Demand still present for higher-end apartment stock

• Sydney’s apartment market has slowed along with the broader housing market, with the Western Sydney market definitely more impacted by rising interest rates on the demand side and rising developer costs on the supply side. 
• Demand for higher end apartment stock in more blue-chip areas of Sydney has held up much better and the higher sale rates per sqm are allowing developers more comfort above rising cost structures. Nevertheless, we still expect that extreme affordability constraints will see some demand shift from houses to apartments and support demand levels over the medium term.

Historically low levels of supply complete over 2022

• A total of 1,777 apartments reached completion in 2022 across the Inner Sydney market. This is likely to mark the trough of new supply delivered to the Sydney market on an annual basis. Just 14 projects reached completion over the year, compared to an average of around 43 projects per year from 2016 to 2021.
• Developers are continuing to battle higher construction and financing costs on new developments. High land prices have also impeded on potential development margins. As such, smaller boutique developments have been able to fare somewhat better than higher density projects and have had more success at progressing to construction.

Apartment sales prices continue to decline

• Values for units across Greater Sydney declined 3.0% over the three months to December 2022. The annual decline is now 9.2%, which compares to 13.2% for detached houses (CoreLogic). Falling capital values and rising rents have seen Sydney gross apartment rental yields rise by around 70 basis points over the past year to their highest level in years.
• The pace of apartment apartment sales slowed markedly through 2022 as interest rate increases took effect. Sales are now more in line with 2019 and 2020 levels. Annual Sydney apartment sales reached a peak of just under 50,000 in early-2022 and has since fallen significantly. However, there was still a relatively robust 2,700 sales per month over the second half of 2022.

Outlook: More headwinds expected in the short term

• There are clearly more headwinds for housing in the short term and Sydney’s high dwelling prices and debt levels leave it more vulnerable to rising interest rates. However, demand should stabilise earlier for apartments as affordability pushes more buyers into this segment of the market and out of houses. 
• Further supporting market balance, new supply levels are already low and are likely to remain moderate for at least several more years. As such, supply is not likely to keep pace with growing underlying housing demand as migration picks up. The rental market is already showing this pressure and is likely to only tighten further in the near term as migration returns to pre-COVID-19 levels.