The Victorian capital’s bull run is over. RP Data figures have revealed the first price falls in Melbourne since 2008, with values falling 1.9% in the three months leading up to January 2011.
Units suffered the worst throughout the quarter, with the median price falling 4.2% to $430,000, while the median house price also dropped by 1.2% to reach $515,000.
"Melbourne is looking like it’s going to be quite flat for the foreseeable future," says RP Data’s head of research Tim Lawless. "Affordability is the real issue: values have increased by around 50% since 2007, so that’s starting to impose a ceiling on growth."
BIS Shrapnel economist Angie Zigomanis agrees with this sentiment.
"There’s not really scope for any more price rises, other than alongside inflation," he says. "Affordability has hit a turning point. Additionally, there aren’t really any supply pressures for growth: construction is at record levels, and the existing underlying deficiency is being eroded. Supply and demand are heading back into a balanced situation."
Indeed, Zigomanis warns that there’s a risk that Melbourne could tip into a slight oversupply. "Something else to watch is that we’ve seen lots of new approvals in the apartment sector," he adds. "Admittedly, these won’t have much of an impact for at least 12 months, but after that there could well be an impact on the rental market."
That’s not good news for Melbourne landlords. The turbocharged capital growth that the city has seen over recent years has knocked rental yields into a cocked hat. Residex figures place median yields for units at 4.04% and at just 3.27% for houses – figures far below that of other capital cities, and in stark contrast to increasing yields elsewhere.
"Melbourne is now offering the lowest rental yield of any capital city in Australia, most likely as a consequence of current supply," says Residex founder and CEO John Edwards.
While he believes rentals will move up, he doubts it will happen this year – and if Zigomanis’ fear of an apartment glut comes true, then it’s possible that it could take even longer for yields to recover.
And now for the good news…
However, industry commentators are confident that the gains made over the past few years are unlikely to disappear.
"Price falls are unlikely," says Zigomanis. "Local economic conditions are good, and the state in general is accelerating along with the country in terms of business confidence and wages growth. Melbourne’s not likely to see a crash – however, I think it’s fair to say that it’s in a holding pattern for the time being."
The market shows no sign of a slowdown in activity, either. Auction figures for February are promising, with clearance rates returning to the 60% level they were hovering at prior to the November Reserve Bank and lender rate rises. Also encouraging are sales volumes, with more than 650 auctions taking place on the weekend of 20 February, and 868 the following week.
"Admittedly, clearance rates aren’t at the 80% level they were at in late 2009," says Lawless, "but for a city like Melbourne, where so many of the sales are carried out via auction, these figures are an encouraging litmus test for the robustness of the market."
Even so, if yields are weak and capital growth flat with no upside on the horizon, should investors be steering clear until better times beckon? Lawless thinks there might be possibilities on the fringes of the city.
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