Low interest rate fuels new growth in Melbourne
Like Sydney, Melbourne is set to hit another record amid frenzied buying in the middle to high-end market
Yes, the latest CoreLogic RP Data figures showed negative growth in Melbourne. Yes, median dwelling values fell by 1.7% during May and down by 0.3% over the quarter. But if you think Melbourne has run out of juice, you could be making a big mistake.
According to Tim Lawless, head of research at CoreLogic RP Data, the softer numbers in May are just temporary, and he expects a stronger showing in June.
“The negative May result is likely due to a natural correction from the previously strong month-on-month results,” Lawless explains. “The market stimulus due to lower interest rates and a well-received federal budget in May are likely to keep momentum going in the market.”
Lawless adds that other market indicators are still pointing to stronger conditions for the Sydney and Melbourne housing markets, with auction clearance rates surging at close to record highs throughout May.
Domain is also reporting a similar trend, with chief economist Andrew Wilson expecting the lower interest rate to continue to fuel buying in Melbourne, particularly in the aspirational segment of the market.
“The lower interest rate is encouraging buyers in the mid to higher price range,” he says. “These are aspirational buyers who don’t have to worry about job security and unemployment. These buyers are targeting the upper- to high-end properties, particularly in the eastern suburbs, northeast all the way down to the southeast. They’re active in trading up.”
Wilson points out that buying activity is mostly concentrated in the inner- and middle-ring suburbs.
“That’s where all the action is happening and where competition among buyers is fierce. That’s what’s generating price growth in Melbourne,” he says.
Even the quieter northern and western suburbs are picking up on the positivity generated in the inner and eastern suburbs, according to Wilson.
“There’s plenty of momentum in this market,” he says. “With another rate cut, prices can only go higher. The Melbourne economy is looking better too. That’s why we’re revising our growth forecast to 5–7% from 3–5% this year.”
Unit market under pressure
While the broader Melbourne market is still buoyant, strong growth is occurring mostly in the housing segment. The apartment sector continues to underperform houses in a big way.
The CoreLogic RP Data stats show that the median house price surged by 9.8% during the past 12 months, while units grew by a measly 2.9%.
“The higher supply levels are likely to be a primary reason why unit values are rising at a much slower pace than house values in Sydney and Melbourne,” says Lawless.
“The pace of growth in unit values across Sydney is about half that being recorded across the detached housing sector, with house values up 16.4% over the year compared with an 8.8% rise in unit values.
“In Melbourne, the situation is even more pronounced, where growth in unit values has been less than half of what is being recorded across the detached housing sector.
“Every other capital city is seeing a similar trend, with the capital gain for houses recorded at a higher rate compared with the unit market.”
Rental market weakens
Predictably, as prices soar rental yields suffer. Melbourne’s landlords are now receiving lower yields as a result.
CoreLogic RP Data’s rental index results show that weekly median rents for Melbourne grew by just 0.9% during the May quarter and by 2.3% year-on-year. Yields in Melbourne are also the lowest in the country at just 3.3%, compared to 3.6% a year ago.
A typical house is returning a gross yield of 3.2%, while units are achieving a slightly higher gross yield, averaging 4.3%, according to the CoreLogic RP Data stats.
“The sluggish rental growth is most likely due to surging investment demand, record levels of new housing construction, and a slowing rate of population growth nationally,” explains Lawless. “These factors are creating more rental accommodation and it’s suppressing rental increases.”
With rental rates already increasing at their slowest annual rate on record, Lawless expects the rate of rental growth to slow further over the coming months.
With residential construction activity continuing to rise, particularly for inner-city units, the increase in housing stock specifically targeted at the investor segment of the market is likely to have a negative impact on investors’ cash flow position.
SUBURB TO WATCH
Burnside: Serene suburb in Melbourne’s west
Burnside boasts lovely homes on beautiful tree-lined streets and is located just 22km west of the Melbourne CBD. And the fact that it’s regarded as a peaceful and safe suburb helps attract families.
There are also a great range of schools in the area, not to mention the parklands. In particular, residents enjoy the Kororoit Creek Trail, which is a popular spot for joggers and cyclists.
With a median house price of just $395,000, Burnside is also less expensive than neighbouring suburbs such as Caroline Springs and Taylors Hill where the median house prices are $455,000 and $515,000 respectively. And Burnside’s vacancy rate of just 0.43% indicates there is already strong demand for this suburb.
Moreover, the current population growth of the City of Melton (which Burnside is part of) is the second fastest of all Victorian local government areas. Another reason for investors to be optimistic about the local economy is that a large proportion of these people (in excess of 70%) are under the age of 45.
Three- or four-bedroom family houses on Perkins Road and Rogers Close can be bought for less than $450,000. These are both quiet streets and close to the Burnside Shopping Centre and parks.
Can you afford to buy in this suburb? Find out how much you can borrow