Prices have already started falling. The latest figures from data provider CoreLogic RP Data show unit prices fell 0.5 per cent in the first quarter of the year – and 0.9 per cent in March alone – and back-up reports show that as early as the June quarter last year up to one-fifth of all homes sold at a loss in the Melbourne CBD.

"Such a high proportion of loss-making resales is a likely indicator of negative equity developing in this precinct as a result of supply outstripping demand," says Tim Lawless, CoreLogic's head of research.

Stock bought off-plan

The price corrections happening now are partly a consequence of stock bought off the plan – available to offshore investors and non-residents – entering the the smaller secondary market of locals. Older homes don't get the new-home rental premium that off-plan stock can get, and the depreciation benefits for owners of secondary stock are also less, so that is often reflected in the price.

And with lenders tightening credit to buyers of apartments – particularly investors and offshore purchasers – concern is growing about settlement risk, the situation in which buyers who have paid a 10 per cent deposit for an off-the-plan apartment are unable to stump up the extra equity their lender demands at time of settlement.

If, for example, a bank now says it will only lend a buyer 80 per cent, rather than the previously agreed 90 per cent of the property value, and the buyer can't find the extra funds to settle, they may have to walk away and lose their deposit. If that happens on a large scale, it could pull apartment values down sharply.

While individual projects may suffer, it doesn't spell widespread disaster. But it does signal a change in a long-running upward trend. While valuations of newly settled apartments are falling by as much as 11.5 per cent in their first year, no one is predicting prices to fall into a skyscraper-sized hole. As long as interest rates remain low, apartment owners can continue to cover the gap between their rental income and mortgage requirements without suffering undue hardship, says Angie Zigomanis, senior manager for residential property at consultancy BIS Shrapnel.

"Anyone who has bought an apartment off-plan and then looks to on-sell within a couple of years will probably be looking at a 10 per cent decline," he says. "At the broader level those price falls will be mitigated by lower interest rates and the fact that people aren't necessarily going to be obliged to put their property on the market."


Melbourne's cityscape has changed dramatically over the past 20 years. In 1993, the city built just 157 high-density apartments (in buildings rising above four storeys). By 1998 that number had risen 10-fold to 1620 and last year the number for new apartment commencements had grown by the more than the same factor again, to 19,777, BIS Shrapnel figures show.

And while the number of new apartment starts will slow, the pipeline is still strong. The City of Melbourne estimates that as of November, it had 20,000 apartments under construction, another 19,000 approved and a further 30,000 dwellings awaiting approval. Half of all new homes under construction were in the CBD.

Rents hardly budged

That is influencing rents, which have hardly budged over the past four years. Melbourne's apartment yields peaked at 5.55 per cent in June, after strong rental growth outpaced the growth in apartment prices, but have dropped and this year are only likely to reach 5.1 per cent, BIS Shrapnel predicts.

Rental vacancy rates in the inner city rose to 3.8 per cent in 2013, well up from the 1 per cent they bottomed out at in 2008, and are likely to sit at the 3.5 per cent level for some time, keeping both price and rental growth low. That matters for this market – private rentals in the inner-Melbourne area account for 58 per cent of all apartments, much higher than the 25 per cent average across the greater Melbourne area.

It's a turning point in the market for apartments that as recently as last year seemed on an ever-upwards trajectory.The ability of offshore investors to continue to invest in new stock, especially in the light of China's much-publicised capital controls, is one concern. Many developers argue that money is like water and will always find a way to get through, particularly when people are keen to invest it in a safe haven such as Australia.

For local investors, particularly those that have bought apartments through self-managed super funds, however, it's a sign that easy capital growth is off the table.

In many ways, the city's relationship to apartments is maturing. They're an accepted accommodation type.


Munyi Lim and his wife are selling the two-bedroom apartment they purchased off-plan six years ago to buy a larger one ahead of starting a family.

He doesn't expect to make money on his unit in The Istana, a 320-home tower on A'Beckett Street.

Others not so lucky

"We will probably break even," he says. "A reasonably sized one with a car park, amenities and natural light will always have demand."

Others aren't so lucky. Mardi Healy is selling the two-bedroom apartment she and husband Peter, a couple with adult children, purchased as their city getaway pad.

They are owners in the Golden Age-developed 27 Little Collins Street, where a 30th floor, three-bedroom apartment was resold last August for $1,565,000 – nearly a 30 per cent discount on its original price.

For the Healys and other owners above the Sheraton Hotel, it's sheer bad luck – developer Grocon's 39-level luxury tower at 85 Spring Street will obliterate the views towards Melbourne's eastern suburbs and the Dandenong Ranges that the Healys and other residents currently enjoy.

"It's a lovely sweeping view," she says. "We won't have that view any more, it will be gone."


Healy doesn't expect to make back anything like the $733,000 records show she and her husband paid in June 2014.

"We know we won't," she says. "But we figure it's better now than when the building goes up and makes it worse."

Not giving up on city life

They're not giving up on city life and plan to buy again in time, but will do things differently, Healy says.

"We would probably be looking to not pay as much next time," she says. "We would not buy off-plan again."

For investors, apartment-capital Melbourne remains the market to watch. Like Brisbane, the oversupply will weigh on prices to a greater extent than in Sydney, which is still playing catch-up on a decade of underinvestment.

Peter Doherty's real estate agent, Ray White's Jamil Allouche, says his client wouldn't have made any more by holding on to the apartment until now.

"Apartments are not proving to be the investments that people think they are," Allouche says. "It's the gluttony – too much supply and low demand."

BIS Shrapnel's Zigomanis says prices will only rise once the excess is soaked up and rents start rising, and that will only be in four to five years' time.

"A lot of that supply, particularly in large projects, has another two or three years to run. You can't just shut off the supply tap that quickly."