An oversupply could be on the cards for the Victorian capital’s property market

“A riddle, wrapped in a mystery, inside an enigma.” Those were the words Winston Churchill once used to describe Russia, but they would work just as well for describing recent property markets in Melbourne.

It doesn’t take an international statesman to see it either. Any investor looking at the latest range of statistics for the Victorian capital’s property market could be forgiven for taking a step back, breathing in deeply, and then wondering what the hell was going on.

After a tumultuous 2011, characterised by value falls, new SQM Research shows that Australia’s second largest city saw a January year-on-year increase of 33.2% in listings.

CBRE global research and consulting manager Sam Reilly explains that this is in dire contrast to a few months ago, when a shortage of quality houses up for sale was an issue for the city. According to Reilly, a lack of confidence in the market saw buyers holding back. There was a perception by vendors that the market wasn’t particularly strong, which saw few properties in the middle and high price bands being released into the market.

The recent increase in stock on the market is an ominous sign for a city already struggling with a crisis of confidence. NAB’s latest Residential Property Index, a measure of sentiment in property markets across the country, shows a mood in Victoria that is now gloomier than ever. Despite the NAB index returning to positive territory for the country as a whole, confidence in Victoria scored the lowest among Australian states at -22, indicating a generally pessimistic outlook.

Sentiment aside, buyer activity hasn’t changed significantly in the last few months, suggesting the sudden spike in stock on the market isn’t the result of buyers becoming reluctant or even disappearing. Robert Larocca, spokesman for the Real Estate Institute of Victoria (REIV), says that his organisation has detected no major change in buying activity from last year. “We’re still seeing a market characterised by low activity. Prices are slightly lower than a year ago, and the cost of borrowing is down, but actual buying activity hasn’t seen much of a change.”

SQM Research CEO Louis Christopher cautions investors that much of these discrepancies can be explained by seasonality.

However, the fact that this year’s stock on market figures differ so much from last year’s leads him to admit that something else might be going on in the market.

Vacancies rise

A hint that something is underfoot in Melbourne could be the city’s vacancy rates rising by 1% to reach 4.4%, well above the 3% benchmark considered to indicate a balanced market.

Moving into mid-2012, however, ANZ expects rental vacancies are likely to track lower, given the recent increase in net arrivals to Victoria driving population growth.

“Ongoing pressure from yield-seeking investors to increase rents and moderate house price falls are making housing purchase affordability easier and we expect housing finance to the first homebuyer segment to gain momentum,” it says in a report. “This will be aided by the Victorian government initiative to phase in stamp duty concessions for first homebuyers, starting at 20% from July 2011 and reaching 50% by September 2014.


Perhaps the best way to understand what is going on in Melbourne is to look at the building and construction industry. In the 18 months leading up to October 2011, Savills Australia claims that demand for inner-city Melbourne land from Asian developers reached “unprecedented” levels.

Savills agents negotiated the sale of more than $100m worth of development sites over that time, according to Nick Peden, the company’s divisional director of CBD sales and investments.

The amount of development in the city speaks volumes about the future of its property market says BIS Shrapnel senior project manager Angie Zigomanis.

“[Melbourne] had a solid response in terms of construction,” he says. “From a supply and demand perspective, the markets are probably now in balance.”

While all this was happening, the REIV put out its report which said over the final quarter of 2011, Melbourne’s median house price rose by just under 2%. Such gravity-defying market performance in light of what the other statistics are saying might get a number of investors’ heads into a giant Gordian Knot trying to understand it all, but they should consider this: the secret to unravelling the mystery might not be at hand.

The real Gordian Knot was undone with a simple cut, but many pundits might be left thinking that the Melbourne market could have done with a cut itself.

Residex CEO John Edwards has labelled the RBA’s February decision to not cut rates as a “missed opportunity to boost sagging property markets”, adding that property markets around the country are at a tipping point.

“The property market is on a knife edge. A rate cut would have had an important impact on affordability and boosting confidence.”