Will units continue to be a more affordable option? Not unless it becomes easier to build them. Analyst Michael Matusik says multi-unit building approvals fell 44 per cent in May and, while the data is volatile, medium-density dwelling starts are on "a serious slide south". This is despite lower interest rates, the economic stimulus and rising investor interest.
Matusik says high prices and restrictive buyer and developer finance are the limiting factors. A new apartment in a downtown city area (Matusik lives in Queensland) costs the buyer at least $8000 a square metre, putting the cost of a 69sqm two-bedroom apartment with one parking space at $550,000.
Investors buy close to 75 per cent of all new apartments, but they now need bigger deposits to do so. Twenty per cent is often the minimum and sometimes 25per cent to 30 per cent.
Growth in rents is also slowing and Matusik says he can't see investors rushing back into the new apartment market. He says most new units sold recently have been substantially discounted, often below replacement cost.
Some are also not that new in the sense they have been on the market for a long time.
Second and third-tier financiers are out of the market, so there has been a dramatic reduction in the amount of development finance available.
"Just 12 months ago, banks would lend on an LVR (loan to valuation ratio) of 80 per cent. Today they are asking 60 (per cent) to 70 per cent," Matusik says. Deposits must be in cash and developers are often asked to provide a profile on each buyer. "Even cashed-up quality developers can't make most of their new projects work under these conditions, and God help you if you need to roll over funds."
Matusik says there are no quick fixes and new apartment construction will be "sluggish at best" for the foreseeable future and even "dead in the water" unless the banks free up finance for such projects. The effect on supply and affordability should be obvious a few years down the track.