Melbourne’s property market has held up longer than expected – but is facing pressure from the rocketing Australian dollar and falling affordability.
Ayear ago in these pages we raised the question of whether Melbourne had become too hot to handle. The consensus was that the market had pretty much peaked and that it would slow significantly – or even correct – within six to nine months.
As far as forecasts go, it was pretty much on the money. By March this year, value growth had slowed to a crawl, with Residex reporting growth for the first quarter of 2011 at 1.2% for houses and 0.63% for units. Indeed, Real Estate Institute of Victoria (REIV) quarterly figures – based on raw sales data – actually recorded a fall of 6% in the Melbourne median house price. Could this be the anticipated correction taking place? Even the REIV isn’t sure.
“We normally see price drops in the first quarter of the year,” says REIV spokesman Robert Larocca. “That fall usually averages about 4.5%. Therefore, three-quarters of this year’s 6% fall is the ‘normal’ market reaction to the slower first quarter.”
Larocca puts the subdued market activity down to interest rate increases and concerns about affordability following the rapid price rises. APM economist Andrew Wilson concurs on the affordability front.
“Melbourne is now approaching Sydney levels of unaffordability, following the stellar growth of the last few years. That in itself would lead you to expect the market to move sideways for a while, to allow incomes to catch up,” says Wilson. “Even so, the market appears to be holding up relatively well, the economy is strong and employment numbers are good.”
Both Deloitte Access Economics and CommSec agree that the Victorian economy is looking in good shape. CommSec’s State of the States report for the first quarter of 2011 suggests the Victorian economy is the third strongest in Australia after the ACT and Western Australia, thanks to historically low unemployment, housing demand and growth in retail spending. Deloitte Access Economics, meanwhile, notes that the new state government has pledged to spend more on infrastructure – typically a good omen for housing markets. Even so, it has issued a warning.
“The Aussie dollar’s surge means that pressures on Victoria’s manufacturers are intensifying, while the potential for interest rates to increase further is worrying the state’s consumers,” it says.
It also noted that Melbourne’s residential vacancy rate has climbed for the first time in quite some time, and rental growth has moderated. At the same time, retail sales growth has been pegged back. That mix of results for housing and retail indicators points to Victoria’s vulnerability as the state’s population growth fades.
“Housing finance is easing off, though no more than elsewhere, and approvals remain solid,” says the report. But while house price growth also remains strong, cutting into affordability, vacancy rates appear to be lifting and population growth rates are falling back rapidly. Overall, expect Victoria’s performance to ease both in absolute and relative terms, but to remain the leader of the pack.
Wilson warns that increasing supply could impact the Melbourne market. “Inner-city apartment construction is going gangbusters, and that’s likely to lead to moderation in rental growth,” he says. “20,000 units coming onto the market will undoubtedly have an impact.”
Wilson also highlights a slowdown in population growth, particularly down to the high dollar causing a drop in the number of international students coming to Melbourne, as a longer-term constraining factor on growth.
“At the most basic level, supply is increasing and demand decreasing,” he adds. “Logically, that’s going to continue to slow things down, but the Melbourne market remains resilient so far.”
Residex CEO John Edwards believes that the market will correct further, but it’s too early to tell by how much.
“It could see further price adjustments or it could simply stagnate,” he comments. “However, I tend to think it will adjust further simply due to the amount of stock coming onto the market.”
Larocca points out that the situation isn’t all doom and gloom across the city, though. “Some suburbs are delivering real capital growth, predominantly those in the south-east and west,” says Larocca. He puts that growth down to some familiar drivers, namely, population growth pressures and the quest for affordable accommodation.
Performing suburbs highlighted by the REIV in the south-east include Langwarrin, Mount Martha, Mornington, Rosebud and Frankston South; meanwhile, western suburbs showing solid growth include Footscray, Caroline Springs, Werribee, Newport, Point Cook, Deer Park and Sunbury.
The REIV figures also reveal value increases in high-end suburbs such as Williamstown, Malvern East and Kew. While Larocca warns that the premium market can be volatile, he suggests there’s an interesting phenomenon taking place at the higher end of the market, particularly around apartments.
“The first quarter of 2011 saw the median price for units in a suburb go over $1m for the first time, in Brighton,” explains Larocca. “It’s fascinating, because demand for detached homes actually went down; houses are priced around 50% more than units.”
Larocca suggests that the swing to units is down to buyers looking for a less expensive way into premium suburbs like Brighton, and the growth of ‘mini apartment complexes’ in areas like this. Larocca comments that there could be scope for developers in the coming months and years as this trend continues.
“Just drive from Port Melbourne to Sandringham and you’ll see a plethora of blocks being subdivided.”
Wilson is also quietly bullish about the mid-to-high end of the market, but warns that stock market performance is likely to be the indicator to watch.
“Melbourne is far less expensive than Sydney in terms of ‘high level suburbs’. Like the NSW capital, that part of the market has been soft since the GFC so it’s possible that we’ll see values push up in those suburbs if and when the stock market kicks in.”
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