Melbourne & Apartments – Time for some Perspective

There is, in essence, no such thing as the ‘Melbourne apartment market’.

It is frustrating for us to witness many observers characterise the ‘apartment market’ as a single entity rather than the multi-segmented market it has matured to be.

Just as we now understand the different drivers and operational considerations of the broader traditional housing market (ie between conventional dwellings and townhouses), it is time for a more mature conversation and understanding of the apartment sector.

The central city and city fringe is a prime example. There is, within a relatively condensed area of our city, a multi-segmented, multiple layered, highly dynamic segment that cannot of itself be labelled the ‘apartment market’.

Different locational considerations (sometimes as little as 250 mtrs can mean a world of difference), development built-form constraints, available view lines, surrounding amenity, previous development patterns and financial and political environments will all contribute to the type and nature of residential development on a specific site.

These factors also contribute to who is willing (and able) to commit to an off-the-plan purchase in the quantum required to de-risk the project and underwrite the traditional finance and construction model we still largely operate (assuming the build-to-rent / multi-family model remains at the relative margins of overall new supply). Funnily enough, often who is willing and able to commit to a purchase will dictate the nature of project proposed…its an economic reality increasingly driven by the skyrocketing costs of placing new product into the ground.

Irrespective of their location across the metropolitan area, apartment buildings will reflect the attributes not only of their location, but the price levels and maturity of the surrounding housing market (to which apartment pricing should theoretically have relativity to), and the nature of purchasers required to underwrite their construction.

Apartments do not simply ‘sprout from the ground’, nor do they grow quickly with some sunshine and water. The most critical form of future housing supply is also laboured with considerable supply constraints…the sensitivities around their emergence in established in-fill locations, ability to complement their residents with required amenity and connectivity, and critically the ever increasing economic cost of delivering what some hoped were to be the ‘affordable’ panacea to housing costs.

The numbers are clear. In our major cities the economic costs of providing high density housing do not make them ‘affordable’ per se…only ‘relatively affordable’ compared to the adjoining townhouse and free standing dwelling in the same street. This will always prevail, and the reality will be that in order to provide housing for a rapidly growing population base drawn to our major cities…we will need to build varying quality of accommodation to simply ensure we house our inhabitants. The utopia of ‘perfect apartments for everyone’ is nor practical, nor is it realistic.

As our city continues to grow one other certainty of life will emerge to join death and taxes…that a higher proportion of our population will either seek or be forced to live in higher density. Within the central city and infill regions of our city this new supply will largely have to be provided via apartments.

Just as in the now fully established central city and city fringe areas, future projects across the city will be varied in their nature, accommodation, occupant profile and position in the ‘market’. Yes, some will be in select locations, be of exceptional quality and carry commensurate pricing structures for financial able owner occupiers.

Others will accommodate the wishes for more aspirational owner occupiers as first and second time buyers make their way through a new vertical property ladder, as traditional home ownership no longer becomes a viable option. Others will cater for off-the-plan investors but gradually shift their position over time as resales occur to owner occupiers due to the sound underlying nature of the location and building (and critically important…how well the buildings are managed by the Owners Corporation).

Others (and apologies in advance to the utopia-seekers)…will be investment grade for life, subject to commentary about their size, amenity and ‘liveability’, but fill a vital role in the overall hierachy of the housing market as even outright apartment ownership becomes beyond the price threshold of many people, and we shift to a longer term rental market in an increasingly expensive and populous city.

The right of passage to traditional home ownership sought and enjoyed by previous generations has passed. Financial realities, the friction and costs associated with moving around a congested city and a desire to remain close to social and employment networks will change the housing dynamics of future generations. They will not make housing decisions based purely on suburb location and school zones…but on the nature and accessibility of amenities critical to their daily lives, and how the building they live in responds to these requirements. The future ‘apartment market’ will operate well beyond any understanding we can anticipate to have today.

Already, select numbers of exclusive and luxury buildings in our city should be viewed more so as a reflection of the positions and movement of the higher value housing market, rather than be ‘lumped’ into the broader/generic apartment sector. Their performance benchmarks are beginning to suggest this is already occurring.

As the depth of market for owner occupation of buildings grows (irrespective of price point), the less external influences will be acting upon them, the more stable the overall environment will be, and more closely the owner occupier apartment segment (irrespective of price point) will mirror the performance of the relative housing market.

There is a lot to take in as we start to get acquainted with this relatively young but critical segment of our housing market …but we need to start to have a more mature understanding of the composition of the segments of the market, a more pragmatic realisation of the role and position of apartments in our broader city, and reporting of the overall picture.

All of these considerations wrap into our approach to managing and selling, and working with vendors, purchasers, investors and tenants. Should you at any stage wish to discuss the ongoing evolution of the market or the position of a building or individual apartment, please feel free to make contact with us directly.