Melbourne investors need to think long-term

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No one could deny that the Melbourne market had a bumper year in 2013. With a major increase in median prices and big growth, the trajectory of Victoria’s capital city surprised many.
According to the latest data from REIV, Melbourne's median house price rose by more than 7% in the final quarter of 2013, to reach a new high of $643,000.
Recent figures from APM and RP Data confirm this level of growth: APM showed 8% growth over 2013, while RP Data recorded a 3.7% increase in January alone.
Commentators have now started to warn that this level of growth is not sustainable and is unlikely to continue for much longer.
Both APM’s Andrew Wilson and RP Data’s Tim Lawless predicted that Melbourne’s growth would moderate and slow considerably over 2014.
Lawless expected low rental yields, increasing affordability issues and high levels of housing supply to have an impact on the market.
Damian Sutherland, from advisory firm William Buck Victoria, was even more pessimistic. He warned Melbourne property was not a good investment bet in the immediate future.
He said the city’s imbalance between high house prices and low rental returns was bad news for investors looking for short to medium term returns.
“To get a good yield on property investors are relying on capital growth. But Melbourne growth projections for the next five years are somewhere in the vicinity of 10-15%.”
Sutherland estimated that this would equate to a return of about 6-7% over a five year period.
Given annual rent returns of just 3-4% plus property outgoings, and the time and money required to deal with tenants and maintenance, this was not a particularly good rate of return.
“Investors won’t lose money, but they also won’t get the sort of returns that they should be getting or would be hoping for.”
However, a clutch of recently released information indicates the city’s long-term prospects might be somewhat rosier for investors.
Recent ABS data predicted strong population growth for Melbourne. The ABS said that Victoria’s overall population will rise by 50%, from 5.6 million to 8.4 million, by 2040. Melbourne’s population is expected to reach 7.9 million people by 2053.
A new Urban Development Programme report found that five out of the six growth areas identified in Melbourne had enough residential land supply to last for approximately 25 years.
The Victorian government has just announced it will fast-track the development of roads and other key infrastructure in Melbourne’s growth areas. The aim being to ensure people moving into new suburbs had immediate access to roads, transport, employment opportunities and community facilities.

This combination of population increases, residential land supply, significant infrastructure work and improved transport links should pay growth dividends for canny investors willing to sit back and wait.
Sutherland said investors should be prepared to invest in property for the longer term - or consider other investment options.

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  • VivKay says on 21/02/2014 09:58:32 AM

    Melbourne has enough residential land for 25 more years? It's simplistic and naive to think that the area of land 'vacant" justifies all the housing growth. The costs of growth are being ignored. It means adding more concrete and heat to our city, and projecting the human needs of roads, infrastructure, public services such as health care and education - all that are failing to keep abreast! The land that is likely to be consumed could be valuable green wedges, biodiversity rich, food bowls or urban fringe areas that are risky for bushfires. There needs to be more professional planning standards in our cities, and the population growth is not inevitable, but dependant on how we vote in the future.

  • John says on 21/02/2014 11:41:27 AM

    Just cramming more and more people into our metropolis is madness. Our Governments should be trying to build more Cities or invest in existing ones like Ballarat and Bendigo and beyond. Country Victoria is dying and Melbourne is going to turn into a hell hole.

  • Bob says on 21/03/2015 11:54:20 PM

    The problem is that with little job growth and declining manufacturing, Melbourne has a distinct medium term economic down curve - politicians need quick answers to get reelected, and so presto: migration and new outer suburbs keep the ball just rolling for now. It creates work in finance sector and construction which feed into imports and small scale local production.
    But it's short term - creates greater congestion, overstretching existing infrastructure, and long term social problems by jamming all recent arrivals and low income renters out in peripheral new suburbs together with diminished expectations.

    It's what has been going on in hyper drive since mid 2000's.

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