A BUST in the inner-city apartment market is a foregone conclusion, according to BIS Shrapnel economist Frank Gelber, and he puts some of the blame on a blinkered approach by developers.

Gelber, addressing a BIS Shrapnel economic briefing in Brisbane, also says while the economy may have held up relatively well following the mining downturn there is a sense that we have delayed the inevitable by shifting too many resources into the apartment sector.

Gelber says developers jumping on the high rise bandwagon have created an anomaly in the current development cycle by targeting investors and creating products that are failing to meet the needs of a growing domestic demographic.

It's also why he is not upset by tighter lending rules for investors by the banking sector.

"By taking the head off the boom, actually we are making the bust cycle," says Gelber.

"We're taking some of the cyclicality out of the market.

"Three years ago we were wondering whether we were not building enough, so when (investors) came in they came in with a vengeance and now we're building too much.

"But we're not necessarily building the right stock. What we're building is investor stock which is built to a rent and a price. They're small one and two bedders, but that's not where the market demand is."

Gelber says demand is strongest from baby boomers who are downsizing from the suburbs and the children of baby boomers with growing families. Both he says are growing market demographics with space requirements not met by the investor stock currently being produced.

"The sooner we realise we need to build different stock the better," says Gelber.

His comments come on the heels of comments by one of Australia's largest apartment developers Harry Triguboff that Chinese settlements defaults are on the rise in his portfolio. Any significant default rate could trigger a rout in the market with smaller developers hit hardest.

However, Gelber is confident the economy is not heading for recession, although a slowdown is inevitable. BIS Shrapnel has previously forecast three years of slowing economic growth until the 2020s.

Gelber says Australia is half way through the transition from the resources boom to a more broad-based economic recovery.

"My real fear is that we actually transferred a lot of activity to the housing and inner-city apartment boom," he says.

"We've employed a lot of people doing that, but of course we've just delayed the impact (of the mining slump) because of course the writing is on the wall for that market."

He says the positive points for the economy are growth in the tourism and education sectors, both of which have benefitted from a lower dollar.

"That's just the beginning; there's a lot more to come," he says.

In some states, he says government infrastructure spending will take up the slack from the slump in apartment construction.

"We're not having a recession, just a difficult and weak period," says Gelber.

He says despite strength in the NSW and Victorian economies, Queensland 'has a better chance of getting through this because it has a much more diversified economy'.

The Australian dollar should be lower but it is being hamstrung by jitters in global financial markets sensitive to even the 'smell of an interest rate rise'.

"Panicking investment markets are keeping the US from lifting interest rates," says Gelber.

"We are going to be in a low interest rate environment for some time, a number of years."


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