VIC - Excerpt from the February 2010 Market Report


Growth moderates after rate rises

After racking up big gains over the past 9 months, Melbourne appears to be losing some steam.

Melbourne staged a stunning performance during the first nine months of the year with median house values surging by12.6% according to RP Data. Residex reported similar strong growth of more than 6% during the September quarter alone.

However, over the past 12 months to October, the rampant growth in Melbourne has cooled a bit with median house values growing by 8.59% compared to Sydney's 9.35%. In fact, during the month of October, house values fell by 1.15% to $518,500. While these month-on-month gyrations are extremely volatile and should not be construed as trends, they do show some underlying weakness in a market that has risen too fast too quickly.

"Melbourne is indicating that it is becoming very sensitive to interest rate increases due to affordability issues," says John Edwards, CEO of Residex.

Paul Braddick, head of property and financial analysis at ANZ adds that Melbourne's solid gains during the first 9 months of the year is bound to ease as the boost from first home buyer activity wanes.

"The type of price growth that we've seen over the first 9 months of 2009 probably will not be sustained into the first half of 2101 just because the first home buyers are likely to exit the market, so the big boost they've provided over the first half of 2009 will no longer be there. At the same time, rising interest rate would probably see prices continue to grow but at a more modest rate over the course of next year. While prices are likely to continue to rise -  it already started to rally in 2009 - rising interest rate at the same is going to really hurt affordability."

Safe haven?
Despite this short-term weakness, John Lindeman, head of research at Residex says Melbourne is still the safest market to invest in at present. "Victoria's population is growing at over 2% per annum and most of the people coming into the state end up in Melbourne so the city is growing at a rapid rate," he says. "It's moving into the middle market for- that's where the future lies for Melbourne."

Lindeman says areas such as Ballarat, Bendigo and Geelong are also showing good prospects, as the rapid population growth and continued under supply force people out into the outer lying suburbs. In regional Victoria, the outlook is dim for drought-ravaged areas such as Shepparton, Mildura and Rutherglen, while coastal suburbs such as Cranbourne and the Mornington Peninsula are beginning to attract commuters.

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