VIC Excerpt from the 2012 December Market report

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Out of the woods? Not yet

When former Victoria premier Jeff Kennett addressed an Australian Property Institute Pan Pacific Congress in September much of his conversation steered toward magic.

The retired politician claimed that Melbourne was in desperate need of a subway and if he had his way it would be created in a flash. “If I was able to wave a magic wand even now, I would start the planning for an underground railway system,” he said.

“It would cost hundreds of millions of dollars but I can assure you when you look back in 50 years, or in 100 years, whatever you pay today would seem cheap. We can hardly accommodate the traffic on the surface of our community in an efficient way and it is only getting worse.”

Kennett was clearly touching on a definite trend. A few months back, much of the talk around Melbourne was that investors needed to take heed. Vacancy rates were climbing and construction analysts were warning of an oversupply of dwellings. But with strong population growth and still stellar levels of demand for housing, this appears not to be the case. If anything, demand for inner city living is as strong as ever and, as Kennett pointed out, it is showing up in the traffic.

A September ANZ Property Outlook report puts the situation into perspective. Flying in the face of April forecasts that Melbourne’s city-wide vacancy rate would hit 4.4%, ANZ says that Melbourne’s rental market will be underpinned by tight vacancy rates, not high ones.

“Victoria’s share of [an] impending acceleration in population growth should cap rental vacancy rates at around 2% over the coming year, presenting conditions for yield-seeking investors to increase rents moderately through 2012-13,” the report says.

Deeper problems

While many investors have mulled over Melbourne’s alleged vacancy problems, ANZ warns that a far more worrying issue for the property market is the city’s stifling economy, which the Property Outlook report claims will face major challenges ahead.

“With a diverse state economy that has minimal direct benefit from the strength of the Australian mining investment boom, Victorian home buyer sentiment has been dampened by weak employment growth and a soft economic outlook,” the report says.

It adds that the Victorian housing market has been one the weakest performing states through the first half of 2012 and that this weakness appears to be driven by a softening economy.

The removal of the state government’s First Home Bonus in late June is expected to further unwind buyer activity – at least until first homebuyer stamp duty concessions take effect at the start of January 2013.

“We expect Melbourne house prices will continue to drift lower until the second half of 2013, with limited opportunities for (residential) capital growth across Victoria,” the report says.

Measuring the impact

With forecasts of a tough time for Melbourne prices, Metropole Property Investment Strategists director Michael Yardney says it is important to remember that city-wide predictions rarely hold true for every suburb. Yardney says that Melbourne, like any other city, will have clear winners and losers.

“Some areas of Melbourne’s property market are still performing well,” he says, reflecting on the fact that inner city regions are vastly outperforming outer ring suburbs. Yardney adds that popular inner city areas, including locations such as Parkville, have tracked well in recent times, showing 12-month growth at 20% according to RP Data August figures.

ANZ’s head of property research Paul Braddick, says investors should also keep in mind that the city’s economic performance is also felt in different ways across each sector. Unemployment figures are not the same across industries and as the Melbourne economy softens, different people respond in different ways depending on how much they feel weakening conditions will impact them.

“Sentiment is down across Victoria,” he says. “But what you’ve got to understand is that the Victorian market does not have that boost from the resources sector like in other states. If unemployment figures were to go from where they currently are at around 5% to over 6%, we’d see confidence fall further, but there will be segments of the market that might not feel as affected.”

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