Rapid growth could exact a toll
Recent data hints that Melbourne’s stellar growth in 2013 might have reached a peak, but commentators see life in the market yet.
Much like a comet, the Melbourne market has blazed suddenly and in spectacular fashion. But could its stellar trajectory across 2013 and into 2014 also be as brief as that of a comet’s across the sky?
According to the latest APM Housing Market Report, Melbourne’s housing market recorded a solid year of buyer activity, in 2013, with most price sections, buyer types and suburban regions reporting growth.
There was price growth of up to 8%, which is the best result since 2009’s 15% increase. Yet, despite this, the median house price remained around the levels recorded in 2010.
While the report predicts solid market activity through the autumn period and growth of between 3 and 5% over 2014, it expects buyer activity to moderate and notes some indications of waning.
The RP Data-Rismark January Home Value Index results tell a similar story.
Impressive growth saw Melbourne values up 11.9% over the 12 months ending January 2014. RP Data research director Tim Lawless says these results show Melbourne is well advanced in its growth cycle.
“The current exuberant conditions will wind down over the coming year due to the very low rental yield environment, increasing affordability constraints and higher levels of housing supply impacting on the market.”
It could well be that the surprising strength of Melbourne’s market could also be its downfall.
Michael Yardney, from Metropole Property Strategists, is more optimistic in his assessment of the situation – but he too is worried the market will reach its peak too soon and simply fizzle out.
More positively, Melbourne’s market is only now reaching its previous peak (of 2010), he says. This means the market is moving into its expansionary phase, while housing is still affordable and interest rates are still low.
“Although first home buyer activity remains low, strong demand from owner-occupiers and investors continues. In fact, there is more demand for properties than there are good properties for sale.”
Overall growth should continue to be solid, to the order of 5 to 7%, in 2014, Yardney says. “While it depends on buyer confidence, interest rates, and broader economic issues, and there could be speed bumps along the way, there is still quite some life left in the Melbourne market.”
He sees another indication of the “life” in the Melbourne market in the pick-up in the prestige market. This has been driven by stock market confidence and dividend payouts.
“It is a more volatile market, but it has started to pick up and will continue to do so. For example - there are now 26 suburbs with median prices of over $1million, and we expect that number to grow.”
However, Melbourne remains a particularly fragmented market with some segments that should be avoided, Yardney warns.
There continues to be an oversupply of new and off-the-plan inner city apartments, yet there is less demand from the tenant demographic that rents in the CBD. There is also an oversupply of newly built house-and-land packages in the outer northern and western suburbs where buyers appear to prefer older, cheaper houses.
In Yardney’s view, investors looking to buy into the Melbourne market will find the best investment opportunities in established apartments with renovation potential in the city’s southern or eastern suburbs.
Struggling rental market
Meanwhile, the latest RP Data-Rismark home value data paints a somewhat worrying picture of Melbourne’s rental market.
The data indicates that the city’s rental rates continue to grow at a pace much slower than property values area. This means that rental yields have essentially remained static.
Melbourne now has the worst rental yield of any of the capital cities. Gross yields for houses are below 4%, while gross yields on units are slightly higher at 4.2%.
RP Data’s Tim Lawless says that such a yield environment could start to act as a disincentive to investors. “With gross yields low, together with the fact that the market is well advanced in its growth cycle, it would suggest that the investment fundamental in this market is waning.”
Suburb to watch: Richmond
Rapidly growing in popularity, vibrant Richmond is an inner city suburb which is consistently being highlighted as a hot spot for investors.
Once best known for its live music scene, the grungy aspect of Richmond is dissipating as goes through the gentrification process. However, it still retains its diversity and an abundance of cafe, restaurant and nightlife options.
The architecturally diverse suburb is an eclectic mix of converted warehouse residences, public housing high-rise flats and Victorian-era terrace housing. There are even some small commercial areas still nestled within the residential areas.
Richmond has some of Melbourne's best examples of residential architecture from most periods, Hocking Stuart Richmond director Peter Perringnon says.
“Changes in the area are afoot: they are slow but inevitable. Much of the industrial property that was here in the 1960s and 1970s is being replaced by big apartment developments. That’s the most common style these days. A good example of one such trendy development is Channel 9 in Bendigo
The suburb’s entertainment options, along with its proximity to Melbourne University and the CBD, mean Richmond has a strong appeal for the young professional demographic. These features also ensure it maintains a healthy rental market.
Further, its position bordering the Yarra River, some lovely parkland and public open spaces - including the Punt Road Oval, the Burnley golf course and the Kevin Bartlett Reserve and sporting complex – help to make the area attractive to families.
Richmond prices are going up and, with some transport and parkland plans currently under development; the suburb’s desirability is only set to continue to grow.
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