Rethinking underlying demand for apartments
Contentions of oversupply for apartments tend to focus on population growth. It makes sense that permanent migrants and overseas visitors heavily influence the use of new apartments. Many of these people are willing and able to pay a premium for living close to a workplace, university or desired retail strip.
This approach assumes that we are counting our population adequately (numbers of people), and in the right ways (who they are). This work is harder than it might appear. Our communities are experiencing larger numbers of overseas visitors who are in Australia for long periods of time; people who are students, workers, backpackers and business people.
When these visitors are in Australia for long enough (a specific ABS formula), they are included in the official population data. Our communities are becoming more porous. But perhaps the degree of porousness is being underestimated.
There is an emerging trend of growth in the length of stay with more visits Australia consisting of duration of 1 to 6 months. The ABS data on the duration of stay by visitors is shown in the chart below. Over the year to May 2017, there were 1.5 million people in Australia who were here for between 1 and 6 months. That number compared to 1.1 million people just five years earlier. An extra 400,000 visitors are in Australia, making a stay of between 1 and 6 months.
The longer duration of stay will be having a greater impact on the economy – and making for unusual patterns of use for our apartments. Their use of housing might be slated to staying in a spare room, or couch surfing. A potential source of accommodation would be apartments owned by the visitors or a family member of the individuals. It seems likely that the surge in long-term stays is contributing to greater use of apartments in some locations, such that they aren’t entering the standard rental market, and that this is limiting any supply blowout.
The benefits to retail spending and demand for services are very substantial. An extra 400,000 people staying for 3 months has a similar duration to an extra 2.4 million people staying for 2 weeks, but with a spending profile that is closer to that of residents. Not surprisingly, ABS retail data shows that spending for cafes & restaurants and recreation services are recording far higher growth rates than for supermarkets and department stores.
Our view is that the nature of apartment use by long-term visitors is becoming more blurred, as Australia becomes more integrated with Asia. It is hard to be definite, and the Census data won’t help. We can draw on anecdotal evidence, where an inner city apartment is used on an extended family basis, with use by students, visitors, business travel and family friends waxing and waning over time.
The source of the emerging trend of growth in the length of stay is likely to be founded on properties owned by permanent migrants, and dual citizens with properties in Australia and elsewhere who are choosing to spend time in more than one country. Such residents may be spending a few months of the year in Australia and the rest in their country of origin. As migrants age and their children become independent they may choose to spend more time Australia. Six-month stays are permissible within any 12-month period. An apartment that is available as a holiday home must become an attractive option for older people with children living permanently in Australia.
A key merit of an apartment purchase is that hotels have become considerably more expensive over the past three years. An apartment purchase is now more compelling as a substitute for hotel stays by disparate members of an extended family.
Occupancy rates for hotel rooms have increased sharply over the past 4 financial years. This has occurred whilst hotel room availability has increased, along with the number of nights that rooms have been occupied. Revenue per available room (RevPAR) has increased by 10% over the past two years.
Hotel stays have become very expensive for repeat visits to Australia, such as those by business people. An apartment purchase can stack up as financially sound, if the number of business trips is large enough. Our broader characterisation of apartment use is one of increasing occupation by extended families of new migrants.
This behaviour is a more traditional form of the ‘sharing economy’, which is now burgeoning through the better use of technology. An apartment might be used by an extended family, and also made available through an accommodation platform like Airbnb when convenient. The occupation modes become even more blurred.
The current market for apartments is moving away from the more traditional forms of demand that involved apartments acting as primary residencies for its owners, or simply as an investment property that generated capital gain and rental income. Even if the vacancy rates for apartments in the standard rental market increase, we expect that the underlying demand for new apartments will stabilise at a higher rate that observed in previous cycles.
Put simply, our need for apartments is shifting towards a broadening set of needs. Temporary use supports the number of visitors in Australia, and people staying for several months can generate amplified benefits for the wider economy.