VIC Excerpt from the 2016 January Market report

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Melbourne has been in Sydney’s shadow for the last 18 months, but the market is gathering momentum as we head into 2016. Is this the Victorian capital’s year?
 
Melbourne has been running a close second to Sydney over 2015 in terms of the best housing performance in Australia – and 2016 could be the year the Victorian capital becomes the top performer.
 
Melbourne’s economy has been bolstered by the same drivers that boosted Sydney to the top of the capital growth charts: the low dollar, low interest rates and high population growth rates.
 
Deloitte Access Economics calls the exchange rate “the key lever for the Victorian economy”, adding that a cheaper currency benefits manufacturers, farmers and the tourism sector. It also boosts numbers of international students coming to study in the state.
 
A new influx of overseas students has helped boost the population growth rate to the highest in the country, with Deloitte highlighting that Victoria will account for a quarter of Australia’s population by the end of 2015.
 
“That will be the first time in more than 20 years that one in four Australians will call Victoria home,” says the think tank’s latest Business Outlook report.
 
Finally, low interest rates have also boosted Melbourne’s financial services sector. They have also helped the housing market, both in terms of trading existing dwellings and housing construction.
 
Indeed, the amount of housing construction in the CBD and nearby environs such as Port Melbourne has helped offset the slowdown in Victoria’s manufacturing sector, not least the car industry. While infrastructure projects are not on the same scale as in NSW, the $11bn Metro Rail project, the $5.5bn Western Distributor road project and the $1.3bn CityLink road upgrade are also providing employment opportunities.
 
The biggest question on many people’s lips is what happens in 2017, when the car manufacturers and their associated suppliers shut down for good – and whether the housing construction boom can pick up the slack.
 
Melbourne
The healthy state of the Victorian capital’s economy has had a knock-on effect on the housing market. While Melbourne hasn’t seen the same kind of rapid value increases that Sydney has over the last two years, it has still experienced solid growth: an average of 13.3% across the market between October 2014 and September 2015, and 14.3% for stand-alone houses over the same period (according to CoreLogic RP Data).
 
CoreLogic RP Data research director Tim Lawless highlights that, while Melbourne may not have scaled the heights of Sydney’s recent boom, it’s been stronger for longer.
 
“Melbourne values have increased by 35.3% since 2012,” says Lawless. “That’s not quite as strong as Sydney but still a strong performer. However, Melbourne has undoubtedly been the strongest market post-GFC, with values increasing 65% since 2009.”
 
The upshot of that less meteoric growth is that Melbourne is set to become the country’s best performer in 2016, as the Sydney boom slows.
 
“Melbourne is taking over as the prime performer,” says Domain’s Andrew Wilson. “Low interest rates and the building boom have energised the market. It’s very consistent, with growth occurring in all price ranges.”
 
The kicker is that Melbourne is less likely to be affected as badly by the headwinds that are causing the Sydney market to cool. More stringent capital requirements for lenders –filtering through to borrowers in the shape of higher interest rates and a crackdown on investment lending – are potentially less of an issue for Melburnians because their properties are more affordable than Sydney’s.
 
In addition, the Victorian capital is less investor-heavy than its NSW counterpart – although that might change as investors look for more affordable markets than Sydney’s, which also have a strong economy and a high rate of job growth, says OnTheHouse.com.au’s Eliza Owen.
 
“Melbourne definitely has an affordability advantage,” adds Wilson. “Incomes are similar to Sydney’s, but median prices are significantly lower. It’s a more even market too, being driven by aspirational buyers in the eastern suburbs. First home buyers are also more active, with their numbers on the rise.”
 
BIS Shrapnel’s Angie Zigomanis says the healthy pipeline of land supply in Melbourne is helping first home buyers get on to the property ladder.
 
“The land market for new housing is competitive: in fact, the cost of new housing is not that much higher than Brisbane,” says Zigomanis. “Outer Melbourne is awash with land, so it’s hard for developers to push up land and new home prices.”
 
The elephant in the high-rise block
However, the big question mark about the Melbourne market is one that’s extremely visible to any visitors: the inner-city apartment market.
 
The aforementioned housing construction boom has led to “unprecedented” growth in new apartments in and around the CBD. While many of these units have been snapped up as cash purchases by overseas investors – who may or may not open them up to renters – there’s still significant concern about the “spectre of oversupply” in this part of the market.
 
“The CBD and near-CBD apartment looks very vulnerable,” says AMP’s Shane Oliver. “That could be a big dampener on the market.”
 
Lawless adds that the sheer number of units “will put a natural lid on gains in the inner city”.
 
A bigger question could well be what effect the CBD apartment boom will have if and when it runs out of steam. The number of tradesmen required for apartment construction has somewhat offset job losses in the manufacturing sector. It’s eminently possible that there could be a sting in the tail for northern and western Melbourne suburbs in a couple of years if housing construction slows down.
 
Deloitte Access Economics highlights this as a key risk, saying “it is clear that any slowdown in housing construction would reverberate through Victoria’s retail spending as well”.
 
That being said, Wilson highlights the suburban unit market as “clearly undersupplied”, particularly in suburbs like Brunswick, Coburg and Preston.
 
Rental prospects in these suburbs are also good, with strong demand from people moving to the state. Zigomanis highlights that the main ‘inflow’ age group is between 20 and 40 years old.
 
“It’s very much the renter and first home buyer demographic,” says Zigomanis. “The rental market is very much being fuelled by Gen Y.”
 
Zigomanis suggests the longer-term outlook may be driven by these renters, particularly in middle-ring suburbs.
 
“Over the next decade, current renters may be looking for something bigger for family, but the big question is what trade-offs they’ll make in terms of location versus property size. We’ll also see more baby boomers downsizing… it all adds up to increased demand for middle suburbs.”
 
Lawless agrees that stand-alone houses with a land component and within 15km of the city are the safest bets, while Century 21 executive chairman Charles Tarbey identifies Frankston as a suburb with strong prospects.
 
“It’s a coastal suburb with good infrastructure,” says Tarbey. “It takes less than an hour to travel to the city, as well as to travel to the Mornington Peninsula. There’s also a good mix of buyers, from first home buyers all the way to premium buyers.
 
Regional Victoria
The outlook for regional Victoria is somewhat subdued – and to a large extent focused on the three major regional cities of Geelong, Ballarat and Bendigo.
 
The progress of the Regional Rail Link is likely to be a major driver for Ballarat and Geelong in particular, and Melburnians seeking lifestyle and affordability within commuting distance of the capital.
 
Andrew Wilson suggests Ballarat may be a stronger performer than its coastal counterpart, at least partly due to the closure of the Ford plant in Geelong. However, Geelong may benefit from sea changers and retirees looking for a coastal community, as may other coastal markets.
 
Zigomanis also suggests the Regional Rail Link may have a larger effect on small towns along its route, such as Tarneit and Wyndham Vale.
 
Meanwhile, Wilson says Bendigo is likely to remain a strong performer throughout 2016 and beyond.
 
“Bendigo is really the only diversified regional hub in Victoria,” says Wilson. “It’s been helped significantly by Victorian government decentralisation programs, which have brought public sector employment into the city. It also services the local agricultural community. It’s breaking away in terms of growth.”
 

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