VIC Excerpt from the 2012 February Market report

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Stronger performance in the Victorian economy could see the Melbourne market stabilising in the year ahead.

It is well known that market performance is swayed by an array of factors, but recent Melbourne activity has illustrated how much influence a particular non-monetary factor can have – emotion.

One of the wider issues for the city is a perception that the market isn’t strong at the moment – and the figures support such sentiment. Melbourne property went through a prolonged period of flat median prices growth for much of 2011, interspersed with periods when values went backwards. It has also been no secret that during this period Melbourne was one of the worst performing capital city markets.

More recently, another issue has emerged – falling sales volumes. CBRE global research and consulting manager Sam Reilly believes that this is where sentiment is playing a big part.

Quality key

“Confidence isn’t strong,” says Reilly. “Vendors have a perception that the market isn’t doing well at the moment and, because of this, there hasn’t been a great deal of stock released and not a great deal of quality stock either.”

He adds that buyers are now cherry-picking only the best properties in particular areas.

“This is probably happening more so in Melbourne than in any other market at the moment. Buyers are really focused on the key ingredients needed for capital growth, such as public transport links and good schools. Secondary properties without those attributes are seeing strong price falls.”

The reverse side of the coin is that properties in quality areas that are coming onto the market are selling reasonably well, Reilly says. Units located close to the CBD are performing quite strongly, while properties priced up to $700,000 are attracting strong buyer interest. Inner-city regions are also showing good rental yields, aided by relatively low vacancy rates of less than 2% in some areas.

Buyer’s agent Karin Mackay believes the rental market is remaining strong thanks in part to the perception among would-be purchasers that it is a bad time to buy. “People are sitting on the fence watching to see where things are going before they buy. In the meantime, they are renting.”

A similar perception, however, is keeping many prospective buyers out of the top end of the market, says Mackay. Properties in the higher price bands are receiving few enquiries and many properties have been on the market for months, unable to sell.

Off a strong base

That aside, performance in the Melbourne market shouldn’t be read into too harshly, says Andrew Wilson, senior economist at APM. He says that the current state of the market needs to be seen within the context of how it performed a few years ago.

“Melbourne had a very good period of prices growth through the post-GFC stimulus period when median house prices rose by up to 30%. This was, of course, unsustainable over the long term, so while most figures show the Melbourne market is down by around 3% over the last year, it’s actually performed quite well, considering that price growth.”

Another issue is that the Victorian economy has continued to perform well over the last 12 months, relative to some other states and territories, which has kept consumer confidence up. The latest figures also hint at a lift in consumer activity, which might help to move the general economy, says Wilson.

The November interest rate cut may also go some way in boosting spending, which was not high throughout 2011, with Australians becoming very savings-conscious in the wake of turmoil in global markets. Wilson says that if the Victorian economy continues to perform well, the housing market would be on track to stabilise and, perhaps, show signs of growth towards the middle part of the new year.

A potential spanner in the works is a growing unemployment rate. “We did see some job shedding and the manufacturing sector was starting to lose some work, but I think that was more a reflection of a weakening in the general economy of the country.

“Going forwards, given that we are still expecting a reasonable performance from the Victorian economy, we will see a stabilisation in the property market in Melbourne over the next two or three quarters,” maintains Wilson.

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