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Australia could be facing a scarcity of apartment units, which could likely influence housing affordability and set a higher threshold for housing accessibility.
CoreLogic economist Kaytlin Ezzy said approvals data from the Australian Bureau of Statistics (ABS) showed a declining trend in the unit sector.
“In July, 4,490 units were approved for construction, down 19.9% from the month prior and 39.8% below the decade average,” she said.
“Excluding a handful of volatile months, the trend in new unit approvals has largely held below the decade average since mid-2018 and well below the trend in house approvals since late 2017.”
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Over the past 10 years, units have accounted for approximately 41.7% of total new housing completions nationally.
In contrast, units only made up 37.1% completions over the March 2023 quarter, holding around 27.1% below the decade average.
Ms Ezzy said although there is increasing demand, developers and consumers are adopting a more cautious stance due to uncertain economic conditions, decreased capital gains, elevated construction expenses, a constrained labour market for trades, and rising interest rates.
“With fewer unit projects set to move through the construction pipeline, it’s likely completions will continue to ease, with units making up a smaller portion of new housing stock over the coming years,” she said.
Still, despite the low completions and approvals, there is a considerable number of unit projects in the pipeline that have yet to be finished.
In fact, unit commencements have shot up from 12,782 in the December quarter of last year to 19,981 through the first quarter of 2023.
“Constraints across the building sector have meant the number of units approved but yet to be completed have swelled to over 158,000 as of March this year,” Ms Ezzy said.
“However, both unit commencements and the total number of approved units in the pipeline yet to be completed, remain below the highs of the mid-2010s.”
Ms Ezzy said units have historically been a relatively affordable entry point for owner-occupiers looking for a first home and for investors seeking rent yields.
“In a low and declining interest rate environment, the apartment boom of the 2010s contributed to persistently low growth in annual rents across the country, averaging about 2% per year, and through the recent pandemic upswing, detached house values ballooned relative the unit sector,” she said.
Despite the surging demand and historically low interest rates, the early 2020s haven't seen the same surge in unit construction.
Ms Ezzy said an elevated number of units under construction, combined with high interest rates, and subdued consumer sentiment could potentially moderate unit demand and price growth.
“But once the pipeline is worked through, Australia faces a relatively low number of approved projects, which may create a temporary vacuum in new unit supply,” she said.
“With the cash rate potentially easing in 2024, greater purchasing demand could fuel a stronger price boom in the unit market at this time.”
Why units are crucial when talking about affordability
The medium to high-density sector has progressively gained significance in Australia's residential real estate market, leading to a gradual increase in the proportion of units in the country's housing stock.
According to August 2023 figures from CoreLogic, units made up 25.9% of national housing stock and around 30.4% of Australia's capital city housing stock, up from 19.6% and 22.9% at the start of 2010, respectively.
Ms Ezzy said Sydney, Melbourne, and even the ACT typically rely on the unit sector to provide new housing stock.
“The medium to high-density sector is increasingly becoming an important tool in delivering additional housing stock for Australia's growing population, especially as households continue to congregate in metropolitan areas,” she said.
“With a median value of $637,593, or around 30% cheaper than capital city houses, capital city units offer a significantly more affordable entry point for first home buyers, as well as a lower maintenance option for both investors and downsizers.”
Demand is surging for units
Given its relative affordability, demand for units continued to be at a high level, especially amid a stronger-than-expected level of net overseas migration.
In the year leading up to March 2023, Australia witnessed a new record high in net overseas migration, with an influx of 454,400 individuals added to the country's population.
Based on the current average household size, this translates to an increase of approximately 181,723 households.
Most recent long-term migrant arrivals tend to rent before becoming homeowners. This increased demand for rental properties has already made an impact on the rental market, as evidenced by capital city unit rents experiencing a new record-high annual growth rate in the year leading up to May.
However, this growth slightly eased over the subsequent 12 months until August.
“While worsening rental affordability has seen the pace of unit rental growth ease in recent months, unit rents are likely to remain elevated for some time, especially with net overseas migration expected to remain high through 2023 and 2024,” Ms Ezzy said.
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