Melbourne hovers over knife edge
Fears that property prices will fall in the face of a rampant oversupply of new properties show no signs of being put to rest
After months of being told that the Melbourne property market faces a flood of new properties coming on to the market, the question for most investors is no longer if an oversupply exists, but where.
Melbourne, after all, is hardly one single market. It is more a collection of markets that, while influencing each other, have their own separate destinies. The overall price movements and trends of the city may paint a general picture of the market, but they do little to describe what is happening in every suburb, street and individual property transaction.
“Now is a time to be very selective in what you buy,” says Michael Yardney, CEO of Metropole Property Strategists. “While there are some good buying opportunities, there are also a lot of secondary properties on the market right now.”
Yardney says that if city-wide stats paint an overall view of the market, it is only logical that within that picture some markets are doing better than others. He believes that well-located properties within inner-ring suburbs are holding their ground, but properties on the city’s outer fringes are struggling.
“More expensive properties have suffered the most, and more recently the first home buyer segment of the market has slumped due to faltering buyer interest [and oversupply]…
“There is also no doubt that Melbourne has been in the slump stage of the property cycle for the last few years, plagued by an oversupply of house and land packages in the northern and western suburbs and an abundance of new apartments coming on to the market.”
Measuring the difference
Jeremy Sheppard, Redwerks research director and inventor of the DSRscore, agrees that some categories of the Melbourne market have performed better than others. “[Demand-wise] units were all the rage in 2010, but since then the demand-to-supply ratio has dropped. Interestingly, it has increased for houses.”
According to Sheppard, the supply of units has increased as demand for them has decreased, while exactly the opposite is true of houses – demand has increased and supply has decreased. However, Sheppard is quick to point out that this was only looking at inner-ring suburbs that included, among others, Carlton, Docklands, Flemington, Kensington, North Melbourne, West Melbourne, Parkville, and South Yarra.
Root of the problem
Generally speaking, oversupply concerns have been the topic of controversy within the Victorian capital. Some have downplayed the issue as media hype while other observers have stressed oversupply as a major risk factor.
The concerns rest on the track record of Melbourne property. The market is considered to have boomed in the last part of the 2000s, but the resultant good times for property prices sent builders and developers running to the market to cash in. As with any market, the party was never going to last forever and the huge number of new properties coming on to the market prompted fears that the supply of listed properties would outstrip demand for them. This, in turn, would send property prices crashing as vendors would have to drop their asking prices considerably to compete for sales.
BIS Shrapnel senior manager Angie Zigomanis argues that concerns were justified, saying oversupply remains a bigger issue than many investors would want to admit.
“There’s still a lot of supply in the pipeline that will continue to be completed in the next couple of years – a lot of it is high-rise apartments that were bought off the plan – so we should at least see pockets of Melbourne in oversupply, if not the entire market,” he says.
Could Vic fall out of favour?
Long hailed as one of Australia’s leading destinations for international and interstate migrants, Victoria’s top ability to pull new residents appears on the wane, according to QBE LMI Housing Outlook 2012–2015.
The report forecasts that between now and 2015 migration into Victoria will be on a par with Queensland and Western Australia, each expected to attract roughly a fifth of all international migrants.
It adds that interstate migration flows are expected to slow over the next two years on the back of a weakening economy. “Reduced interstate movement generally occurs when economic conditions overall deteriorate,” the reports says, adding that another significant driver of migration between states is the affordability of housing.
In this regard, the report says that even though oversupply issues may weaken price growth in Melbourne, the market is still considered ‘unaffordable’. “Strong median price growth in recent years has seen housing affordability deteriorate significantly and, with the state economy now underperforming most of the other states, this will hurt interstate migration.”
Spotlight on: Melbourne’s biggest losers
Melbourne’s eastern suburbs, home to nearly half of Melbourne’s four million residents, have emerged as the epicentre for some of the city’s biggest property price falls.
RP Data figures showed that suburbs such as Oakleigh South, Box Hill North and Mulgrave are among the top 10 suburbs with the largest reduction in median price over the 12 months to January.
The suburb experiencing the highest falls was centrally located St Kilda West, where prices were reported as falling 27%. Being a prestige market, the fall constituted a $437,400 reduction in the median sales price.
A southeastern neighbour of St Kilda West, Mulgrave saw unit prices tank 25%, a $139,000 drop. Eastern suburbs Box Hill North and Oakleigh South have had $115,800 and $95,000
shaved off their prices, respectively.
As this has happened, yields in many of these markets have remained dismal. Mulgrave units had a January rental yield of just 4%, according to RP Data, while yields on Box Hill North units were the same figure.
Metropole Property Strategists director Michael Yardney warns investors to stay close to the confines of the inner city if they are considering investing in Melbourne soon. “The best investment opportunities are well-located, established apartments in Melbourne’s inner- and middle-ring suburbs with an element of scarcity,” he says.
Rebbecca Murray of Evolve Real Estate explains why inner-city locality Southbank has much to offer gun-shy investors
Selling points: Southbank is a major residential hub with a vibrant community feel. There is an abundance of high-rise buildings and great shopping and entertainment precincts. The area is affluent and there are many penthouses, although there are also a number of new apartment opportunities available from the mid-$500,000s that offer great rental returns.
Most sought after properties: Two-bed apartments in quality buildings are in high demand. Overpriced properties are taking time to sell, but anything up to $2.5m has been moving well. The most common properties are high-rise developments south of the Yarra River.
Top amenities: The Crown Entertainment Complex is one of Melbourne’s biggest draws, and we are privileged to have it on our doorstep. Many of Melbourne’s elite schools are a short tram ride away, as well as everything that epitomises the inner-city lifestyle – shops, cafes and restaurants. Trams, buses, and train stations are within walking distance.
Local industry and business: Most residents are commuters to the CBD, with an interest in the city lifestyle.
Recent changes: Southbank has seen major growth in the last decade, with the shape of the city changing enormously. The population has increased, and there is a lot more foot traffic nowadays. Many new developments are under construction, with many more planned, so there’s a busy and bright future ahead for Southbank.
Best streets: I recommend riverside living, or apartments with views that can’t be built out. We have some fabulous examples of quality living in really spectacular buildings.
Main arteries: There is freeway access for a quick escape out of the city, and the beach is a 10-minute drive away.
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