Downtown apartment prices appear to be defying gravity, with price growth outpacing rent growth in the hard-hit CBD unit markets of Sydney and Melbourne, according to new figures.
Low interest rates have reduced mortgage costs for investors, allowing many to accept lower rents for a while without being forced to sell.
The closure of Australian borders last year reduced demand for CBD rentals, excluding students and international workers.
Landlords reduced empty apartments to attract new tenants as vacancy rates rose.
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Sydney CBD unit prices were up 3% on the year to September, year-on-year, the latest Estate Home Price Report find. Rents moved in the opposite direction and fell 5.5% over the same period.
In Melbourne CBD, unit prices have fallen 7% over the past year, while rents have fallen 17.8%.
AMP Capital’s chief economist, Shane Oliver, said the spread showed low mortgage costs allowed landlords to borrow more, even when tenants ran out of money to pay.
“CBD units, particularly in Sydney and Melbourne, have lagged suburban home gains, and there is now better value to be had in CBD units,” he said.
“The danger is that very low rental yields tell you that in absolute terms, it’s still expensive.
“And there could be a risk if investors change their minds and say, we can’t accept very low rental yields anymore, and start selling.”
On the other hand, he said the eventual return of immigrants and international students would help the CBD apartment market.
Brisbane CBD shows a similar effect, with unit prices up 4.1% even though rents are stable.
Weak CBD rental markets in the two largest capitals stand in stark contrast to other cities and regional areas where rents have soared as locked-down residents seek lifestyle changes.
Once a hard-hit market, Perth CBD rents jumped 7.7% while sale prices fell 2.2%. And a series of regional centers have recorded increases in rental prices and sales.
Even in Sydney and Melbourne, the tide has turned outside the CBD, with unit rents in each city making up for lost time, while selling prices have risen more modestly.
Charter Keck Cramer, director of research and strategy, Angie Zigomanis, also noted the boost from low interest rates.
“As a buyer, you don’t have to dip into your pocket as much to make your mortgage payments, even on lower rents, because interest rates have come down,” he said.
“This is one of the main reasons for the rise in prices. And if rents go down, that also has the effect of canceling out any fall in prices.
Interest rates are unlikely to stay this low over the long term. The Reserve Bank has previously said its central scenario is a cash rate hike in 2024, and some economists suggest it could move as early as next year after inflation rises and the economic outlook improves.
“If interest rate cuts are one of the main drivers of price performance, then if interest rates go back up – and obviously we’ve seen a slightly higher than expected inflation figure – that has a negative impact on prices,” Zigomanis said.
He added that the market could change over the next few years. As investors have retreated in recent years, it has become more difficult for apartment developers to come up with new projects.
When overseas migration restarts, empty units begin to fill up again and rents rise, but it would take property developers more than two to four years to bring in new supply.
“You might well find three or four years from now we’re talking about market stress,” he said.
A recent report by investment bank UBS found that Sydney real estate was overvalued and Australians were taking on more debt relative to their income to keep up.
Separate research released on Monday found that the average size of new apartments has hit an 11-year high as buyers prefer larger living spaces.
Figures show apartments completed in 2020-21, and started much earlier, would likely show little effect from the pandemic, but that could soon show up in new construction, the CommSec’s chief economist said, Craig James.
The average new apartment is now 138.3 square meters, up 0.4% from the previous year, the Commsec Annual House Size Report find. The average single-family home completed in the same year measures 229.3 square meters, down 2.9% from seven-year highs.
“No doubt during the construction phase as well there were a number of discussions between people who said, ‘I don’t have a room for a study area, maybe I need to include some. a’,” Mr. James said.
“We’ll see some unwinding of the apartment-to-home trend that we’ve seen over the last 18 months…it depends on how COVID progresses.”