Will Melbourne outperform Sydney?

With Sydney running too hot for many investors, can Melbourne deliver better returns?

It may just be a small 0.1% difference in growth, but Melbourne did outperform Sydney in June, prompting suggestions that it could trump Sydney’s stellar performance over the coming year.

According to the June stats from CoreLogic RP Data, median dwelling values in Melbourne jumped 2.9% compared to Sydney’s 2.8%. 

“With Sydney prices streaking ahead of Melbourne, the question investors are starting to ask is whether Melbourne will outperform Sydney next year,” says Linda Phillips, senior economist at Propell Ltd.

“The question is valid. With a median house price of $615,000 in Melbourne, compared to $900,000 in Sydney, Melbourne is looking increasingly attractive to investors who are otherwise getting priced out of the Sydney market.

“At some point in 2016, we can postulate that the rate of growth in Melbourne may exceed that of Sydney, as Sydney prices stabilise while overseas and domestic investors increasingly support the Melbourne market.”

Foreign investors target premium suburbs

If foreign investors in prestige property shift their attention from Sydney to Melbourne, then Melbourne could show rapid price growth, according to Phillips. 

“Since 2010, Melbourne prices have actually fallen 8% in US dollar terms, whereas Sydney prices have risen by a similar amount. This is a considerable gap that could tempt foreigners to shift their attention,” she says. “However, this small niche market can be risky for investors who are seeking quick profits, as it is much more difficult to predict which properties precisely will be of interest.”

Foreign investors have been most active in the prestige property market for houses priced from $2m upwards, although they are not dominating, says Jeremy Marsden, residential manager Vic, Propell Ltd. “They are most active in the eastern suburbs close to the CBD, particularly Toorak, Kew, Balwyn and Glen Waverley. Interest wanes above $5m, where the market is still dominated by domestic purchasers,” he says.

Challenges ahead

Despite this upbeat assessment, Melbourne faces headwinds, says Angie Zigomanis, senior analyst at BIS Shrapnel. 

“The Melbourne market has been underpinned by strong net overseas and interstate migration inflows, which were higher than the other states. This allowed population growth to match the elevated level of supply ... However, overseas migration has been trending down while new dwelling construction, particularly for apartments, is again at record levels.”

Zigomanis adds that the downturn in manufacturing and construction will also dampen economic conditions. “The potential for continued solid growth in Melbourne’s median house price is limited given the potential for oversupply and weakness in the state economy.” 

Zigomanis forecasts Melbourne’s median house price to grow by a total of just 4% over 2015 to 2018. “Given the level of supply due to come through, there is greater downside in the apartment sector, where the median unit price is forecast to fall by 12% in real terms,” he says.

Where to look for opportunities 

Phillips suggests investors should target areas within 15km of the CBD if focusing on the southeastern suburbs. In the west and north, they can still find quality investments within 10km of the CBD. 

“Houses around $1m within 10km of the CBD are in demand by investors, reflecting that it is hard to buy below $1m that close to the city, but these are also highly sought after by professional couples,” she says. “For houses around the median price, southeastern suburbs are still in demand. Out west, such houses are harder to move, with fewer purchasers in the market. ... Areas like Point Cook, Craigieburn and Broadmeadows see good demand for land, and new developments and are popular with new immigrants.”

For those in the $500k to $1m range, there is more choice in the inner west to mid north, such as Preston, Thornbury, Ivanhoe, Coburg and Strathmore.

Apartment woes

Melbourne’s apartment market is oversupplied, with high levels of new construction and massive towers on the north side of the CBD, says Phillips. “Those apartments that were sold off

the plan a couple of years ago are now struggling to be valued at the price paid, with many having fallen 10% to 20% in resale value since purchase...

“Having said that, good-quality apartments that have well-chosen locations, near transport hubs such as train stations, or close to the CBD, Port Phillip Bay, school zones or parks, are still in demand.”

SUBURB TO WATCH

Clayton: Multicultural suburb with big potential

It’s no accident that there are more than 15,000 people living in Clayton (according to the last ABS census). This is a suburb with plenty to offer. For one, it is 19km southeast of the Melbourne CBD, but there are also many great things happening in the suburb itself. Students love the fact that it’s home to Monash University, which has around 26,000 students.

In addition to a plethora of schools and shops, amenities include Monash Medical Centre and a train station. Clayton is also a multicultural community, which is reflected in the wide variety of international restaurants.

There is a 2.01% vacancy rate, according to DSRdata.com.au, which shows that landlords in Clayton don’t have too much difficulty finding tenants for their units. And the fact that there’s just 1.46% of stock on the market is another indicator of solid demand for this suburb.

There are excellent options for investors in the area around Monash Green Drive and Leaf Court, which are right in the heart of Clayton’s popular medical and university precinct. They are also within walking distance of the Clayton train station, shops and schools.

Two-bedroom apartments can be picked up on Monash Green Drive for less than $350,000, while two-bedroom townhouses are going on Leaf Court for just under $500,000.