Surprise improvement in Melbourne market

Melbourne is displaying a markedly improved outlook, but that apartment oversupply problem continues to linger

Certain health problems have long plagued Victoria’s property market but, in recent months, it has started to look much healthier and more confident.

Victoria’s market reported a significant increase in confidence – with a rise of 18 points to 117 in the June quarter – in the latest Property Council of Australia-ANZ Property Industry Confidence Survey. This result is Victoria’s first positive index reading since the first survey in December 2011.

ANZ head of property research Paul Braddick says the increase in confidence was probably driven largely by an improved outlook for the residential property market, with solid housing sales and positive house price growth in recent months. “In addition, a more stable global economic outlook and expectations of increased availability of debt finance is likely to have boosted expectations for construction activity and property capital growth in Victoria.”

Nonetheless, ANZ still expect property industry confidence to be weaker in the coming quarters. Braddick says it will be weighed down by a soft outlook for the state economy, further slowing in housing construction from the recent peak and a subdued outlook for retail spending and office employment.

However, Australian Property Buyers managing director Karin MacKay says the property market has definitely been on the rise, with inner city Melbourne houses in high demand – especially

period houses in areas like Hawthorne and Camberwell. “It’s a good positive market at the moment. There was 1-2% growth last quarter. Individual properties are doing well. There always seems to be at least two bidders on properties at sale. This has all been impacting on prices.”

The crucial factor in this is the low interest rates, but Victoria’s high migration rates – with approximately 7000 people moving to the state each week – also help, she says. “Low interest rates are key to the improved market though. They are a big decision making factor for investors, particularly for first home buyers.”

MacKay believes it’s a great time to invest in property, with prices nearing the level the market had to offer in 2010 and a nearly 4% return on sales. “The only type of properties that don’t sell are overpriced properties where the vendors don’t have realistic expectations and are not prepared to negotiate.”

The area of the market not performing is that which includes the big apartment developments, she says. “They are still struggling. That is where oversupply is affecting prices, sales are quite slow and the market is not bouncing back as well.”

The apartment oversupply problem

While MacKay says there is only a glut of apartments in areas like Docklands and Port Melbourne, and sales of 1960-70s style apartments in areas like Toorak are strong, her comments point to one of Melbourne’s perennial problems.

Australian Property Monitors senior economist Dr Andrew Wilson says the apartment oversupply is most concentrated in the CBD, and has occurred simply because there has been a record level of construction over the past few years that has not been met by the same level of demand.

He believes such situations are nothing new and, in the longer term, inflation and population growth tend to catch up and the market adjusts. However, the short-term prospects for investors looking at Melbourne apartments are not very good, he says.

“It is also worth noting Melbourne rentals offer the lowest returns in Australia. This is because Victoria builds a lot of units and houses. As a result, the rental market is slow: it has lower rents and higher vacancy rates than elsewhere.”

Further, Victoria’s love of residential construction is something investors should watch out for. According to the July Herron Todd White report, there is evidence the apartment oversupply is set to continue with approximately 25,500 more expected to be completed by the end of next year.

This situation throws up traps for the unwary. Wilson cautions investors that the incentive packages currently being offered by developers – who need to get rid of their apartment stock – do distort the market a bit.

Meanwhile, the Herron Todd White report warns, while off the plan properties may be tempting with 10% deposits and reduced stamp duty, a large portion of demand is coming from overseas. As most foreign investors can only purchase new off the plan properties, when it comes to selling years later, the market pool will have diminished considerably.

Spotlight on: Melbourne’s high end suburbs

Melbourne’s high end suburbs have long been popular aspirational purchase choices. They are known, and desired for, their beauty, Australian Property Buyers’ Karin MacKay says. “They are made attractive by their proximity to the city, their leafy outlooks and their access to beach and lifestyle options.”

Suburb to watch

Middle park

Middle Park is located just 5km south of Melbourne’s CBD. Like neighbouring suburb Albert Park, it features some of the best preserved terrace house and Victorian architecture in Melbourne.

Cayzer Real Estate managing director Geoff Cayzer says Middle Park is a desirable suburb to buy in because of its inner city location, village-like atmosphere, sporting facilities, and beautiful beaches. “Nestled between Albert Park Lake, parklands and the beach, it provides the perfect lifestyle for families at any stage of life.”

A large part of the City of Port Phillip, including Middle Park, is protected by heritage overlay, he continues. “This means the typical properties available in Middle Park are heritage homes and upmarket townhouses. The Middle park precinct was a later development with bigger allotments than the Albert Park and South Melbourne precincts.”

Cayzer says the suburb has excellent pre-school and primary school education options, a nearby state-of-the art hospital (Alfred), brilliant sporting facilities including the Melbourne Sports & Aquatic Centre, lovely outdoor strip shopping with small boutique stores, plenty of cafes to choose from, and is serviced by tram, light rail and bus.

If Middle Park prices remain consistent with previous years, the area will see steady capital appreciation through a supply and demand effect, he adds. “There is little variation in the quality across all streets, and too many fabulous streets to pick from.”