Melbourne houses experienced the greatest capital growth of all Australian capital cities in February.
“Melbourne has been going at such a rapid pace of growth since the start of 2009,” says Tim Lawless, research director with rpdata.com. “At such a high rate of growth, I would have expected it to slow down, tapering off in January and February, but it still managed to outperform the rest of the capital cities.”
Robert Larocca, policy, communication and research manager at the Real Estate Institute of Victoria (REIV), says a strong economy and consumer confidence are the two main driving factors behind the current market, as well as a shortage of housing supply.
“The market is very strong; in fact, it’s the strongest pre-Easter market that we’ve seen in Melbourne for some time,” he says. “Confidence is a critical factor when people are making a commitment that lasts for 25 to 30 years.”
In the past five years, Melbourne’s rate of population growth has increased by 84% and, according to the ABS, the number of seasonally adjusted dwelling commencements in Victoria has increased by 22.4%.
Larocca says there’s no doubt that the mismatch between supply and demand, underpinned by increasing population, is driving house prices in Melbourne. HIA senior economist Ben Phillips says in his recent report that the Victorian capital city is struggling to satisfy the needs of its residents. “The growth areas in and around Melbourne also show high levels of demand,” Phillips says. “Current construction levels in most high-demand areas are simply not sufficient to meet the needs of a fast-growing population.”
HIA is projecting the underlying housing demand to hit 34,288 in Melbourne alone between 2011 and 2020. At the moment, only 18,231 dwellings are being constructed, which suggests a sizeable shortage of 16,057 dwellings will materialise in a decade’s time.
Brendan Smith, residential valuations manager with WBP Property Group, agrees that the housing shortage, combined with high demand from a growing population, has resulted in sky-rocketing Melbourne property prices.
This has led to a fast-moving auction market, which doesn’t look set to change anytime soon. Larocca from REIV notes that prior to Easter, the four suburbs of Bentleigh, Mulgrave, Ormond and Fairfield had seen more than 20 auctions and achieved a 100% clearance rate.
However, this level of exuberance is a concern to Lawless.
“It seems that exuberance is really gathering momentum in Melbourne and that level of momentum can be quite difficult to stop until you find prices overshooting the mark, which will result in another flat period in the market over the coming years,” he says.
Vacancy rates ease
While prices continue to soar, Melbourne’s median vacancy rate has eased slightly over the month. The REIV rental vacancy rate for Melbourne in February 2010 was 1.7%, up from 1.5% in January.
“The overall rental vacancy rate for Melbourne and regional Victoria has remained stable over the past three months and conditions do seem to be improving in suburbs within 4km of the CBD,” says Larocca.
Vacancy rates for the inner (0–4km radius of the CBD), middle and outer suburbs of the city improved, yet tightening was evident within a 4–10km radius of the CBD, as well as in regional Victoria, according to the REIV.
“There was a clear improvement in the inner-city vacancy rate over the last quarter, which was good news for renters,” explains Larocca. “The average vacancy rate over the last three months in the inner city was just over 2%, which is the best it’s been in suburbs such as Richmond, Fitzroy and Carlton in four years.
“Time will tell if conditions for renters continue to improve to our preferred 3% vacancy rate or tighten once more.”
The middle suburbs saw an increase from 1.5% to 1.7% and the outer suburbs witnessed a rise from 1.2% to 1.6%. The vacancy rate in regional Victoria also remains tighter than in the capital city.
Larocca praises the Victorian government’s plan to increase affordable rental housing in the state. “The recent announcement by the state government for an additional 4,500 new subsidised private rental homes is welcome and, when delivered, will take some pressure off the market.
“If all the promised homes were delivered tomorrow it would improve the vacancy rate by 1%.
“This is an example of the sort of investment in the state’s rental housing that’s necessary to address the systemic problems in the state’s rental market – and more is required.”
He predicts that Melbourne will continue to show positive growth in the coming months. “Unless the economy takes a turn for the worse, the current factors are likely to continue.”