A Monthly Video Success Tip by Leading Australian Property Market Analyst, John Lindeman.
Hello! It’s John here.
There’s been a great deal of media interest and speculation about the apparent oversupply of units and apartments in the inner urban Sydney and Melbourne markets.
I’ve seen headlines such as Sydney’s unit prices forecast to fall and Melbourne’s apartment prices set to crash as the oversupply loans. What’s going on?
Now, it’s true that units and apartments are mostly purchased by investors while houses are mostly bought by owner/occupiers. In greater Sydney, including the entire Sydney metropolitan area, only about 20% of the houses are rented but that figure climbs to about 60% of the half million units that are in Sydney.
When we move to the inner urban areas in Sydney such as the City of Sydney where I am now, that percentage rises to three quarters for all units owned by investors.
The large percentage of investors in these areas mean that they heavily relied on rental demand. If the rental demand drives up, then of course the cash flow does as well and investors will try to sell their properties.
This is very similar to what occurred in the mining boom towns such as Moranbah during the last mining boom. Over 80% of the properties in towns of Moranbah were owned by investors and when the rental demand dried up at the end of the mining boom, so did the cash flow and investors started competing with each other to sell properties.
Housing markets in these areas crashed as all the investors tried to sell at the same time. In Moranbah for example, the median house prices from a million dollars in 2013 is just a hundred thousand dollars at the beginning of this year.
But this is where the similarity ends because many of the investors in the inner urban unit markets of Sydney and Melbourne are investors from overseas. In particular, China. Many of these people view property as a form of security. So, they invest in units not because of the capital growth potential or the cash flow but they lock them up and they leave them brand new, unrented, unoccupied as a form of security for the future.
This phenomenon is what we call, “Unit Banking” and it’s happening all over the inner urban unit markets of Sydney and Melbourne. You see, when you look at the figures, realize that 20% of the home units and apartments in Sydney in the inner urban areas are currently empty. But only 7% are advertised for rent or for sale. This is because 13% are actually left deliberately unoccupied by the owners.
In Melbourne, the percentage of inner urban units deliberately left unoccupied is around 10% of the total. You can see all of these investors are not after cash flow or capital growth but they are after security and peace of mind that owning a unit in inner urban Sydney or Melbourne brings.
It would indeed take a massive economic catastrophe to force all of these people to sell their properties all at once. And if that would happen, we would be worried about far greater things than the price in inner urban units. So, what they do actually represents the opposite of what people think.
They provide security and peace of mind to a great percentage of investors and that provides security and growth to the others. So, you don’t need to worry about an imminent housing market collapse caused by inner urban unit over-development because it’s simply won’t occur.