Buyer’s markets where no one wants to buy

Housing affordability in Australia continues to deteriorate on several fronts. The supply rate of newly built housing was largely insufficient to meet demand due to strong population growth and new household formation. However, new analysis from CoreLogic has identified 65 Sydney and Melbourne unit markets where values ​​are below record highs since the 2010s. In some of these markets, housing affordability is improving despite high interest rates and a large proportion of sellers are willing to sell at a loss.

But buyers are not biting. The reason? Wrong type of supply.

Figure 1 (available here) shows the unit markets where values ​​are below all-time highs, along with the current median value, the date of the peak value and the change in value over the last 12 months. While most other unit markets in the country have recovered from the oversupply in apartments through the 2010s, many markets in Sydney and Melbourne are still underperforming.

Despite Melbourne housing currently being the weaker of the capital’s two markets, Sydney makes up the bulk of the list, with 51 unit markets below a 2018 or 2017 peak.

Across Sydney’s unit market as a whole, values ​​have risen by 8.7 per cent since mid-2017. But suburbs like Epping are in stark contrast, which currently has a median unit value of just under $800,000, and the market value of units is down -18.4% from the May 2017 peak.

Relative to incomes, affordability has improved in the Pennant Hills-Epping SA3 unit market. Between the June quarter 2017 and 2024, the time it took for the average household to save a 20% deposit fell from 9.8 years to 7.6 years. Despite rising mortgage rates, the amount of income needed to service a mortgage also remained low relative to the wider Sydney average at 36.0% in the June 2024 quarter (down from 36.1% in the June 2017).

Unit market values ​​in Greater Melbourne increased by 6.5% from mid-2017 to September this year, but in the Melbourne City SA3 region (a good proxy for inner Melbourne), which accounted for 8 suburbs on this list, values units are still – 8.6% below their 2017 peak. The median unit value in this market was just $514,000 in September 2024, and as of June it took just 5.4 years to save a deposit and 34 % of average household income to service a mortgage loan. Buyers really have the upper hand in this market, with resale data for the June quarter suggesting that 42.2% of unit owners in the Melbourne City Council area experienced a loss on sale in the June quarter this year.

Why have these markets performed?

The underperforming Sydney and Melbourne unit markets are generally linked to an oversupply of quality investment units built in the 2010s. As interest rates fell after the GFC, residential property investment became particularly attractive in the suburbs from the inner and middle ring of Sydney and the inner city suburbs of Melbourne and Brisbane.

During this period, investors’ share of new home financing reached record levels of 46% in 2015. Purchases of non-compliant flats from the investment plan abroad increased, and strong investor take-up of interest-only loans for tax purposes added possible speculative activity in the apartment sector.

Based on median gross household income and an annual savings rate of 15%.

Australia’s off-the-plan apartment boom

This has led to a boom in unit construction, where investor activity is generally much more concentrated in the unit sector. Nationally, apartment approvals peaked at 123,000 in the year to August 2016. Remarkably, apartment approvals eclipsed detached house approvals over this period, another sign that the market has been shaped by high levels of activity investment. Housing and occupancy data from the ABS at the time showed that owner occupiers were largely opting for home ownership, with around 80% of recent home buyers purchasing a home in the 2015-16 financial year.

Granular ABS approvals data showed approvals of almost 5,000 units in the Melbourne and Southbank SA2 markets in the 2015-16 financial year alone. In the same period 1,300 units were approved in Epping – North Epping SA2 and 770 units were approved in Liverpool – Warwick Farm.

The apartment investment boom ended around 2017 when a temporary cap on interest-only loans was introduced to curb potentially risky lending. At the time this cap was announced, around 70% of new loans to investors were on interest-only terms. With the cap in place, along with other tightening of lending conditions, investors quickly exited the Australian housing market, undermining the value of newly built units.

To make matters worse, the apartment market also suffered a crisis of confidence after a series of construction quality issues emerged from recent construction. These included high-profile cases such as Mascot Towers and the cracks in the Opal Tower in Olympic Park.

Wrong type of supply

The result of the apartment boom of the 2010s meant that some of the most convenient and well-located development sites were used for a certain type of buyer at a certain point in time – however, the supply built during a investment boom may not meet the needs of today’s buyers. Instead of first home buyers rushing to this relatively affordable stock, many may be wary of the flaws in these builds or put off by the high density and relatively small size of the units.

Even today’s investors can be put off by these markets, which have generated poor capital growth returns for the better part of a decade. Although rents have risen strongly over the past few years, interest rates are still higher now than they were in the 2010s, and values ​​in some of these apartment markets may need to fall further in value to be attractive from a yield perspective the rent.

Interestingly, some of these equity markets have seen a sharp turnaround in capital growth of late. In Tallawong, where the Northwest Metro line opened in 2019, unit values ​​gained a whopping 11.9% in the 12 months to September. The low-priced unit markets of Sydney’s Punchbowl and Lakemba and Melbourne’s Parkville have also seen relatively high growth rates over the past year and still have an average unit value below $600,000. This suggests that buyers may finally be swayed to consider purchasing in the medium to high density unit markets…but only if the price is right.

Access additional data here.

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meets Eliza Owen

Head of Residential Research Australia

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Eliza Owen was appointed Head of Research at CoreLogic Australia in 2020.

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