A new report by BIS Shrapnel forecasts that the current boom in the inner Sydney apartment market will continue over the next couple of years and will peak in 2017. The boom is fuelled by buoyant investor demand, underpinned by low vacancy rates, expectation of further price growth and low interest rates.

Leading industry analyst and economic forecaster, BIS Shrapnel in its Inner Sydney Apartments 2014 to 2021 report says that high levels of off-the-plan sales over the next two years will continue, driving further rise in new inner Sydney apartment completions to a historic peak by 2017. On the downside, this sustained level of additional stock can potentially tip the inner Sydney apartment market into oversupply.

Senior manager and report author, Mr Angie Zigomanis explains that investor demand for inner Sydney apartments was initially driven by attractive yields in a low interest rate environment, but continues to be encouraged by the expectation of further capital gains.

According to Zigomanis, investor demand is likely to remain buoyant in the absence of any negative news in the Sydney residential market. Vacancy rates will be under pressure in the short term until the upturn in new construction translates to completions, while low interest rates and low or volatile returns for other investment classes are expected to continue to encourage investors into residential property.

There will also be demand from overseas buyers attracted by the stable economic and political environment of Australia, as well as its transparent property market. Zigomanis observes that the inner Sydney apartment market is catching up after almost a decade of weak demand for new apartments and limited price growth. However, the current surge in off-the-plan demand is likely to see the market get ahead of itself again as pre-sold new apartment projects commence and progressively work their way through to completion.

BIS Shrapnel estimates around 5,800 apartments in inner Sydney are currently under construction with further projects currently marketing, or likely to go ahead, expected to result in 11,500 new apartments being completed over the next three years. While the anticipated peak of 4,500 apartment completions by 2016/17 is expected to be on par with the previous 1999/2000 peak, the average supply forecast of just over 3,800 apartments per year will be above any previous three-year period.

Highlights of the Inner Sydney Apartments 2014 to 2021 report

Overseas student enrolments are increasing for the first time since peaking over 2009/2010, and growth in long term overseas visitor arrivals has also returned, while professional employment growth in inner Sydney is also expected to be relatively robust. With most inner Sydney apartments purchased by investors, these groups will contribute to rising tenant demand and help to fill up the new apartment stock.

Rising inner and middle ring Sydney house prices will encourage some tenants to upgrade to a larger apartment in inner Sydney as an owner occupier, while empty nesters and retirees may more easily trade down from their existing house to an apartment.

While declining rental yields are sustainable in the current low interest rate environment where the gap between rental income and mortgage repayments is relatively narrow, weaker purchaser demand and prices are anticipated to emerge once interest rate policy enters a tightening phase. BIS Shrapnel forecasts the first rise in interest rates by the end of 2015, and further rises over 2016 and into 2017.

Zigomanis observes that landlords of new apartments will have to be more competitive to attract tenants over existing stock, while owners of older apartments may have to lower rents to attract tenants from neighbouring suburbs. The decreasing gap between rental returns and mortgage servicing costs will reduce the amount purchasers are willing to pay for an apartment; many owners who bought at, or close to the top of the market could experience losses if they sold into the downturn.

However, the forecast downturn from 2016/17 will be relatively shallow, with vacancy rates not expected to reach the levels of the mid-2000s downturn following the last apartment market boom.

Demand in the short term for inner Sydney apartments is expected to remain buoyant, with low vacancy and interest rates helping to fuel the market and drive median price growth averaging around six per cent per annum over 2014/15 and 2015/16. This level of growth is expected to be ahead of the magnitude of decline in prices anticipated over the following two years. As a result, total price growth of around 21 per cent, or just below three per cent per annum, is forecast through to 2021.