Mosman Blog

The last peak in new apartment completions in inner Sydney was 1999, pre Olympics. The dynamics that created this scenario are perhaps unique, but it is important to understand how the supply of residential apartments is absorbed by the market. Taking a simplistic view, this supply can either be bought by investors - increasing the amount of rental accommodation available, or by home buyers - who then leave the rental market and so reduce the demand for rental accommodation. So excess supply not only increases the pool of rental accommodation, it also reduced the demand. 

Naturally, vacancy rates increased in the early 2000's and rents suffered downward pressure. Ultimately, this asset class became unattractive to investors who instead chased other more attractive assets, such as the equities which produced stellar returns over the period 2000 - 2007.

The years of investor neglect in residential property stagnated apartment prices and made it less appealing for developers to release more stock. Ultimately, with disinterest from investors and lack of new construction, Sydney’s ongoing population expansion not only wiped out the excess supply, but set the foundations for a very tight rental market.

From 2005 vacancy rates plummeted to record lows and rents started their upward march.

In late 2007 the world's financial system suffered a crisis. Most asset classes suffered losses, but importantly yield expectations were reset. For the past 5 years returns on deposits have been negligible (potentially going lower) and not everyone has the appetite to invest in shares, given the markets’ volatility. 

During the same period we were seeing strengthening fundamentals in the rental market; supply was very tight, vacancy rates were sitting at record lows and rents were increasing. It was only a matter of time before these fundamentals, particularly when compared with the financial markets, caught the attention of investors.

Naturally investors started buying again, prices started to strengthen and developers started to produce and release more stock.

A report by economic forcaster BIS Schrapnel forecasts that new apartment construction/completions in Inner Sydney, which includes Sydney CBD and Inner West, are set to peak in 2017. 

Mr Zigomanis said that the market might be playing “catch-up” after almost a decade of weak demand for new apartments and limited price growth. It is also worth noting that yield hungry investors have limited options to park money, with low yields on deposit rates and a volatile share market.

But the obvious question now is: Have we overshot the mark with supply?

Most capitals cities are starting to see the signs of oversupply – vacancy rates are on the rise and rents are falling. Sydney and Melbourne are the exceptions for the time being, but we may not be immune.