. There are benefits buying a property today as long as you buy in the right location and hold onto the property for the long term. Call us today on 1300 123 463 and we can show you the best properties for your requirements.
Published on 4th of April 2016 by Marty Stanowich
Marty Stanowich
Marty Stanowich

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