The Buyer’s Markets Where No One Wants to Buy: Analyzing Sydney and Melbourne’s Underperforming Unit Markets

Australia’s housing market has been a focal point for years, and recent analysis from CoreLogic, led by property expert Eliza Owen, sheds light on a paradox gripping Sydney and Melbourne’s unit markets. These once-booming urban sectors are now struggling with declining values and an alarming lack of interest from buyers, even as affordability improves. So, what’s driving the downturn, and why are these unit markets failing to attract buyers?

Supply Glut in the 2010s: The Root of the Problem

The trouble in Sydney and Melbourne’s unit markets is largely a consequence of an oversupply of investment-grade units built during the 2010s. As Owen explains, “Under-performing unit markets in Sydney and Melbourne are generally tied to an over-supply of investment-grade units.” Many of these units were built for investors seeking quick returns rather than owner-occupiers, leading to an influx of small, high-density apartments that catered to a very specific buyer.

This period saw a boom in apartment construction, driven by investor activity, which peaked in 2016 with a record 123,000 apartment approvals. However, by 2017, investor interest began to wane due to tighter lending conditions and rising concerns about construction quality. High-profile incidents like cracks in Opal Tower and Mascot Towers further damaged buyer confidence.

Declining Values and the Buyer Standoff

The numbers tell a stark story. In Sydney alone, 51 unit markets have yet to recover their peak values from the 2010s. One glaring example is the suburb of Epping, where median unit values have dropped by 18.4% from their peak in May 2017. As Owen notes, “Buyers truly have the advantage in this market,” yet few seem willing to take the plunge. A similar scenario is unfolding in Melbourne, where unit values in key areas like the Melbourne City Council area remain 8.6% below their 2017 high, with over 42% of sellers incurring losses during recent sales.

Despite these falling prices and improved affordability, buyers remain reluctant. Why? As Owen explains, “Supply built during an investment boom may not meet the needs of today’s buyers.” Many potential first-home buyers are deterred by small unit sizes and concerns about structural integrity. Meanwhile, investors are wary of poor capital growth and higher interest rates, which make these units less attractive as investment properties.

A Ray of Hope?

While the broader picture remains bleak, some unit markets have shown signs of recovery. Suburbs like Tallawong and Punchbowl in Sydney, along with Parkville in Melbourne, have seen unit values rise by as much as 11.9% in the past year. However, these pockets of growth are exceptions rather than the norm.

Ultimately, the future of Sydney and Melbourne’s unit markets depends on a recalibration of supply and demand. Buyers may eventually return, but only if prices fall far enough to justify the risks associated with older, high-density developments. Until then, the standoff between sellers and buyers will likely continue.

References

Eliza Owen, CoreLogic: The Buyer’s Markets Where No One Wants to Buy https://www.therealestateconversation.com.au/news/2024/10/07/the-buyers-markets-where-no-one-wants-buy-corelogic/1728231960