Melbourne hovers over knife edge

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Fears that property prices will fall in the face of a rampant oversupply of new properties show no signs of being put to rest

 

After months of being told that the Melbourne property market faces a flood of new properties coming onto the market, the question for most investors is no longer if an oversupply exists, but where.

Melbourne, after all, is hardly one single market. It is more a collection of markets that, while influencing each other, have their own separate destiny. The overall price movements and trends of the city may paint a general picture of the market, but they do little to describe what is happening in every suburb, street and individual property transaction.

“Now is a time to be very selective in what you buy,” says Michael Yardney, CEO of Metropole Property Strategists. “While there are some good buying opportunities, there are also a lot of secondary properties on the market right now.”

Yardney says that if city-wide stats paint an overall view of the market, it is only logical that within that picture some markets are doing better than others. He believes that well-located properties within inner-ring suburbs are holding their ground, but properties on the city’s outer fringes are struggling.

“More expensive properties have suffered the most and more recently the first home buyer segment of the market has slumped due to faltering buyer interest [and oversupply]… There is also no doubt that Melbourne has been in the slump stage of the property cycle for the last few years, plagued by an oversupply of house and land packages in the northern and western suburbs and an abundance of new apartments coming onto the market.”

Measuring the difference

Redwerks research director and inventor of the DSRscore, Jeremy Sheppard, agrees that different categories of the Melbourne market have performed better than others. “[Demand wise] units were all the rage in 2010, but since then the demand to supply ratio has dropped. Interestingly, it has increased for houses.”

According to Sheppard, the supply of units has increased as demand for them has decreased, while exactly the opposite is true of houses – demand has increased and supply has decreased. However, Sheppard is quick to point out that this was only looking at inner ring suburbs that included, among others, Carlton,  Docklands, Flemington, Kensington, North Melbourne, West Melbourne, Parkville and South Yarra.

Root of the problem

Generally speaking, oversupply concerns have been the topic of controversy within the Victorian capital. Some have downplayed the issue as media hype while other observers have stressed oversupply as a major risk factor.

The concerns rest on Melbourne property’s track record. The market is considered to have boomed over the last part of the 2000s, but the resultant good times for property prices sent builders and developers running to the market to cash in. As with any market, the party was never going to last forever and the huge amount of new properties coming onto the market prompted fears that the supply of listed properties would outstrip demand for them. This, in turn, would send property prices crashing as vendors would have to drop their asking prices considerably to compete for sales.

BIS Shrapnel senior manager Angie Zigomanis argues that the concerns were justified, saying oversupply remains a bigger issue than many investors would want to admit.

“There’s still a lot of supply in the pipeline that will continue to be completed in the next couple of years – a lot of it is high rise apartments that were bought off the plan – so we should at least see pockets of Melbourne in oversupply,” he says. 

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