Is the Apartment Glut Over? Why Inner-City Apartment Units are Making a Comeback

Australia's inner-city apartment market is experiencing a remarkable transformation as we enter 2026. After years of underperformance and concerns about oversupply, apartments are staging an unexpected comeback, presenting fresh opportunities for first-home buyers and investors alike.

The Shift from Oversupply to Undersupply

The narrative surrounding Australia's apartment sector has undergone a dramatic shift. According to the Australian Bureau of Statistics, only 177,856 dwellings were completed throughout 2024, near the lowest level in over a decade. More significantly, the National Housing Supply and Affordability Council projects that gross new housing supply will remain subdued through early 2027, averaging just 183,000 dwellings annually, falling short of the 1.2 million Housing Accord target by approximately 262,000 units.

"The days of apartment oversupply are firmly behind us," notes Paul Virdi, Director of Alpha Real Property Group. "What we're witnessing in 2026 is a market correction where demand fundamentals are finally overtaking supply constraints. For savvy buyers and investors, this represents a generational opportunity to enter the inner-city apartment market at below replacement cost whilst positioning for significant capital growth."

Inner-city apartment completions have plummeted to historic lows. In Melbourne's inner city, only 1,400 new apartments were completed in 2024—the third lowest annual level in 20 years. With just 6,500 apartments currently under construction and the development pipeline constrained by elevated building costs and financing challenges, the supply shortage is becoming increasingly acute.

Market Performance: Units Outpacing Houses

The inner-city apartment market performance in 2025 shattered conventional wisdom. Domain data revealed that Sydney apartments increased by 0.4% in the final quarter of 2024, whilst houses dropped by 0.1%. By December 2024, Sydney's median apartment price reached $812,863—the highest in the country.

Oxford Economics Australia's Senior Economist, Maree Kilroy, forecasts that apartments are expected to outperform houses in capital growth from 2025 through 2027, with an annualised growth rate of 6.7% (versus 6.2% for capital city houses). This marks a significant reversal after apartments underperformed throughout the pandemic period.

Melbourne's inner-city apartments demonstrated resilience, with values remaining steady at $587,500 over 2024, significantly outperforming the broader metropolitan apartment market where values declined. Rental growth has been particularly strong, with median Inner Melbourne apartment rents reaching $575 per week in November 2024, representing a 5% annual increase.

First Home Buyers: A New Path to Property Ownership

The expanded government initiatives launched in October 2025 have fundamentally altered market access for first home buyers. Under the enhanced 5% Deposit Scheme, all first home buyers can now purchase with as little as a 5% deposit, with the government guaranteeing up to 15% of the loan and waiving Lenders' Mortgage Insurance.

For the inner-city apartment market, this is transformative. A Sydney buyer can now purchase a $1 million apartment with just a $50,000 deposit. First home buyers currently account for 25-30% of capital city purchases according to CoreLogic, and the Australian Bureau of Statistics reported first home buyer loan commitments rose 2.3% in the September 2025 quarter.

The affordability equation has shifted decisively towards apartments. With Sydney house prices prohibitively expensive for most first home buyers, apartments offer a realistic entry point. The median Sydney apartment at $812,863 represents significantly better value than the typical house, particularly when considering location advantages and lifestyle amenities.

Investor Activity - Inner-city Apartment Market Surge

The inner-city apartment market is witnessing a remarkable surge in investor interest. According to the ABS, investor loan commitments jumped 13.6% in the September 2025 quarter to 57,624—the highest on record. The value of new mortgage lending to investors reached 40.6% in September 2025, marking a rise from 38.7% a year prior.

This renewed investor confidence is driven by compelling rental yields. Sydney apartments are delivering average rental yields of 4.6%, significantly higher than the 2.45% yield for houses. Combined with low vacancy rates—Sydney's inner-city rental vacancy sits at historically tight levels—the investment case for apartments has strengthened considerably.

CBRE forecasts that median apartment rents will grow by 24% between 2025 and 2030 across Australian capital cities. By 2030, 92% of 2-bedroom apartments are forecast to have rents exceeding $700 per week, with 33% exceeding $1,000 per week.

Below Replacement Cost: The Value Proposition

One of the most compelling aspects of the inner-city apartment market in 2026 is the pricing relative to replacement cost. With construction costs having risen more than 40% since the pandemic and residential lot values up approximately 33%, new apartment developments are economically unviable in many locations.

This creates a unique window where established, family-friendly apartments are trading considerably below the cost to build equivalent new stock. For investors and owner-occupiers, this represents both immediate value and downside protection.

Looking Ahead: 2026 Market Outlook

The outlook for Australia's inner-city apartment market in 2026 is decidedly positive. PropTrack's Chief Economist Eleanor Creagh expects national home prices to maintain upward momentum, particularly as interest rates stabilise at 3.60% following three rate cuts totalling 75 basis points.

Population growth remains robust, with net overseas migration contributing 446,000 people in the year ending June 2024. This demographic pressure, combined with historically low construction completions, will continue supporting inner-city apartment values.

The transformation of Australia's inner-city apartment market from oversupply concerns to a supply-constrained, investor-driven sector represents one of the most significant shifts in the property landscape. For first home buyers seeking affordability and investors pursuing yield and growth, apartments have moved from afterthought to opportunity.

Connect with Alpha Real Property Group to explore inner-city apartment opportunities in 2026.

Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. Readers should conduct their own research and consult with qualified professionals before making property