Property market update: Melbourne, September 2019

According to PIPA chairman Peter Koulizos: “The number of investors who now see Sydney as the state capital with the best investment prospects has increased significantly since last year (14 per cent); however, it is still lagging behind Brisbane (44 per cent) and Melbourne (27 per cent).”

With a monthly growth of 2.1 per cent, Melbourne is currently showing the strongest growth out of all the major capital cities, SQM Research said.

The Victorian capital is followed by Sydney and Brisbane, with monthly growth recorded at 1.9 per cent and 1.2 per cent, respectively. Meanwhile, Perth and Darwin both saw declines during the month.

Melbourne’s current median house price is $959,600 for houses – inching closer to its $1.01 million high from April 2018.

“We can expect to record rapid rises in dwelling prices for our two largest cities at least in the December quarter and likely beyond,” SQM’s managing director Louis Christopher said.

Across Australia, the median house asking price sits at $942,400 while the median unit asking price sits at $568,300.

Truly, risks associated with the latest downturn in the property market have abated, according to the Council of Financial Regulators (CFR), which consists of the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and Treasury.

CFR’s quarterly statement on financial stability noted that, while the flow of housing credit remained “subdued”, property prices had improved in the major capitals, easing the threat to financial stability.

“The potential for risks to financial stability from falling housing prices in Sydney and Melbourne has abated somewhat, with prices rising in the past few months,” the regulators highlighted.

However, the improvement in prices and buyer sentiment is unlikely to trigger a price boom any time soon, mainly due to tighter lending conditions and subdued economic activity, according to AMP Capital chief economist Shane Oliver.

House price gains would be far more constrained that the expected 10 per cent to 15 per cent increase implied by current auction clearance rates.

Through 2020, price gains would be constrained at around 5 per cent, Mr Oliver said.

Erin Kitson, director of structured finance at global ratings agency S&P, said: “A lot of the positive announcements recently, particularly in rate cuts and the removal of the debt serviceability floor and uncertainty around property-related taxes, will probably help on the demand side and particularly on access to finance.”

“However, a more cautious household sector will still constrain the extent to which these factors help mount a recovery.

“We still have weak wage growth and a high level of household indebtedness, [so] I think that will act as a bit of a handbrake on property prices taking off again any time soon.”

Property values

After months of decline, housing values in Sydney and Melbourne – two of Australia’s largest cities – have bounced back rapidly, recording a 3.3 per cent and 3.2 per cent growth in August and September, respectively.

The strong rebound is attributed to a variety of factors, including low mortgage rates, improved access to credit, the healthy economic and demographic conditions across NSW and Victoria, and higher levels of investor participation, which provide a strong platform for housing demand.

However, while the recovery is certainly gathering momentum, policymakers and regulators remain relaxed about the rebound.

CoreLogic head of research Tim Lawless said: “Although housing values are now consistently tracking higher, at least at a macro-level, the national index remains 6.8 per cent below the October 2017 peak, indicating that buyers still have some time to take advantage of improved housing affordability before values return to record highs.”

In Melbourne, housing values remain 7.9 per cent below its November 2017 peak, while Sydney remains 11.9 per cent below its July 2017 peak.

Over the quarter, the sharpest decline in home values was recorded in Darwin (1.8 per cent), followed by Perth (1.4 per cent), Melbourne (0.8 per cent), Brisbane (0.7 per cent), Adelaide (0.6 per cent) and Sydney (0.5 per cent).

“Potentially improved housing values and activity will help boost consumer attitudes and fuel spending as well as ease the downturn in residential construction activity,” according to Mr Lawless..

“However, household debt levels reached new record highs relative to their incomes over the June quarter, suggesting the sector is vulnerable to a shock or change in household circumstances.”

Over the next three years, insurance giant QBE predicted a jump in house prices across Melbourne by as much as 5.1 per cent, following Brisbane with 20.3 per cent, Adelaide with 12.7 per cent and Sydney with 5.8 per cent.

Meanwhile, Darwin is predicted to grow by 7 per cent, Canberra by 6.4 per cent, Perth by 6 per cent and Hobart to see value increases of 4.1 per cent.

In terms of units, Darwin is expected to have the highest rate of growth at 9.2 per cent, followed by Canberra at 6.7 per cent, Perth at 5.3 per cent, Adelaide at 4.7 per cent and Hobart at 2.8 per cent growth.

Melbourne is predicted to increase by 3.8 per cent after -0.7 per cent growth in 2020, 0.9 per cent growth in 2021 and 3.6 per cent in 2022 for a total growth of 3.8 per cent.

According to QBE’s CEO Phil White: “Especially in our largest markets of Sydney and Melbourne, we expect property prices to stabilise as owner-occupiers are enticed back.”

Among the economic indicators that are expected to drive the recovery of the Melbourne property market, along with other Australian property markets, are:

1. The official cash rate is projected to remain low although would increase by 50 basis points by 2022 in a rise to 1.5 per cent.
2. Employment growth is predicted to fall to 1.7 per cent, with the unemployment rate falling to 4.8 per cent down from 5.1 per cent in 2019.
3. The consumer price index (CPI) will remain strong growing to 2.5 per cent up 80 basis points from 1.7 per cent in 2019.
4. Australia’s gross domestic product (GDP) will grow to 2.9 per cent up from 2.1 per cent in 2019.

