Rocketing prices, staggering population rises and room left for growth has made Melbourne the feather in Australia’s cap. The Victorian capital recorded the strongest housing market except Darwin in the country over the past 12 months with a growth rate of 14.25% according to Residex.
“The combination of a better than expected economic conditions and strong population growth has resulted in an unprecedented level of pressure on housing costs in Melbourne,” says Enzo Raimondo, CEO of the Real Estate Institute of Victoria.
“The city’s population is increasing by around 1,700 people per week and unfortunately housing construction has not responded as quickly as would be necessary to ease the pressure in the market.
“The level of confidence in the market is apparent from the number of homes being bought and sold; the REIV has recorded an increase of 22 % since the 2008 December quarter.”
Slow down in sight?
It’s a phenomenal performance. However, there is speculation that the golden child of the property market is in for a slow down over the next 12 months.
While Cameron Kusher, senior analyst with RP Data is “reluctant to use the phrase over heating”, he thinks the Melbourne market will definitely see a change in pace. “I think the growth has been unexpected [in Melbourne],” he says. “I wouldn’t be surprised to see the growth slow in 2010 and see a couple of years of virtually none.”
John Lindeman from Residex disagrees entirely with Melbourne skeptics – he sees continued growth for the city. “Melbourne has a higher population growth than Sydney and a large migration intake,” he says. “There’s still room for expansion, especially in the west.”
He points to houses, in particular, as showing the most promise. “It’s more like an LA-type city – people want to live in houses and there’s room to do that,” he says. “Investors will get good returns from houses – units are cheaper but houses have renovation potential so I think investors would be better of buying houses.”
The exception, he says, is the huge residential unit developments just outside the city in areas such as Dockland. “I suspect that will continue as it’s a lifestyle option. People prefer to live in units that have everything – you can walk to work and it’s a lifestyle alternative that wasn’t available 20 years ago,” he says. “That area is very attractive and provides high rental returns and good capital growth.”
According the Real Estate Institute of Victoria’s data, the suburbs with the largest increases in median price for units and apartments were East Melbourne, followed by Port Melbourne, Armadale, Caulfield North and Northcote. For houses Burwood recorded the largest increase – 23.1% – as the median increased from $658,000 to $810,000. This was followed by Ringwood, with a 16.2% increase, and Mount Evelyn, whose median increased by 16.1%.
Opportunity in the sticks
There is also opportunity in country Victoria. The median house price in the City of Ballarat rose by 7.3% to $265,000; in Greater Bendigo by 4.3% to $261,000; and in Greater Geelong by 4.4% to $342,000, according to the REIV.
“Ballarat is an area we quite like – there are still some incentives for people to build in rural areas, there’s a diversified economy and you can still get good prices there,” says Kusher. “Geelong could bounce back over the next year too – it’s got good connectivity to Melbourne, and a lot of manufacturing in the area.”
Kusher also highlights Footscray and Seddon in Melbourne’s west as affordable markets with investment potential.
However, Kusher says investors should consider their goals before they invest in Melbourne. “Yields are quite low at the moment, so it might be a good time to get in if your chasing yields because as that growth slows you’ll see the yields moving up as rents grow,” he says. “If you’re an investor looking for strong growth, I don’t think you’re going to see 15% growth next year, probably single digit growth and it might be a couple of years of slow growth.”
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