These Australian suburbs could see explosive growth in new apartments in the next 2 years

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While it’s had next to no impact on capital city auction clearance rates, which currently sit at the highest level seen since early 2015, concerns about a potential apartment glut in some of Australia’s largest cities seem to increase daily.

It’s been on the Reserve Bank of Australia’s radar for some time, and, more recently, Citibank’s Australian economics team. Others have also weighed in, expressing concern about the potential impact it could have on prices, settlement risks and the solvency of some developers.

No one really knows what to expect, even forgiving the heavy involvement of foreign investors in the market which in itself adds another layer of uncertainty.

Though much has already been said about the outlook for specific markets, the one thing that has been absent from the debate so far is how many apartments are likely to be built, and where.

Thankfully, we now have the answer, courtesy of Cameron Kusher, a research analyst at CoreLogic.

In a blog post released on the group’s website earlier today, Kusher has used recent building approvals and housing starts data from the ABS to estimate just how many new apartments may be about hit the market over the next two years.

In short, a lot.

“At the end of the June 2016 quarter, there were 55,682 units under construction across New South Wales, 46,676 under construction in Victoria and 31,070 under construction in Queensland,” says Kusher, noting that “while data is not available at a capital city level however, what is occurring in each of these states is a proxy for the capital city unit markets”.

“If you look at the long-run averages you can see that the current unit construction boom is unlike anything we’ve ever seen before. The long-run averages for units under construction are: 16,194 in New South Wales, 10,139 in Victoria and 7,429 in Queensland.”

As he says, it’s unlike anything we’ve ever seen before.

An epic and unprecedented apartment building boom, as seen in recent data released by RLB which revealed the number of cranes in use for apartment construction in Sydney, Melbourne and Brisbane (454) was higher than in New York, Boston, Chicago, San Francisco, Los Angeles, Toronto and Calgary combined (419) in the September quarter this year.

Using data on apartments currently under construction, along with building approvals figures from the ABS, Kusher produced this excellent chart that shows the expected increase in the proportion of apartments in each of Australia’s capital cities in the next two years if everything approved to be built is completed.

While not all of these apartments, particularly at the approvals stage, will get built, it demonstrates why some are worried about the prospect of an apartment glut in the years ahead, particularly in Brisbane and to a lesser degree, Melbourne.

“Brisbane is set to see the biggest uplift in total unit stock followed by Melbourne and clearly in more immature unit markets this carries a risk,” says Kusher. “Importantly though, the potential uplift in unit stock in Sydney is not immaterial at 8.5% although it is lower than both Brisbane and Melbourne”.

Breaking that analysis down further, Kusher has supplied a table that puts those percentage gains into actual apartment numbers, looking at the 20 council regions that will see the largest increase in supply over the next 24 months should everything get built.

Unsurprisingly, all of the regions are located in Sydney, Melbourne and Brisbane, with the vast majority in inner-city areas.

Kusher, like others, suggests that risks of oversupply are building. However, differentiating him from some other analysts, he believes some parts of Sydney are also at threat of experiencing an apartment glut:

In Melbourne and Brisbane the regions listed are generally located close to the city, within around 10 kilometres. In Sydney, the regions listed include inner-city locations as well as regions further afield, particularly along the transport spines and Western Sydney. To some extent this does disperse the risk a little more than say Brisbane where if everything is built, unit stock in Brisbane Inner will increase by 33.6%, it will rise by 33.3% in Inner-North and by 32.5% in Holland Park-Yeronga.

Although, the potential risks in Sydney should not be discounted; Strathfield-Burwood-Ashfield will potentially see a 20.7% increase in unit stock, Parramatta unit stock could increase 19.2% and Auburn could see stock increase by 26.1%. While the unit settlement pipeline across the broad Sydney metro region is appears to be more manageable than the metro areas of Melbourne and Brisbane, the unit supply risks present in specific geographic areas of Sydney should be carefully considered, especially when much of the stock has reportedly been sold to offshore buyers and given that many lenders have now tightened lending policies to these types of buyers.

While Kusher is concerned about some select markets, he believes that it’s important to “analyse supply risk at a very granular geographic level”, pointing out that “oversupply concerns are generally confined to specific localities”.

“The risk of oversupply and non-settlement is likely to be vastly different across product types, target markets and based on the quality of the development, location of the site and the reputation of the developer,” he says.

Though many remain pessimistic about the outlook for apartment prices, if you are in the market to purchase in these regions, you now know where they’re going to be built to help refine your end decision.

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