Short-term problems plague Victoria’s property market
Despite a strong economic status, there is unease in the market
There’s no denying that Melbourne’s property market has been on a continuing growth trend in recent years. However, not all property markets are created equal, and at a micro level certain areas are performing better than others.
Indeed, Greville Pabst, executive chairman of WBP Property Group, indicates that “the gap in performance between the inner-circle and outer-lying areas appears to be widening”.
“Within the inner 20km radius of Melbourne, homebuyers entering the market currently outnumber listings by three to one,” Pabst confirms.
It’s a mix of investors and homeowners driving the market. Given the higher property prices in Sydney, home buyers are seeking an alternative in Melbourne, which is underpinning population growth. As a result, Melbourne is expected to become Australia’s largest city by 2056.
It’s perhaps no surprise then that Victoria is currently Australia’s fastest-growing state, reports Herron Todd White in its Month in Review
for June 2016.
In the 12 months leading up to March 2016, the net growth rate clocked in at 1.7%, surpassing NSW. The state’s strong economy is the main driver of this growth.
Tim Lawless, head of research at CoreLogic, adds that the economy of Melbourne “remains relatively sheltered from the downturn in the resources sector and has benefited from a very healthy services sector and positive population inflows”.
While Lawless still expects the current home growth rate to slow down over the year, it should still perform better than Sydney’s.
Vacancy rates set to rise?
Gareth Aird of Institutional Banking & Markets adds that, as well as increased population growth, demand from foreign investors is a huge factor driving the Melbourne market.
The Foreign Investment Review Board reports that approximately 20% of real estate buyers in the country are foreign. However, with a number of new measures introduced to curb foreign investing, including an increase in stamp duty from 3% to 7%, that figure is set to change.
In recent years, the presence of overseas investors has played a part in artificially suppressing vacancy rates, because many of these buyers neither live in their purchased homes nor put them up for lease. As a result, many banks have placed restrictions on lending to overseas buyers.
The suppression of vacancy rates may have helped mask the considerable risks of unit oversupply in the inner city. While building approval numbers have dropped by 2.7% in Victoria as whole, according to the Housing Industry Association, the number of residences being constructed remains at a record high.
According to CoreLogic, the unit prices in central Melbourne dipped by 0.5% in the first quarter of 2016, likely due to oversupply concerns. The Real Estate Institute of Victoria also indicates that the median unit price in the Melbourne CBD fell by 17.2%.
How the city’s vacancy rates will respond to a slowdown in international buying and a rise in stock on market remains to be seen, but it seems clear that investors should brace themselves for a reduction in rental returns.
Melbourne’s two-tier market emerges
Historically, interest rate cuts have stimulated property markets, but in Melbourne that hasn’t seemed to eventuate in the last 12 months.
Auction clearance rates remain in the 70% range, which is a positive sign; however, record-low mortgage interest rates have not boosted housing demand to noticeable highs.
The recent growth rate has inspired some discomfort in the market, however, and Pabst points out that in previous downturns demand and supply dropped equally. In the process, property values declined as well.
“The outlook in the short term is that Melbourne will see a widening gap between high-growth assets, which will continue to grow in value, albeit at a reduced rate; and poor-performing property, which will stagnate if not reduce in value,” Pabst concludes.
SUBURB TO WATCH
St Albans: Amenities in this mid-city suburb boost its value
The large, mid-city suburb of St Albans is a melting pot of cultures. Its proximity and accessibility are bringing in many professionals and families from all around Victoria. The Melbourne CBD is just about half an hour away by car, and it boasts three train stations and bus services.
According to a suburb statistics report generated by Residex, house prices in St Albans enjoyed 19.6% growth in the past 12 months.
A development is currently in construction in the suburb that will consist of houses, duplexes and townhouses, giving prospective buyers many options. Cedar Woods Victoria and Queensland state manager Nathan Blackburne highlights the proposed central park and local amenities, such as the St Albans train station, which provide “enviable lifestyle and comfort”.
“The St Albans Town Centre is regarded as the largest local main street shopping precinct in the City of Brimbank,” Blackburne adds. The centre houses several facilities for retail, commercial, recreational and community purposes. St Albans also focuses heavily on offering education through renowned institutes like St Albans Secondary College.
Can you afford to buy in this suburb? Find out how much you can borrow