The current construction boom in the inner Sydney apartment market will lead to a situation of oversupply in coming years, a leading forecasting firm says.

In its Inner Sydney Apartments 2014 to 2021 report, BIS Shrapnel says it expects apartment prices within Sydney’s inner suburbs to surge by six per cent per annum in each of 2014/15 and 2015/16 on the back of buoyant demand underpinned by low vacancy rates, the expectation of further price growth and low interest rates.

While in the short term, the market is likely to be supported by current market undersupply and robust demand driven by strong levels of professional employment growth and increasing overseas student enrolments, this will not be sufficient over the long term to absorb an increasing mass of new supply. This, BIS suggests, will lead to rising vacancy rates, a slowdown in rental growth and weaker prices due to anticipated increases in interest rates from the end of 2015 onward.

Already, BIS says, 5,800 apartments are currently under construction within the inner city area, and with further projects currently being marketed or likely to go ahead, around 11,500 apartments are likely to be completed over the next three years – more than for any other three-year period on record.

In 2016/17 alone, a near-record 4,500 completions are set to come onto the market.

“To some extent, the inner Sydney apartment market is playing ‘catch up’ after almost a decade of weak demand for new apartments and limited price growth,” BIS senior manager and report author Angie Zigomanis said.

“However, the current surge in off-the-plan demand is likely to see the market get ahead of itself again as pre-sold new apartment projects commence and progressively work their way through to completion.”

Zigomanis says the forecast downturn in prices from 2016/17 onward will be shallow and short-lived, and that an underlying deficiency and subsequent cyclical upturn should re-emerge around the end of the decade as excess supply is mopped up relatively quickly.

Still, he warns, owners of newly completed stock will face a competitive environment in several years’ time.

“Landlords of newly-completed apartments will have to be more competitive to attract tenants over existing stock, while owners of older apartments may have to discount to attract tenants from neighbouring suburbs,” Zigomanis said.

“The decline in rental returns and increase in mortgage servicing costs will reduce the amount the purchasers will be willing to pay for an apartment and many owners who bought at, or close to, the top of the market could experience losses if they sold into the downturn.”

Overall, BIS expects total price growth of 21 per cent between now and 2021 – an average of just under three per cent per annum.