I wrote
this blog in February suggesting that I thought investment-grade apartments were intrinsically under-valued. Well, according to Jarrod McCabe, director of
Wakelin Property Advisory, “the investment-grade apartment market in Melbourne is showing signs of growth this year”.
My view that apartments are intrinsically under-valued has become even stronger over the last 6 months and I would like to share a few reasons why.
House prices have appreciated significantly over the past 5-10 years and maybe that’s changing
As
this chart suggests, house price growth has become significantly stronger than apartment growth over the last nine years. The median house price appreciated by 6.8% p.a. on average over that period compared to 4.1% p.a. for apartments.
Since citing this chart in February, anecdotally, it would appear that demand for investment-grade houses in Melbourne’s blue-chip suburbs peaked towards the end of 2017. Buyer demand in this sector of the market has been less buoyant in 2018. This suggests that perhaps this growth cycle (all markets move in cycles) has ended. Maybe the trend will turn around and apartments will generate stronger growth than houses?
Tightening credit means people can borrow less
The credit environment is very tight (as I have noted many times previously) and that has put downward pressure on people’s borrowing capacities. I estimate that most people’s borrowing capacities has reduced by between 20% and 40% (sometimes more) over the past few years. This means more people will be priced out of the housing market (in prime locations) and be forced to consider invest in a one or two-bedroom apartment instead.
Supply of new-build apartments
The supply of new-build apartments will have an impact on overall median data and supply-demand fundamentals. However, the geographical concentration of new developments is what you must consider. Capital city data is less meaningful.
For example, in Melbourne, there has been a lot of new apartment development in Prahran and South Yarra but that seems to be slowing down now. However, suburbs such as Richmond and East Melbourne curr
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