Short-term volatility, long-term gains

Despite signs of a slowing market due to affordability constraints and oversupply fears, Melbourne’s prospects remain healthy over the long term

Talk about a study in contradictions!  Trying to analyse the Melbourne market can be a difficult task.

This is because of its very obvious multimarket composition, and the very different situations in each market.  

Positive Real Estate coach Elaine Chase – who says that overall the Melbourne market is sitting at five to seven in its cycle and is in a growth phase – provides a breakdown.  

“Landlocked areas in the inner and eastern suburbs have increased in value … Yet Melbourne’s inner apartment market is still in major oversupply, with more apartments approved for construction,” Chase says.

She adds that land estates in the outer suburbs are recovering from oversupply. “But there is still so much land in those areas that developers may start oversupplying the market again, if the demand returns.”  

The latest Herron Todd White report also highlights the diversity within Melbourne’s market.  

It states that, although the inner east has been the dominant market of late, the inner north is attracting lots of interest from developers and investors.  This is because the area is becoming a hotspot for students and young renters, thanks to the infrastructure surrounding the universities.

The report then notes that high-density areas, like Melbourne’s CBD, have the potential for oversupply, while in the outer suburbs housing costs are increasing.  

Melbourne’s strong population growth is causing massive development of housing and accompanying infrastructure on the rural urban fringe, the report continues. For example, in the northwest of the city where land is relatively cheap, multiple developments are going up.  

First home buyers are heading to these outer areas in droves, while investors and developers are competing for inner-city properties. The report says this is pushing housing prices up.  

Hard data

However, according to the latest CoreLogic RP Data Home Value Index results, Melbourne’s dwelling values seem to be on the decline.  

Over the month of November, dwelling values fell by 2.6%, while over the quarter ending 30 November they fell by 1.6%. Conversely, the year-on-year result shows values rose by 8.3%.  

CoreLogic RP Data research analyst Cameron Kusher says the city has moved past its cyclical peak, which was 11.9% in January 2014.  

It is worth noting that the CoreLogic RP Data results show that Melbourne continues to have the lowest rental yields of all the capital cities, for both houses (3.3%) and units (4.2%).

Long-term view

Despite these results, Open Wealth Creation CEO Cam McLellan is a staunch believer in the Melbourne market.  

While he never predicts short term, he is willing to bet the city’s prices will double in the next 10 years.  

“Melbourne has an excellent long-term population growth forecast, which makes for long-term growth in the property market.”  

He says that, currently, consumer confidence is up, while new restrictions on inner-suburb development are resulting in increasing prices and small-scale developers moving to the outer suburbs.  

Oversupply of various types of stock is an issue in some areas, McLellan continues.  

“For example, the west has an oversupply of poorly delivered developments and an oversupply of investor stock,” he says.  

Such situations impact on the rental markets in affected areas. This means there is an oversupply of rental property in Melbourne’s west, while at the same time there is a strong need for rental properties in the east and north.  

McLellan recommends that investors buy medium-density houses and land located in infill areas.  

“The middle to outer ring is where they can achieve a good yield which increases their DSR, allowing them to hold a larger asset base for less out of the back pocket.”  

Bedroom indicators

Meanwhile, the Real Estate Institute of Victoria has released data showing that demand from families wanting more space has led to strong price growth in four-bedroom homes over the past year.  

The median price of four-bedroom homes grew in inner, middle and outer Melbourne by 3.9%, 4.2% and 5.6% respectively.  

However, the biggest median price change in the outer suburbs was for smaller, two-bedroom homes. These were up 7% (to $390,000).  

This suggests that Melbourne’s rising property prices have increased demand for these more affordable smaller houses which offer a good way to enter the market.


Clyde North: Solid outperformer

Rapid population growth and accompanying development are the driving forces behind Clyde North.

Formerly a farming area, it is now a rapidly expanding urban fringe suburb.  Although 46km from the Melbourne CBD, it is in the City of Casey, which is Australia’s eighth fastest-growing municipality.

The Casey-Cardinia growth corridor is expected to be home to between 68,000 and 85,000 more households – and between 100,000 and 140,000 jobs – by 2031.  

Five Squared Property Group co-founder Ashley Lewis says local infrastructure, an urban outdoor lifestyle, and an affordable price tag make the area appealing to Melbourne families.  

“It’s close to Berwick train station, several large shopping centres, and many highly regarded schools. It offers a perfect blend of suburban and cosmopolitan living.”  

Proximity to several highways, and the suburb’s gateway position in relation to Phillip Island and the Mornington Peninsula, mean it is commutable for both city and rural workers.  

Lewis says most buyers want to step onto the property ladder at a certain price point. With a current median house price of $434,900, the suburb offers that opportunity.  

As prices have increased in Melbourne’s more central suburbs, Clyde North has started to benefit. Lewis says there has been significant price growth over the past year, while rental yields are a healthy 5%. He is confident that the suburb has plenty of growth ahead of it.  

Selandra Boulevard and Mackillop Way, which are conveniently located and within walking distance from the community hub, are good streets to buy on.