VIC Excerpt from the 2011 February Market report


Units within the inner ring remain popular, but further out the demand is shifting towards boutique developments.

Anyone with half an eye on the Melbourne property market will no doubt have noticed that its extraordinary growth spurt over recent times has come to an end, but the market’s strong fundamentals have kept the mood bullish among local property professionals.

“There’s a lagging supply of stock and there’s been a good strong demand. Capital growth is a bit flat and will remain flat for the next couple of months, but I think it will catch up,” says 1st Property director Randeep Virdi. “Property is a long-term investment, and growth will always flatten out at times.”

One factor behind this flattening out of capital growth is the end of the new buyer rush, which was backed by the cash boosts of the First Home Owner Grant. And reduced activity in this sector of the market has had a knock-on effect for growth in Melbourne as a whole.

“Growth has been artificially high, so I’m actually really pleased that Melbourne is returning to slow and steady growth,” says Buyer Solutions director Janet Spencer. “We’re not seeing spikes in activity like we did with the First Home Owner Grant [boost].”

Colliers International managing director of Residential for Victoria Tim Storey believes that interest rate increases too have played their part in dampening activity amongst Melbourne property buyers, but that this had led to a more sustainable growth rate.

“Interest hikes have slowed activity down. In the first part of 2010 we saw auction clearance rates upwards of 85%. To keep that going with the price growth we’ve seen was quite unsustainable,” says Storey.

“It’s now quite an even market. There are opportunities for buyers, and there are also good properties selling at good prices. We’ll see a similar market to this going forward for the next 12 months.”

Spencer points out that 2010 was a year full of distractions for local homebuyers. Not only has the state seen two elections – one at state and one at federal levels – but the footie mad city also saw an AFL Grand Final replay for the first time since 1977.

“We had two elections, and the federal election was undecided for some weeks, and atypically we’ve had two grand finals. So 2010’s been a bit of an unusual year,” she says.

Building recovery remains patchy

Despite all the distractions, building activity was strong in the Garden State during 2010, with CommSec’s chief economist Craig James noting in his State of the States report that Victoria was second only to ACT for dwelling starts during the first half of the year.

Dwelling starts hit a record in the June 2010 quarter and was 38% higher than ‘normal’ levels or the average of the past decade, according to James. “Not only are starts at historically high levels, but they are up almost 41% on a year ago. Strong population growth is the key factor underpinning dwelling activity in Victoria,” he says.

This level of building activity, however, is not represented in all areas of the Victorian property market, with local property professionals observing that the number of good quality, well-located units in central Melbourne is still failing to match demand.

“There’s definitely an undersupply of good stock, and building activity is a bit quiet. When developers come up with new stock, it sells very quickly,” says Virdi.

“The Big Four banks have been a lot less inclined to lend on property developments since the GFC, so we will start to see stock dwindle. It’s good news for investors that we’re not going to see an oversupply, but it’s not good for public housing,” adds Spencer.

CBD units in high demand

With a strong demand for well-located units in mind, Storey tips the CBD as the place to be, warning that in the current market outlying suburbs may not perform as well as their inner-city neighbours.

“I think the CBD’s extremely strong. In the CBD itself, provided you’ve got a well designed, well priced and well located product, it should perform very well. The secondary areas, such as Southbank, from our view are going to be a little bit more vulnerable,” he says.

But that isn’t to say that investors should focus only on the inner ring. Storey believes that there’s a strong Gen Y market for units on the fringe of the CBD – in suburbs such as South Melbourne, South Yarra, Prahran and Richmond – but that the demand in these areas is for quality developments.

“Boutique projects with around 80 or 90 units in areas like Prahran and St Kilda have got a good depth of market, provided that the building has a point of difference. If it’s just a generic apartment building, and the developer’s asking for a premium, it will be tougher,” says Storey.

Regional strength

Moving away from the city, PRDnationwide’s research director Aaron Maskrey believes that regional Victoria has shown astonishing resilience in the face of the GFC and, given Melbourne’s slowing growth rates, investors would do well to look outside of the state capital.

“It’s really a trend that we’ve seen throughout all of regional Victoria that, while a lot of the capital cities in Australia experienced a loss of confidence and activity plummeted, regional-based economies actually prospered from the fall in interest rates – and a lot of people capitalised on this,” says Maskrey.

“So Victoria’s been the success story, if there was one, during the GFC and its wake. You talk to people there and they were really unaffected by the global financial crisis,” he adds.

Maskrey highlights Warrnambool as a shining example of regional Victoria’s potential, with the median price in the area more than doubling in the 10 years to June 2010 to reach $315,995, according to Property Data Solutions figures.

“Warrnambool’s got fantastic, steady levels of activity. During the last 10 years the median price has just steadily grown. It was unaffected by the GFC, and activity levels have been fairly consistent as well,” he says.


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