Mixed signals divide the market
Melbourne’s property market presents conflicting and confusing signals that often leave investors wondering whether to flee or dive in
It’s a time of good results at a time of oversupply. It’s a period of growth and a time of contraction. It is indeed a tale of two markets in Melbourne.
Victoria’s capital continues to surprise observers with the strong performance of its market, yet that performance belies some of the issues bubbling below the surface. As in the Charles Dickens’ classic, the true tale is one of duality.
According to the latest APM Quarterly Housing Report, Melbourne’s median house price increased by 1.7%, while its median unit price went up by 0.7%, over the June quarter. This was a slightly stronger result than that seen over the March quarter.
However, APM senior economist Andrew Wilson did note that the annual outcome for the city was likely to be around half of the exceptional 2013 results.
This belief was supported by Residex founder John Edwards in his July property market update. In his view, the data indicates that the rate of growth in Australia’s recent market leaders – of which Melbourne is one – is cooling and moderating.
So while Melbourne’s market continues to post attractive results, the golden hour looks to be coming to an end.
Mixed market tales
Metropole Property Strategist’s Michael Yardney says Melbourne has seen about 9.5% capital growth this year, which indicates the market is performing well. In fact, he finds the overall strength of the market quite surprising.
“It’s a mixed market. Some markets are experiencing significant oversupply while, at the same time, there is a shortage of stock in others.”
This means that:
- there continues to be notable oversupply in the inner city and CBD apartment markets. Further, a high number of new apartments are still coming on stream. This will undermine capital gains and rental growth
- there is also an oversupply of newly built house and land packages in Melbourne’s outer northern and western suburbs
- yet there is a shortage of well-located established homes and apartments in Melbourne’s middle ring suburbs. In these areas, demand is outpacing supply, and keeping prices strong
The contradictory situation is underpinned by immigration-fuelled population growth, which at 1.9% per annum is high. People moving to Melbourne want to be close to the jobs, while younger people want to be close to a range of lifestyle options. Hence the popularity of the middle ring suburbs which provide easy access to everything.
However, it is in the inner city that properties are being developed, Yardney explains. “And we have a planning minister who wants to ‘Manhattanise’ the CBD of Melbourne in readiness for its projected population growth, which presents both challenges and opportunities.”
The problem is that, of late, there have been some scathing reports on the state of Melbourne CBD apartments, he says. Issues to do with density and overdevelopment, as well as the size and quality of apartments, have been identified.
Further, a host of new planning regulations - which will limit development in established suburbs – are likely to add to the difficulties in catering to the city’s growing population.
While this situation could push prices up, Yardney believes there won’t be as much capital growth in the next few years as there was in the last couple. That level of capital growth was unsustainable, so it is good for the market to slow down to avoid a crash, he says.
“There are still opportunities in the Melbourne market. It has a few more years to run yet. The cycle will come to an end when interest rate rises kick in – probably circa 2016-17.”
Victoria’s economic scorecard
Meanwhile, the latest Deloitte Access Economics Business Outlook states that the high Australian dollar has hurt Victoria’s manufacturing and international education sectors. In turn, this has kept the state’s unemployment rate higher than the national average and hurt job growth generally.
On a more positive note, the report says that Victoria’s strong population growth has helped maintain and lift the housing construction sector. This means that the “recent downturn in Victorian growth” is unlikely to accelerate.
In fact, the report states that good news on interest rates and exchange rates, along with rising wealth and strong population gains, should keep growth in Victoria “solid enough”.
The latest CommSec State of the States report lends further weight to this assessment of Victoria. It too notes the state’s strong population growth is sustaining home purchase and construction – despite comparatively weak commercial and engineering activity and relatively high unemployment.
Suburb to watch
South Melbourne: Units offer good investment potential
One of the city’s oldest suburbs, South Melbourne was traditionally a working class area. Back in the 1980s it went through a major gentrification process, yet it still has some public housing and has been home to waves of migrants.
According to Verica Jokic, from City Hobo, this means the bustling inner city suburb continues to offer plenty of variety. “South Melbourne is diverse, interesting, convenient, and has plenty of shops, cafes and restaurants plus a great fresh food market.”
Gentrification of the suburb was triggered by its close proximity to the city centre and its high amount of cottages and terraces, Jokic says.
Today, it is notable for its well preserved Victorian era streetscapes - which include bluestone cobbled laneways and a town hall precinct with some significant examples of Victorian architecture.
South Melbourne has a commercial aspect to it, but it also sits beside Albert Park and is near sporting facilities, the Royal Botanic Gardens and the beach. These features make the suburb appealing to young families as well as to the urban professional demographic.
The suburb’s prime location means it is a highly sought after residential area – popular with renters and buyers alike. While the median house price is high, the unit market offers opportunities for keen investors with a median price of $540,000 and a healthy 5% rental yield.
Jokic adds that – due to the demand for the area - apartment rents are in the mid to high range, while house rental prices are higher.
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