Has Melbourne’s growth become unsustainable?

Melbourne’s expected strong growth during the next 12 months is now raising some concerns about its sustainability

The definition of ‘unsustainable’ according to the Oxford Dictionary is: “not able to be maintained at the current rate or level”. According to some experts, another definition that comes to mind is the Melbourne property market.

After enjoying a strong market economy in 2013 throughout both Melbourne and regional Victoria, some experts are now predicting a price decline across the greater Melbourne area towards the latter half of this year.

However, not all agree. There is divided opinion on the Melbourne market among experts, and only time will tell which outlook is correct. BIS Shrapnel managing director Robert Mellor believes oversaturation of inner-city apartments and an excess supply of homes within the greater Melbourne area will create a drop-off in the market in 2014.

“By our calculations we think there’s an excess supply of dwellings in the Melbourne market, that’s heavily weighted to inner-city apartments in Docklands, Southbank and the CBD,” Mellor explains.

But RP Data’s Victoria housing market specialist, Robert Larocca, firmly disagrees. “There is no oversupply of homes on the market in Melbourne,” he states.

“Compared to this time last year, there are fewer homes on the market and there is no surge of new listings. Sales transactions have also been rising over the last year.”

In the month ending 16 February, RP Data tracked 7,789 new listings – less than this time last year by 0.7% – and the total number of homes on the market was 31,199, 7% fewer than a year ago.

“Prices may be at a new peak in nominal terms but they are still below peak in real terms, indicating there is still scope for sustainable growth in values,” Larocca says.

“Sustainable and lasting growth in the market relies of course on the economy, and rises in unemployment will act to moderate the property market, but not so much as to result in falls in prices at this point.”

Southbank and Docklands oversupply tipped to crash development

At the end of 2012, 56,000 apartments were constructed in the combined inner-city precinct, including Southbank and Docklands.

Mellor says that within the 2012/13 period an additional 5,700 apartments were completed and he predicts an additional 6,000 p.a. to be constructed within the 2014/15 and 2015/16 periods, equating to a 40% increase in apartments within four years.

“So in effect you’re adding 40% to stock over a four-year period,” he explains. “That’s big given you are typically adding 2% for your stock of dwellings across an entire state.

I just don’t see the demand and I don’t think there’s going to be a sufficient shift in the demand pattern – that is, occupier pattern – to absorb that level of supply.”

Based on these numbers Mellor predicts vacancy rates within the CBD, Southbank and Docklands precincts will increase significantly by the second half of this year, and by 2015/16 he expects a vacancy rate of at least 10%.

Mellor also argues that at some point the need for pre-commencement sales will cause a collapse in construction.

“With many developers in the Melbourne market selling off the plan, primarily in Asian and other overseas countries, some could take the view that foreign investors can afford to take a long-term view on their investment, but at some point the next round of projects will struggle to get support because investors will start to feel burned,” he says.

SUBURB TO WATCH

Berwick

Affordability, multimillion-dollar infrastructure and a growing population create a hat-trick for Berwick, located 43km southeast of the Melbourne CBD. Property value is also likely to continue on an upward trend looking ahead, as development land release areas in Berwick and adjacent Narre Warren South have been exhausted. There is the possibility of future development within the town centre, however, and investors would be wise to keep an eye open for these opportunities.

Transport is on the up in Berwick, with a recently opened $55.6m freeway extension. The now-four-lane carriageway offers easier access for the 30,000-plus vehicles travelling between Berwick and the Princes Highway each day.

Victorian government officials say the extension also makes local travel easier for residents to access Monash University, Berwick Station and Berwick Activity Centre. Stage two of the St John of God Berwick Hospital redevelopment is also in the planning phase and will include 200 new beds, eight operating theatres and other specialised services units. The second stage is expected to be completed by 2016.

Berwick has a median price of $450,000 for a house and $334,000 for a unit. Offering five-year growth of 27% and a rental yield of 5% on units, Berwick’s property is well within the reach of investors. At present, the lowest-priced rental property advertised is $210 per week for a bedsit and the highest is $695 for a six-bedroom executive home in Bellbird Park Estate.

Primarily the home of married couples, who make up 59% of residents, Berwick attracts growing families – and there must be something in the water at South Berwick, which recorded a population growth of 150% over the 10-year period ending 2011. Berwick as a whole has a population of 75,400, with 9% growth since 1991.