Australia's Apartment Market: Anticipating a 23% Surge by 2026

The Australian real estate market is poised for a significant shift. According to CBRE, prices for newer apartments are expected to soar by over 20% by the end of 2026. What’s driving this anticipated increase? A combination of lower interest rates and a shrinking supply of new apartments.

Australia’s Apartment Market Set for a Boom

Sameer Chopra, CBRE’s head of research for the Pacific region, highlights that the high costs of construction and a shortage of new apartments justify the expected rise in values. “Apartment values have not kept pace with construction costs in the past five years,” Chopra notes. The current disparity stands at 23%, but CBRE expects this gap to close as interest rates drop, boosting prices and supply.

Interest Rates and Construction Costs

A significant driver behind the expected price increase is the cost of construction, which has outpaced apartment values over the past five years. Chopra states, “That disparity is currently at 23%. We can expect this gap to close out and revert to a premium. But for the gap to close out quickly, we need interest rate cuts.”

The future supply of apartments will hit 50,000 units annually from 2025 to 2029. However, this falls short of the 75,000 homes needed to accommodate the population growth. Without significant interest rate cuts, new supply may not meet demand until 2030. “If interest rate cuts are smaller than expected or delayed further, we will not get new supply until 2030,” Chopra adds.

Expert Predictions

Tim Gurner, founder of Gurner Group, believes a boom in apartment prices is imminent, driven by a critical undersupply of housing and record demand fuelled by population growth. Gurner suggests, "It is coming, whether it’s in the next 12, 18 or 24 months. I’m certain that it’s going to be even bigger than people are expecting."

Gurner views this period as the best time to buy in the next 10 to 20 years.

Premiums on New Apartments

The premium on newly built apartments is another factor to consider. Newly built one-bedroom apartments typically sell at a 16% premium over older stock, while two-bedroom units command a 30% premium. Larger three-bedroom apartments are fetching prices 45% higher compared to older stock.

Chopra notes, "The large premiums of newly built apartments show that there is a scope for further price increases." This premium reflects the strong demand for new developments, despite high construction costs.

Market Outlook and Affordability

Gary Dempsey of Gary Dempsey Developments notes that despite high construction costs, strong demand, and low supply are driving profitability. His MYKA development in Scarborough Beach exemplifies how the premium end of the market is beginning to reflect these costs. "My budget for the latest project has nearly doubled to $50 million since I started doing the feasibility studies two years ago, because of high construction costs," Dempsey explains. "But this is turning out to be one of the most profitable projects I’ve done because of strong demand and low supply."

For the broader market, higher premiums on new apartments make the older stock more attractive to buyers and investors. Ray White’s chief economist, Nerida Conisbee, foresees a 20% increase in new apartment prices over the next two years to cover rising construction costs. As prices for older stock rise due to higher demand, the gap between new and old apartment prices will narrow, making new builds more viable. "I can easily see prices for new apartments increasing by more than 20% over the next two years," Conisbee says.

Rental Market Trends

Rents are also expected to rise by over 25%, or $170 a week, in major precincts across capital cities, including Sydney, Melbourne, and Brisbane. Specifically, Sydney’s CBD, eastern suburbs, and Liverpool area. Vacancy rates are projected to drop to 1.2% by 2029, tightening the rental market further. CBRE predicts that capital city vacancy rates will fall further to 1.2% by 2029 from 1.9% in 2024.

Australia's apartment market is on the cusp of a significant transformation. As supply struggles to meet the surging demand and construction costs continue to climb, the real estate landscape will present both challenges and opportunities for buyers and developers. Staying informed and proactive will be key to navigating this evolving market.

*Source: Sweeney, N. (2024, Oct 7). Newer Apartment Prices to Climb by 23% by 2026. Financial Review.