12th Sep 2017

Melbourne Residential Market Update

Spring has arrived and it would appear that there are no signs of any slowdown in the performance of the general Melbourne residential property market. That being said, performance continues to vary depending on geographical locations and property types.

2012 saw the last real lull in general market activity and value rises for Melbourne, with a very strong growth phase coming since, which continues today. Value levels across the board are at historic highs and continue to push higher with no signs of any slowdown in the near term.

The fundamentals that continue to drive the Melbourne property market are summarised in the SWOT analysis below:

Strengths:

Population growth

  • Consistent growth of 2-3% welcoming 140,000 to Melbourne in 2016. This growth increases demand on all types of housing.

Economic stability

  • Unemployment rate reduced to 5.9% in Victoria 2015/16 with prediction for 5.75% in 2016/17 final results.
  • Victorian Real Gross State Product growth recorded at 3.3% in 2015/16 with prediction of approximately 3% growth for 2016/17 final results.
  • Consumer Sentiment in Victoria rose by 4.2% to 101.4 in August and is currently the highest of the major states. Nationally, consumer sentiment declined by 1.2% in August to 95.5.

Desirable location to live

  • Voted world’s most livable city for the 7th year running by “The Economist”, which ranks cities on topics such as: Stability, Culture and Environment.

Weaknesses:

Unaffordability

  • Continued growth in property values with the median house price rising in excess of 11% in the year to June 30, to $822,000.
  • Growth in property values outstrip wage growth in Victoria of around 2-2.3% for 2015-2017 year on year.

Congestion

  • Increased population in turn creates greater congestion and demand on roads and public transport. Particular strain on freeway access in the western suburbs, which is home to one of the fasting growing municipalities in Australia being Wyndham City Council.

Planning controls – Apartments

  • Relaxed planning regulations in particular apartment design, has resulted in instances of what we consider poor unit configuration in Melbourne over recent years, with bedrooms lacking natural light or external windows, small unit areas reducing overall utility and ultimately creating product which is less desirable on a second-hand basis to local buyers.

Opportunities:

Development Dollar

  • Underlying land value growth has resulted in many properties highest and best use becoming development for multiple units, in particular through infrastructure nodes of the existing urban framework. This change in highest and best use, has potential to add value and growth over and above the single residential use market.

Low interest rates

  • After the Reserve Bank meeting in August, the cash rate was left unchanged at 1.5%, as it has been since August 2016. Low interest rates help with serviceability although this is somewhat countered by lenders increased “stress testing” of applications and increased scrutiny around living cost calculations.

Competition for business

  • The mortgage broker driven applications have forced lenders to compete against one another for individuals’ business and the competition has helped with more desirable and flexible products being offered.

Threats:

Policy

  • Governing policies have the ability to dramatically impact all property sectors. Recent changes to first home owners in the sub $750,000 range are now eligible for at least partial stamp duty reductions, and full abolishment in the sub $600,000 bracket. The changes were introduced to help with affordability for first home buyers and even though still only early in implementation, the increased demand and competition with properties in the sub $600,000 category has contributed to value growth counter to the intentions of the policy. 

Economic decline

  • Whilst current economic indicators are strong, Melbourne’s performance is heavily tied to population growth. Any changes to the major underlying economic drivers, has the ability to dramatically impact market values and activity.

International warfare – external threats

  • Given the presence of international investors in the Victorian property market, any changes to international investment flow, will ultimately impact on the Victorian property market performance. With rising tensions involving North Korea, USA and potential involvement from Russia and China, economic impact internationally is a real possibility.

The residential market for Victoria has been very strong over 2016/2017 with some asset classes growing at up to 25% year on year, although this is not the case for all asset classes and all locations.  

Apartments have typically seen low to no growth in capital values owing to smaller land components and an increased supply in particular through the CBD, Southbank and Docklands.

Townhouses and villas have typically seen medium to good levels of growth in capital values although they too are influenced by the increasing supply of new stock.

Single residential houses have been the strongest performing asset in the residential market although dependent on location and individual property attributes.

The inner 10 km’s of Melbourne is usually the first area to see value increases and the first to see decline in values. This trend usually flows through to the outer suburbs in a more delayed “wave”. Currently the value spikes are hitting the “mortgage belt” and establishing outer areas with land prices rising higher than off the plan purchase prices over the settlement period and thus creating instant equity for those purchasers.

It has been common to see 15-25% growth in values for land in Melbourne’s outer suburbs over the last 12 months.

We don’t have a crystal ball although all factors considered, the only argument we have for changes to current performance for now is the “counter cyclical” argument; what goes up will eventually come down.

Nick Funnell

State Residential Director - VIC
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