Is the Victorian capital a no-go area for investors – or are there opportunities out there?
Last year was without a doubt the year that the runaway Melbourne property market slowed from a gallop to a trot.
The data for the year only confirms what buyers and sellers have seen with their own eyes: it’s come off the boil. RP Data’s end-of-year figures put median annual growth for 2010 at 8.4%, and Residex reckons it’s 9.2% for the same period – down from closer to 15% at the end of 2009. Admittedly, Melbourne still stands out as the star performer for growth out of all the capital cities; however, like the rest of the market, growth has more recently slowed to a crawl – with Residex charting the increase for the final quarter of 2010 at just 0.13%.
The rapid value increases have also impacted rental yields, with RP Data listing Melbourne’s yields as the worst among the capital cities at just 3.4% for houses and 4.1% for units. Fears of a looming oversupply, especially in the apartment market, combined with a slowing population increase, suggests that demand is unlikely to start promoting rental growth in the near future.
So, with capital growth at a crawl and rental yields low, should investors be shunning Melbourne for sunnier pastures right now?
“The year ahead is going to be a challenging one for Melbourne’s residential property market,” says Greville Pabst, CEO of WBP Property Group. “In particular, Melbourne’s performance will rely on two major factors; whether interest rates rise and if so, by how much, and whether national income continues to grow.”
A drop in immigration is also playing a role in the bearish market sentiment, with Pabst highlighting that immigration rates are not only 30% below their peak in 2009, but that there has also been a sharp reduction in overseas students coming to Melbourne.
Australian Property Monitors (APM)’s research director Andrew Wilson agrees that the Victorian capital is likely to ‘quieten down’ over the coming months, and adds that the slowdown could be exacerbated by a glut of new apartments coming onto the market.
“Melbourne’s got a reasonable supply line in terms of new construction – particularly a boom in apartment building. There’s something in the region of 20,000 units set to be coming through – a record number in terms of approvals and commencements,” says Wilson.
However, Wilson is confident that any oversupply “will eventually clear”, especially as the Melburnian enthusiasm for inner-city apartment living doesn’t appear to be on the wane.
However, Pabst thinks that any oversupply issues could be mitigated by the possibility that not all of the developments that have gained approval will come to fruition – or at least not this year.
“We are seeing an abundant supply of new apartments aimed at the entry-level market. These properties typically have poor fundamentals for investors and homebuyers with high owner corporation charges and small floor spaces, which affect resale prices.
However, while 33,000 new units have been approved in the last 12 months, only 6,300 have commenced construction,” he points out. “Meanwhile, the new state government has restricted the scope for higher density developments.
“So, the number of new apartments which will be completed in 2011 – or in subsequent years – remains an open question. The higher the number completed, the greater the downward price pressure on CBD and inner urban apartments.”
Will Melbourne crash? “I don’t think so,” says Residex CEO John Edwards. “Employment levels are high, and improving, and the economic situation is very different to the 1960s. I think we’re likely to see a period of significant stagnation, accompanied by low rental returns. Over the next 12 months, we’re looking at growth around 3%, with rental yields also around 3%.”
One light on the horizon is the 20% cut in stamp duty for first homebuyers, announced by the recently installed coalition state government, as well as smaller cuts for other buyers.
However, Pabst doesn’t think that this will have a major impact.
“The cuts are unlikely to help affordability. Similar policies in the past have resulted in spikes of buyer demand and rapid price jumps, but given the prevailing sentiment, the net effect of this new government policy for the buyer will be zero,” Pabst says. “Market sentiment can have a strong influence on short-term demand and we expect the market’s current lacklustre sentiment to continue through the first half of 2011.”
