Apartment Prices Are Falling. Who Is Buying?

One sale says it all

Canberra wants 1.2 million new homes. Macquarie Street wants thousands of apartments across Bondi Junction, Edgecliff and Woollahra. We are told this will fix the housing crisis.

The market is telling a different story.

This week a one-bedroom apartment at 1 Adelaide Street, Bondi Junction sold for $1,070,000. Level 8. Uninterrupted Harbour views. A prestige building, across the road from Westfield. It sold within two weeks, above a price guide of $950,000-plus.

On the surface, a strong result. But the owner paid $1,140,000 in 2021.

That is a $70,000 loss on price alone.

Then add NSW stamp duty. On a $1,140,000 purchase in 2021, the duty was about $47,400. That money went to the State Government on day one. It never comes back.

Purchase and sale prices as recorded. Stamp duty is an estimate on the 2021 purchase price.

That is about 10 per cent of the purchase price. On one of the better one-bedders in the suburb.

And the State collects again. The new buyer pays duty on $1,070,000. The same government pushing thousands more apartments into the suburb has now been paid twice on one that lost money.

Note what happened here. Buyers moved quickly once the price met today’s market. At the 2021 price, they would not have moved at all.

Buyers move fast at today’s price. At yesterday’s price, they do not move at all.

Next door at the Archibald, a two-bedroom, two-bathroom apartment is on the market with a guide of $1.3 million. That is well below what it cost off the plan in 2021.

These are not distressed sales of poor stock. This is quality product, in the best-connected suburb in the east, selling for less than it did five years ago.

What is planned

Now look at what is coming.

The State’s draft rezoning for Edgecliff and Woollahra proposes about 9,400 new homes across 168 hectares. Towers of up to 34 storeys at Edgecliff Station. Up to 32 storeys at Woollahra Station. Woollahra Council’s own plan allowed for about 3,600.

Waverley Council’s Bondi Junction master plan adds roughly 3,000 more over 20 years.

That is more than 12,000 new apartments along one short stretch of rail line.

How many will be affordable? The base affordable housing contribution is 3 per cent, rising to 15 per cent on certain sites. The rest sell at market price.

The targets are slipping

Nationally, the numbers are going the wrong way. Home approvals fell from 18,056 in July to 16,953 in the latest figures. NSW approvals dropped 17.3 per cent, led by apartments. No current projection has the country reaching the 240,000 homes a year the Housing Accord requires.

Prices are falling with them. Sydney led the capitals in August with a 1.4 per cent monthly fall. The industry blames the interest rate rises and the tax changes in the May budget.

So government is rezoning for supply while buyers retreat and developers put down tools.

Who is the buyer?

This is the question nobody in government answers. So do the sums.

To buy a $1,070,000 one-bedroom apartment, you need a 20 per cent deposit of $214,000, plus about $42,000 in stamp duty. That is over a quarter of a million dollars in cash before you own a thing.

Then the loan. Repayments on $856,000 at 6.5 per cent run to about $5,400 a month. To carry that comfortably, a household needs an income of around $215,000 a year.

That is for one bedroom.

The newly arrived family cannot pay that. The average income earner cannot borrow it. The first home buyer cannot reach it without serious help from parents.

Yet these are the people the policy is meant to help.

Build cost, land cost and finance cost set the price of a new apartment. None of them are falling. A new tower in Edgecliff or Woollahra will not come to market cheaper than the Bondi Junction stock already struggling to hold its 2021 value.

You cannot fix affordability by building more of what people already cannot afford.

The buyer was a downsizer

Who bought 1 Adelaide Street? A downsizer.

Not a first home buyer. Not a newly arrived family. Not a young couple on an average income.

Downsizers typically sell a house to buy an apartment. They carry little or no debt. Interest rates barely touch them.

That is who new supply above $1 million really serves. People who already own property here, moving from one address to another. It adds apartments. It does not add home owners.

Why investors have gone quiet

Investors once soaked up this stock. Run their sums today.

A one-bedroom apartment with parking in Bondi Junction rents for $850 to $950 a week. That is $44,200 to $49,400 a year. On a $1,070,000 purchase, a gross yield of 4.1 to 4.6 per cent.

Borrow 80 per cent at 6.5 per cent and the interest alone is about $55,600 a year.

The rent does not cover the interest. The shortfall is $6,000 to $11,000 a year before strata levies, council rates, management fees and land tax.

The two-bedroom tells the same story. At $1,000 to $1,300 a week, a $1.3 million apartment returns 4 to 5.2 per cent gross.

Since the May budget, an investor buying an established apartment can no longer negatively gear that loss. They simply wear it.

So the investor stays home. The first home buyer cannot reach. That leaves the downsizer, and there are only so many of them.

A closed catchment

Government measures supply in dwellings. The market measures it in buyers.

In 35 years, the pattern has not changed. The buyers of Eastern Suburbs apartments come from the Eastern Suburbs. The downsizer from Bellevue Hill or Dover Heights. The parents in Vaucluse buying for a son or daughter. The local owner trading one address for another.

It is a closed catchment. The same money moves around inside it.

And that catchment is not growing by 12,000 households. Every downsizer who buys an apartment first has to sell a house. Fewer houses sold means fewer downsizers with money in hand.

This is the real absorption rate. Not how many apartments the State can approve, but how many local owners are ready to move in any one year.

Approve 12,000 apartments for a buyer pool that size and one of two things happens. They do not get built. Or they get built, and the price falls to meet the buyer.

Neither outcome houses the people the policy was written for.

The settlement problem

There is a harder issue coming.

Completed apartments in Bondi Junction are now reaching the market. Many were bought off the plan at peak prices. Those buyers must settle at the contract price. Their bank will lend against today’s valuation.

Where the valuation falls short, the buyer finds the difference in cash. Some will. Some will not.

If that is you, do not wait for the settlement notice.

Then there are the developers. Some are holding completed, unsold stock worth tens to hundreds of millions of dollars. Every month costs them interest.

They have three choices. Discount, and reset the price of every apartment in the building. Hold, and pay for it. Or rent the stock out and wait.

Renting has its own cost. Under the May budget changes, investors can only access negative gearing if they buy a new home. An apartment that has been tenanted may no longer be new. The developer collects rent today and may lose the investor buyer tomorrow.

What 35 years tells me

I have seen this cycle before. Supply arrives late, at the top of the cost curve, into a market that has already turned.

The policy treats housing as a numbers problem. Build enough, and prices take care of themselves. But the east does not have a numbers problem. It has a price problem. And every new tower arrives at a price only the existing wealthy can pay.

For owners, the lesson is simple. Price to the market in front of you, not the one you bought in.

For government, the lesson is harder. Approving thousands of apartments is not the same as housing people.