Thousands of inner-city apartments are about to flood onto Sydney and Melbourne markets already struggling with oversupply

Sydney apartment prices could fall as oversupply hits the market.

Residential landlords are planning to dump thousands of rental apartments in the Sydney and Melbourne central business districts in the coming months to avoid a further cash flow crunch following the termination of mortgage repayment holidays at the end of March.

The owners of 2037 apartments in Melbourne and of 2282 flats in Sydney intend to list their property, potentially flooding markets grappling with oversupply and poor demand because of border closures, a survey conducted by Digital Finance Analytics shows.

“Property investors with units in high-rise buildings are the most likely to list, as net rentals are often negative, meaning they lose money in cash flow terms, and they are hoping to get a buyer given the slight rise in some unit prices – though across many suburbs they are still falling,” said Martin North, director of Digital Finance Analytics.

DFA’s findings mirror a survey conducted by ME bank that showed 23 per cent of investors indicated they want to sell their property in the next 12 months, compared with only 11 per cent of owner occupiers.

CBD apartment landlords would struggle to support their mortgage with the current high vacancy rates and falling rents, despite the low interest rates, said Andrew Wilson, chief economist of Archistar.

“There was a high proportion of investors taking advantage of those mortgage repayment holidays, so they were on life support to some degree,” he said.

“Those investors were finding it hard to get a tenant or they have to take a much reduced rent. Now that they don’t have that support mechanism, some investors may have to sell because their outgoings can’t match their income,” he said.

Some sellers, though, may find willing buyers as the broader unit market shows signs of stabilising, said Cameron Kusher, REA group director of economic research.

Searches from REA showed investors were increasingly looking for units in the Brisbane, Melbourne and Sydney markets. In the past 12 months, investor searches more than doubled in Brisbane, jumped by 36 per cent in Melbourne and rose 45 per cent in Sydney.

“Investors are seemingly sensing that the drop in rents are over and so too is the reduction in prices, so now is a good time to start looking in these areas again,” Mr Kusher said.

Not enough buyers

But most landlords will still struggle to offload their property because of the perceived risks of high-rise apartments and preference for standalone homes.

“While we’re seeing some investor interest return to inner city areas it is unlikely to be as strong as it has been in the past,” said Mr Kusher.
“Investors are increasingly looking at outer capital city and lifestyle areas than what they have in the recent past.”

The situation for CBD apartment vendors was unlikely to improve in the near term, warned Louis Christopher, SQM Research’s managing director.
“Listings for sale in the CBDs are going up and up and we’re nearly at an all time high, particularly in Melbourne CBD,” he said.

“This is not showing enthusiasm from vendors who are capturing hot prices, it’s them wanting to get out of a market that’s in a lot of trouble.

“The surplus stock is going to get worse this year, so first-home buyers or investors looking for cheaper apartments may find even better buying conditions six months from now,” Mr Christopher said.

This story first appeared in The Australian Financial Review. Read it here or follow the Financial Review on Facebook.