Apartment rents tipped to fall after glut dilutes market

This financial year, 7700 apartments are expected to be completed. Over the next three years, a further surge in supply may squeeze rents by up to 15 per cent, economic forecaster BIS Shrapnel said.

"Anyone who has an established apartment will have to discount their rental to be competitive against the new stock that is coming online," BIS senior analyst Angie Zigomanis said.

Melbourne's overall vacancy rate in April was 3.1 per cent. A year ago, during the same month, it was 2.7 per cent, according to SQM Research.

In the CBD, the vacancy rate has almost doubled (4.9 per cent) from a low of 2.6 per cent in the same month in 2006.

Southbank and Docklands have similar high rates, 4.2 and 4.5 per cent respectively.

A vacancy rate of 3 per cent is considered a "balanced" market.

"Definitely at 4.9 per cent, that would make it a tenants' market," SQM's Louis Christopher said.

In nearby, trendy inner suburbs Richmond, Fitzroy and North Melbourne vacancy rates are between 1.3 and 1.7 per cent.

After the 2008 global financial crisis, apartments were a more attractive investment option than stocks, which resulted in investors flooding the inner Melbourne market, BIS Shrapnel's Apartments 2012 to 2019 report says.

Record numbers of new apartments were being built and "a question mark remains on whether there will be sufficient demand to occupy this rise in the supply," BIS says.

Melbourne's apartment prices were forecast to remain flat until the excess stock was absorbed, Mr Zigomanis said.

Sydney was also facing an upswing in apartment building but would not be able to satisfy demand.

"[We] anticipate a modest deficiency of apartments in inner Sydney will still be in place by 2016," BIS said.

A number of factors have driven Melbourne's demand:

Melbourne apartment yields after the GFC were more attractive than in Sydney.

The strong Victorian economy and residential market compared to weak conditions in Sydney reduced expectations of capital gains for inner Sydney apartments.

And a greater availability of cheaper sites in inner Melbourne meant prices were lower and the pool of potential purchasers larger.

A City of Melbourne report released last week found falling consumer confidence and higher levels of construction were impacting on prices.

"Purchasing a unit or apartment has become more affordable . . . with the median price decreasing 7.1 per cent in the 12 months to December 2011, to $471,000," the council's annual Property Watch report said.