Australia's medium to high-density apartment sector has emerged as a pivotal player in meeting the surging housing demand driven by the country's expanding population.

However, the unit market faces a nationwide housing deficit projection of approximately 106,300 units by 2027, according to the latest ABS building approvals data.

While the unit sector has seen a dip in approvals and completions, house approvals have remained relatively stable. Despite these challenges, there's a substantial pipeline of unit projects in various stages of development, with over 158,000 units approved but yet to be completed as of March this year.

One driving force behind the robust demand for housing is a stronger-than-anticipated net overseas migration, particularly in regions like Melbourne's South East, Melbourne Inner, Sydney's Inner South West, and Parramatta. This influx of migrants, many of whom initially rent before buying, has propelled unit rents to record-high annual growth rates. While affordability has improved, unit rents are expected to stay elevated in the foreseeable future.

Historically, units have been an attractive entry point for first-time homebuyers and investors seeking favourable rental yields. However, challenges such as a shortage in new unit construction, fluctuating interest rates, and cautious consumer sentiment may temper unit demand and price growth.

The medium to high-density sector is a significant part of Australia's residential real estate landscape, accounting for a growing share of the housing stock. As of August, units comprised nearly 26% of the national housing stock and over 30% in capital cities, marking a substantial increase from the figures recorded in 2010.

This growing reliance on the unit sector is especially prominent in major urban centres like Sydney and Melbourne, as well as the ACT, where limited land availability makes low-density development increasingly challenging.

Despite lower-than-average unit approvals and completions, units have historically made up a significant portion of new housing completions, amounting to approximately 41.7% over the past decade. However, recent trends show that units accounted for just 37.1% of completions in the March quarter of 2023, remaining well below the decade average.

While demand for housing remains strong, developers and consumers are exercising caution due to economic uncertainties, modest capital gains, rising construction costs, labour market constraints, and higher interest rates. This may lead to a continued decline in unit completions, resulting in units constituting a smaller fraction of the housing market. It's important to note that despite the decrease in completions and approvals, there is a considerable pipeline of unit projects awaiting completion. Unit commencements have risen from 12,782 in the last quarter of the previous year to 19,981 in the first quarter of 2023.

However, both unit commencements and the total number of approved units awaiting completion remain below the peak levels seen in the mid-2010s.

While unit construction may not reach previous highs, strong demand persists. Net overseas migration, driven by a substantial imbalance between arrivals and departures, has fueled housing demand. In the year ending March 2023, net overseas migration reached a record high, adding 454,400 people to Australia's population.

The majority of long-term migrant arrivals initially opt for renting, contributing to the remarkable growth in capital city unit rents. Although rental affordability has slightly improved in recent months, unit rents are projected to remain elevated, especially with sustained high net overseas migration expected in 2023 and 2024.

Traditionally, units have provided a more affordable entry point for first-time homebuyers and offered investors attractive rental yields. However, in contrast to the apartment boom of the 2010s, unit construction has not seen a similar surge in the early 2020s.

While an abundance of units currently under construction, combined with increased interest rates and cautious consumer sentiment, may dampen unit demand and price growth, a shift could occur once the pipeline is exhausted. Anticipated easing of the cash rate in 2024 may further stimulate demand and potentially trigger a stronger price surge in the unit market.

This potential future scenario could reshape the dynamics of the property market, emphasizing the importance of monitoring trends in the medium to high-density apartment sector.

Donie Collins