Is the Melbourne apartment market reaching saturation point?

Docklands has over 10 per cent vacancy rates regularly – clearly in oversupply. 

Collingwood has 1-2 per cent vacancy rates – supply can’t match demand.

If you believe what you read in the media, Melbourne is currently suffering from an apartment glut. For those who dived into this market either as an investor or owner-occupier concerns over significant price reductions are palpable.

We see it all the time, property investors scared off from a particular market because of a damning article highlighting the statistics of why not to invest in a particular city.

So how much truth is there to these statements?

The common wisdom is that Melbourne is in oversupply of apartments, some even suggesting it could lead to significant price reductions, hurting investors and owner-occupiers in areas throughout the city. 

There are a number of ways to measure the level of supply, some more effective than others. These include measurements of development applications, property sales volumes, price growth, construction commencements and actual construction.

For our tale of two suburbs, let's take a look at rental vacancies.

Docklands

Rental vacancies exceeded 10 per cent three times in the last half-decade, with the running average of the last 10 years well into oversupply. The area’s sales and sales growth has not been assisted by significant foreign investment and questionable architecture being some of many factors limiting local appeal.

Collingwood

If a crow (or magpie) were to fly 3.5 kilometres to the north-east of Docklands, it would land in a suburb where the story is quite different. Here, rental vacancies spend the majority of their time at undersupply levels, with the maximum of 4 per cent reached just once in the last decade and returning to undersupply in a matter of months.

This area has transformed substantially and continues to do so through urban renewal, assisted by passionate property developers/architects changing the street facade and prompting inner-city types to take residence in the area.

Conclusion

It is foolhardy to tar an entire city with the same brush which has happened all too much for in past years. It is clear that there are some areas of Melbourne that have seen development focused on revenue rather than sustainable design. These areas have had a damning response from the local demographic.

Although minimising costs may seem like an intelligent business decision in the short term, the implications on the ability to match a modern demographic to these dwellings are dire in the long term.

The old idiom of ‘build it and they will come’ is proven to be trivial in the urban environment of this decade. Just as in other industries, consumers demand more which is why there are winners and losers in the sub-markets of our capital cities.

For today’s investor, an important principle to maintain is that you can save cents on poorly thought-out property today but it will cost you dollars when it comes to finding tenants and purchasers in the world of tomorrow.