Australian building completions are likely to remain strong in 2017, but softer prices and tighter lending mean a slower 2018, though conditions vary from city to city, says JLL.
Apartment supply to the end of 2017 is likely to exceed the supply of 2016, according to the latest numbers from Jones Lang LaSalle, but tighter lending conditions will restrict the number of new projects proceeding to construction, meaning completions are likely to fall substantially over the next few years.
The effect of tighter lending conditions is already being felt in some markets, says JLL’s Australian Head of Residential Research, Leigh Warner.
“The supply pipeline is already shrinking in those markets where supply fears have been of greatest concern," he said, noting that the number of apartments under construction fell in the second quarter of 2017 in Brisbane, Melbourne and Perth.
"Banks are certainly imposing much tighter lending conditions on developers in these markets and it is clear that in a more subdued demand environment, less projects are able to proceed to construction," he said.
The Sydney market is more robust after a long period of limited supply
The situation is different in Sydney, said Warner, because apartments are still in strong demand. The latest data from the Real Estate Institute of New South Wales show's Sydney vacancy rate is sitting at 1.9 per cent.
“Sydney is the market where the longer-term supply-demand balance remains healthiest and the number of apartments both under construction and being marketed rose in the quarter," he said.
"This remains a positive for a low-vacancy market starved of product for such an extended period and where demand remains robust, albeit slower than the recent cyclical peaks,” he said.
Number of apartments under construction in 2Q17 fell in Brisbane, Perth, and Melbourne
At the end of the second quarter in 2017, there were 52,200 apartments under construction in Australia in the inner-city areas monitored by JLL in Sydney, Melbourne, Brisbane, Adelaide, Perth and Canberra.
The number was up 1.7 per cent on the previous quarter. Increases were recorded in Sydney, Adelaide and Canberra, but the number of apartments under construction in Brisbane fell 9 per cent over the quarter, Melbourne fell 3 per cent, and Perth had one-third fewer apartments under construction, after a strong first quarter of completions.
Warner said JLL expects further reductions in the number of projects commencing from this point onwards, meaning construction levels are likely to peak in 2017.
"Development finance is now being rationed to those developers with the strongest track records and, even where finance is available, slower sales rates have meant it is taking longer to reach pre-sale hurdles," he said.
"This is definitely making it harder for larger projects to start and we are seeing a clear shift to smaller owner-occupier focused projects as regulators’ measures to slow investor demand continue to bite,” said Warner.
Warner said the cycle varies from city to city.
The Perth market is slowing the most after a strong 1Q
“The Perth market is a little further through the cycle than other markets," he said, citing slower population growth and a weak economy as the reasons. Warner said the silver lining to Perth's low prices is increased attention from interstate investors.
"Brisbane’s relatively large supply pipeline for its size has tipped it into moderate price decline," said Warner.
JLL is also expecting some pricing pressure in the short term in inner Melbourne as the market absorbs the substantial completions due over the remainder of the year.
Sydney prices expected to keep rising
Sydney prices are expected to continue to rise modestly in the short-term, says JLL.
View Jones Lang LaSalle's latest research on major residential markets here.
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