Recent reports citing the drop in apartment prices are worrying economists who believe that the possibility of over-development and supply is causing the lack of confidence in the real estate market.

Recent reports show that apartment prices in Australia’s CBDs have fallen by an average of 6.3% in the last 12 months. The Melbourne CBD and Sydney CBD areas show the highest rates of decline.

In the coming months tens of thousands of apartments will be bought by foreign investors specifically from Asia, who will be purchasing unprecedented amounts of land with the goal of reselling it to future buyers. This rising trend is due to the fact that offshore buyers only have the ability to purchase new real estate, thereby establishing a “secondary market” where the value of land is not secure and very volatile. While this is good news for struggling  buyers who wish to enter the market, it is important to understand the consequences of this “secondary market”.

The CBD apartment market presents a settlement risk to buyers. This means that the current value of planned apartments may drop once development is done, allowing banks to default loans on deposits made by buyers because it is now seen as a risky investment.

Secondly, while there are many developers and investors ready to buy and build currently, there is no guarantee that there will be people willing to live and rent out these new properties. This presents an occupational risk where vacancy rates increase and apartments are left empty therefore investors receive no return.

Such risk of oversupply can leave the economy in a vulnerable position as banks are left exposed to falling house prices and a subsequent reduction in profits. While there is no predicting the future of the real estate market, it is safe to say development in our CBDs will definitely restructure the real estate market both in terms of prices and in framework, as owning a traditional home seems like a dying wish for many young home buyers.