VIC Excerpt from the 2011 October Market report

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Property experts have been tipping Melbourne for a correction since it became clear that the rocketing growth rates that characterised the market between 2007 and early 2010 were slowing. 

Analysts have highlighted a number of reasons why Melbourne’s best days are behind it, from affordability – at its worst level since the early 1960s, according to Residex CEO John Edwards – to slowing population growth due to lower overseas student numbers, as well as looming oversupply issues due to over-eager apartment developments.

However, the Victorian capital’s market appears to be holding up better than expected: while walues are undoubtedly sliding – RP Data figures for May recorded a fall in median values of 1.9% over the previous three months – they’re not falling as fast as many expected.

“Go figure Melbourne!” says APM senior economist Andrew Wilson. “My gut feeling is that it’s going to do a lot better than predicted.”

Wilson highlights a surge in the number of first homebuyers entering the market as a particularly good sign.

“We saw the highest number of first homebuyers in the market all year in May,” he comments. “Admittedly, I’m not saying everything’s hunky-dory: Melbourne’s still recovering from the massive, unsustainable price growth – but the correction’s not at the level that we thought it would be. We may even see a bit of growth by the end of the year.

Wilson points out that some of the issues that pundits suggested could harm the Melbourne market might actually help to set it up for another surge.

“There are still large numbers of apartments and houses being built – this will keep a cap on prices for now. That will see affordability improve, especially as months go past without an interest rate rise.”

Victoria’s strong economy will promote wage growth, too – another factor assisting affordability. CommSec’s latest State of the States report rates the Victorian economy as the third strongest in Australia (following WA and the ACT). CommSec chief economist Craig James highlights historically-low unemployment levels supporting housing lending, retail spending and home building as the drivers of the state. Wilson admits that construction is a major driver of the economy, but reiterates that its strength is a bonus. It could also drive sales in the upper end of the market.

“My gut feel is also that there’s been a bit of a revival in the upper end,” says Wilson. “I think that Melbourne represents very good value at the upper end – certainly compared to Sydney: $1.5m will buy you a lot more in Melbourne than it will in Sydney, and we might see activity push through on the back of a very strong Victorian economy.

“I’m not talking about a boom or anything, but the conditions are right for stabilisation,” says Wilson. “We expected Melbourne to catch its breath this year and recover to a certain degree, but things are looking brighter than we thought – which is a bit of a surprise.”

WBP Property Group CEO Greville Pabst also thinks the Melbourne outlook is improving – although he pins his hopes to a spike in post-auction sales.

Pabst argues that an increasing number of passed-in properties are selling following “tough post-auction negotiation”, especially around the city’s inner suburbs.

“Auction results during the last fortnight are a positive sign for the Melbourne market,” says Pabst. “Post-auction sales are resulting in good outcomes for buyers and fair results for vendors.”

Pabst warns that the positive change hasn’t affected all areas, though.

“Some areas are faring better than others, such as the inner east where clearance rates for units have reached 90%. Despite this strong result, buyers remain very selective; not only about the suburbs they wish to reside in but also about the streets and property types.”

Pabst highlighted the case of St Kilda. He commented that the suburb has seen “mixed results” as buyers vie for only a select few of the many properties on offer in the area.

“Buyers and tenants in St Kilda are placing increased value on security when deciding to buy or rent, with implications for demand and prices for some local properties,” added Pabst. He also stressed that while the market may have bottomed out, he did not expect prices to move upward in the near future.

Angie Zigomanis, senior project manager for BIS Shrapnel, is a little more concerned about the housing supply issue.

“Melbourne still has an underlying shortfall of accommodation, but that’s quickly getting eroded by the high levels of construction,” he says. “Even though there’s been a high level of starts, it hasn’t translated as supply yet because a lot of development has been focused on large scale projects. They take a couple of years to turn around and physically add to supply.”

Zigomanis cautions that in a couple of years, when most of those projects have been completed, the impact will really be felt.

“Vacancy rates in particular are likely to rise – if not across the board, then certainly in certain pockets,” he comments.

Zigomanis is also bearish about the prospects for growth in the coming years.

“There’s no real upwards price pressure, apart from healthy economic conditions – and affordability is strained. I don’t really see an upside in terms of growth; if you’re looking in terms of real price growth, it’ll probably be below inflation.”

On the up 

Valuers Herron Todd White highlight the affordable end of the market as one that investors should look at closely.

Its Melbourne office notes that suburbs that have seen steady growth over the 12 months to March 2011 are predominantly the more affordable properties in locations such as Langwarrin (16% increase), Footscray (15% increase), Werribee (14% increase) and Caroline Springs (15% increase).

It also recommends inner Melbourne suburbs such as Maribyrnong, Footscray West and Altona as good investment options under the $500,000 mark.

“Altona and Maribyrnong did perform relatively well although not as strong as predicted,” says the firm’s latest Month in Review report. “However, we note that Footscray West has actually fallen by approximately 6% for the year to March 2011.”

A word of warning, though: HTW points out that these suburbs are heavily dependent on first home owners, so short-term value growth may depend on how well this market segment recovers.

HTW also suggests that there are housing investment opportunities on a smaller scale in outer-lying suburbs with good infrastructure and established communities.

“[These] offer the potential for further subdivision and development,” says HTW. “This leads to exponential capital growth, which may not be available to the majority of their more expensive inner-city counterparts.”

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