Melbourne to outperform in 2016 but oversupply set to worsen
Melbourne is expected to lead the country in 2016 in terms of capital growth, albeit at a slower pace. But investors who bought units in inner Melbourne face a tough year ahead
Just like Sydney, Melbourne put on a stellar show in 2015, growing by 11.2%, behind Sydney’s 11.5%. However, just like Sydney, Melbourne is now facing slower growth in 2016.
While dwelling values managed to grow by 1% in the month of December, values fell by 1.9% over the quarter, joining Sydney in the biggest fall in values of all capital cities, according to the latest stats from CoreLogic RP Data.
This weak performance is in stark contrast to Melbourne’s showing during the first quarter of 2015 when values surged by 13.3%.
Andrew Wilson, senior economist at Domain, expects to see Melbourne dominate the market over the next 12 months, but by a narrow range compared to the other capital cities.
“If Melbourne will lead the pack, it’s because it may grow by 6%, Brisbane maybe by 5% and Adelaide
maybe 3–4%, those sorts of numbers,” he says.
Unlike Sydney, there’s still some affordability left in Melbourne, he says, with the median still sitting at around $700k, compared to Sydney’s $800k.
“It’s a balanced market; all sectors get buyers, from first home buyers to upgraders to investors. There’s a sense that the Melbourne market is a little bit more optimistic this year, and this will continue. Melbourne will be the best-performing, if not one of the better-performing, cities this year. But this will not be as strong as last year. I’m expecting to see half of 2015’s performance.”
Apartment glut set to worsen
Despite the more upbeat outlook overall, Robert Mellor, managing director at BIS Shrapnel, remains pessimistic about the apartment sector in the Melbourne CBD.
“We’re still very concerned about the apartment markets in the CBD, Docklands and Southbank
areas,” he says. “We think the sign of significant oversupply is already developing, and you can see it in the rising vacancy rates. There’s a lot of vacant dwellings that are not showing up fully in those vacancy rates.”
Mellor says BIS Shrapnel numbers show that Melbourne’s inner-city apartment sector is already heading into significant oversupply in 2016. “The oversupply will only get worse in 2017. The apartments in these areas are already in for a substantial downturn and significant price correction.
We’re quite pessimistic and our outlook is negative towards this sector. I think going forward developers will find it harder to get projects off the ground because they won’t get enough precommencement sales in Melbourne.”
On the other hand, the established housing market remains balanced at the moment, in Mellor’s view. However, he warns that growth in house prices, particularly in entry-level suburbs, will be limited by availability of land.
“Suburbs in the northern and western suburbs ... are being targeted by homebuyers. There’s a substantial pipeline of houses being built in these areas. The demand for land has been strong because people are moving into these areas and building, so it will probably limit the price growth going forward,” Mellor says.
He adds that in order to see any stabilisation in the apartment sector, there has to be a substantial drop in the level of construction. “Residential construction, particularly in the high-density sector and also across the board, has been running very high over the last six years or so. It needs to drop dramatically, otherwise the market will become even more oversupplied.”
Despite worries about oversupply, Mellor doesn’t think there will be a lot of foreclosures in this market.
“The thing with this cycle is that the interest rate is so low, so it’s cheaper to hold on to a property. However, people get caught and make assumptions that prices will grow, and they don’t; and that they will able to rent out the property, and they can’t rent it out. Eventually, they’ll have to sell.”
Wilson agrees that even now vendors of these properties are struggling.
“CBD apartments are struggling to find buyers, which is not a surprise. Melbourne had record construction in the CBD, and more will come online. The apartment sector is really the weak link ... While foreign buyers are still active, I doubt it’s strong enough to support prices,” he says.
SUBURB TO WATCH
St Kilda, Vic: Trendy suburb continues to surge
St Kilda, a popular inner-city suburb, doesn’t just embody the Melbourne version of a bohemian lifestyle, it owns it. It’s located in Melbourne’s most famous beach area and is steeped in rich history. Once a red-light district, it now enjoys the influence of a range of subcultures. It boasts excellent restaurants and cafes, along with an eclectic mix of shops.
Like in many other parts of Melbourne, the buying market has been robust during the past 12 months, with the median house price jumping by 18.7%. Since December 2012, median house values have jumped by a total of 30.2%, according to OnTheHouse.com.au. The company sees further growth ahead, with the median house price set to grow by 6% each year for the next eight years. “Based on the expected rate of growth over the next eight years, the median value of houses in suburb St Kilda will be in the order of $2,184,000,” it says.
However, units have fallen behind, as values dropped by -0.3% over 2015. During the next eight years, median unit values are forecast to grow by a slower 5%, taking the median to $740,500.
Can you afford to buy in this suburb? Find out how much you can borrow