Property cycles support a bottoming in prices for Melbourne, but a weakening economy could throw a spanner in the works.
It’s hard to paint a property market as large as Melbourne with the same brush. The market itself is made up of many sub-markets and, more so than any other capital city, each of these market segments will have vastly differing fortunes over 2013. This makes forecasting median prices for the entire city something of a mute exercise. Yet slowly, imprecisely, the bigger picture does reveal certain secrets. In a general sense, Melbourne property faces troubles ahead. It is something analysts have been saying since 2010, and investors who have become accustomed to such forecasts might be asking: why this time?
Perhaps it is because of the nature of one threat in particular. ANZ’s head of property research Paul Braddick says that because Victorian property has been outperforming for the last six years, analysts were always going to be expecting a period of adjustment to come, a period when prices would underperform for quite some time. While this hasn’t happened over 2012, Braddick says that a new issue is slowly emerging to make 2013 a more likely year when there will be an adjustment.
“Hopefully [Melbourne] holds a basing in prices. We’re seeing tentative signs of that recently… but local economic conditions are really going to matter. There is a concern that the housing market could be underpinned by a softening economy,” he says.
For Braddick, the Victorian economy is currently carrying a lot of weakness and this will have a major effect on the property market. The state economy, diverse as it is, has minimal direct benefit from the strength of the Australian mining investment boom and weak employment growth has become an increasingly prevalent theme over 2012.
The unemployment rate is now hovering above 5.5%, which though far from bad when compared to Europe or the United States, is a wide berth from Western Australia, where the unemployment rate is around 3%.
These would be manageable problems in and of themselves, yet the short-term future sees no emergency exit in sight. The state government has put more of a lid on new infrastructure spending. Many existing projects are being finished and there appears to be no next round of projects to come through on the horizon.
Combined, all of these issues could fl atten the chances of Melbourne throwing off the persistent warnings that analysts have been passing about since 2010 – that adjustments are coming. “2012 was certainly a surprise,” says Residex CEO John Edwards. “I thought Victoria would do worse than it has done, but I wouldn’t expect it to surprise like that again over 2013.”
Supply and demand factors
1. Market timing
Edwards says that 2012 was a slight surprise because on many measures the city showed growth, just at a time when a group of forward indicators had suggested prices would drop.
The Melbourne residential property market had been slowing since the start of this decade, with June 2012 prices some 4.5 percentage points below their 2010 peaks. Before those peaks, Melbourne’s median house price had been flying. This was made clear when the median price grew a substantial 27% in 2009, driven by attractive financial incentives for first homebuyers and variable interest rates that were at 40-year lows.
When interest rates crept back up through the end of 2009, the rise in prices became unsustainable. Affordability surpassed its previous worse point (in June 2008) and prices growth began to slow down. At the same time, the rise in prices spurred a boom in new residential construction. First homebuyers and upgraders were still driving demand for new houses, just as investors rushed to buy off-the-plan apartments.
Since then the bottom has been removed from Melbourne prices, leading to the current situation where price growth has been in negative territory for the last two years. Whereas in other cities such a prolonged period of adjustment would suggest that a bottoming out in prices would be near, RP Data’s national research director Tim Lawless says this may not be the case for Melbourne.
“Melbourne’s housing market is now emerging from a sharp correction … since the end of May values increased 4% [up until September], but the market still needs to claw back [almost 7% in] value to recover to its 2010 peak. While Melbourne dwelling values are recovering, rental markets remain reasonably fl at and rental yields are the lowest of any capital city,” says Lawless.
2. Buyer activity
The unexpected performance of Melbourne, a city where property values didn’t drop as steeply as they were expected to, also leads Australian Property Monitors’ senior economist Andrew Wilson to conclude that there’s more to statistics than meets the eye.
“Melbourne has certainly been an unusual case this year,” Wilson says. “I think it’s fair to say that it has held the line in terms of its market. I know that certain models have shown there’s been house price growth, we’ve also seen some being recorded overall, but I think this has been confined to two areas: the prestige market and the inner suburban and inner east market.”
Wilson says that the prestige market developed value momentum in parts of 2012, because people perceived that it had been oversold. Inner suburban and inner east markets, on the other hand, had seen widespread bargain hunting, which created momentum.
“The big hole in the Melbourne market has been from middle ring suburbs,” Wilson says. “This market, particularly out in the eastern suburbs has been very quiet.
“We’re also still seeing low activity in the middle ring change the buyer market. It’s these buyers that are the missing link in Melbourne at the moment, so while the prestige market is continuing to be positive, I’m not sure that’s going to keep afl oat the market.”
3. Oversupply, slowing population growth
To make matters worse for the city, during its last property price boom, the high level of new dwelling construction that occurred has been coinciding with slowing population growth.
The result is that the market is estimated to have moved from close to balanced (where the demand for housing meets the supply) at June 2011, to a rising surplus of dwellings at June 2012, according to a QBE LMI Housing Outlook 2012-2015 report.
In this environment, rental vacancies have also begun to increase as most of the off-the-plan apartments that investors purchased get completed.
“From a demand perspective, nationally we’re seeing a pick-up in overseas migration, but Victoria is not benefiting hugely from that,” says BIS Shrapnel senior manager Angie Zigomanis. “This will affect the demand side of the equation, and of course, on the supply side, there’s still a lot of supply in the pipeline ... especially among high-rise apartments.”
Despite two years of lacklustre growth, affordability continues to be strained, according to Residex’s John Edwards. “Even though we’ve had the recent performance over the last two years and Melbourne’s affordability is better than Sydney, it is still the second most unaffordable city in Australia,” Edwards says.
He adds that part of the equation needed for Melbourne prices to recover is an increase in affordability. The problem is that the softening job market and wider economy don’t support large enough income growth – which brings all arguments about Melbourne capital growth back to their starting point: Melbourne, and Victoria at large, is on the wrong side of Australia’s two-speed economy.
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