Supply and demand

Data released by SQM Research has shown that September national listings fell from 325,963 in August to 312,754.

Property sales listings decreased across all states over the month, with Hobart experiencing the highest decrease at 6.4 per cent, followed by Melbourne and Perth, both with a 5.8 per cent decrease, and Sydney a 5.7 per cent decrease. The lowest decrease was Canberra of 1.1 per cent over the month.

Year-on-year, Sydney’s listings declined by 20.4 per cent, while Melbourne, Brisbane and Adelaide fell by 5.9 per cent, 4.6 per cent and 6.3 per cent, respectively. Perth and Darwin’s year-on-year listings also saw declines of 4.6 per cent and 3.6 per cent, respectively.

Canberra, on the other hand, saw the strongest growth in lists, with 8.4 per cent more properties on the market. Hobart also finished in positive territory, growing by 3.1 per cent for the year.

In terms of sales, there were 367,630 settled sales over the past 12 months across Australia, according to CoreLogic – 17 per cent lower year-on-year, and approximately 30 per cent below the peak level of annual sales recorded over the 12 months ending September 2015.

However, despite the decline, Mr Lawless said that, over the recent months, home sales have appeared to stabilise, with the six-month trend reporting a floor at around the same lows recorded during the last two downturns in 2008 and 2010-12.

Meanwhile, there were 1,022 Melbourne homes taken to auction during the same period, 77.8 per cent of which returned a successful result – up from the 74.5 per cent final auction clearance last week when volumes were lower (826). One year ago, 53.8 per cent of the 1,161 Melbourne homes taken to auction were cleared.

The median house price for Melbourne was at $1,020,000, while the median unit price sits at $645,000.

Demand for housing is expected to pick up further in the coming months, with the mortgage rates expected to fall further as analysts predict at least one additional cut to the cash rate before the close of 2019.

Mr White said that the growth across the property market would come in response to an “imbalance” in supply and demand.

Along with lower interest rates, government incentives and an easing of lending restrictions, a drop in construction completions is expected to drive prices higher over the next few years, according to QBE’s Australian Housing Outlook 2019-2022 report.

“Building approvals fell by 19 per cent in 2018-19, and completions are forecast to fall to 163,500 dwellings by 2020-21, down by 22 per cent from the average over the past five years. With population growth expected to remain strong, that’s well below underlying demand. This could mean some previously oversupplied markets will tip back into undersupply by 2021-22.”

Further, Mr White noted that a “discrepancy” between the current demand for housing and the timing of future supply of units may also result in “greater volatility and upward pressure on property prices”.

Due to the projected price increases, QBE forecasted a 2.6 per cent decline in housing affordability, or the proportion of disposable income needed to service a mortgage.

Strategy

Propertyology’s head of research Simon Pressley said that there are five main opportunities for property investors to capitalise on in the current market, namely low interest rates, high yields, vacancy rates, median house price guides and economic development.

According to Mr Pressley, the country is seeing the lowest interest rates “in any living Australian’s lifetime”, which makes property financing more accessible than ever.

“It’s the cheapest time that you will have ever had in your life to do something proactive for your future. Take advantage of it,” he said.

Further, the property expert encouraged investors to seek locations where there are industries that have a strong outlook, including natural resources, education, agriculture, tourism, and renewable energy.

For investors chasing capital growth, Domain noted that Melbourne’s less expensive suburbs saw the most growth between 2014 and 2019.

For example, in Toorak, where the median house price was $2.56 million in 2014, house prices grew by 10 per cent by 2019, whereas in Melton South, where the median house price in 2014 was $240,000, prices increased by 71 per cent.

Units in Melbourne experienced a similar trend to that of houses.

Still, despite the apparent trend, there were some clear outliers in the Victorian capital over the past five years.

For example, the coastal suburb of Hampton, which had a median price of $1.150 million in 2014, saw prices rise by 57 per cent over five years, whereas Kew, in Melbourne’s inner-east, had a median house price of $1.696 million in 2014 and saw prices grow by only 1 per cent.

In order to make the most out of the Melbourne property market today, PIPA advise investors to avoid timing the market as it has the potential to cost them hundreds of thousands of dollars over the long term.

PIPA’s latest research, which looked at every capital city market over the past 15 years to determine whether time in the market or timing the market produced the best capital growth, found that an investor trying to time the market could potentially lose nearly $140,000 over a 15-year period.

It found the top three performing capital cities over the past 15 years were Melbourne, Hobart and Darwin, with median house price growth of between 147 per cent and 106 per cent.

By comparison, the best capital city between 2003 and 2008 was Darwin at 91 per cent growth. Meanwhile, from 2008 to 2013, it was Sydney at 41 per cent; and from 2013 to 2018, it was Sydney and Melbourne at 38 per cent.

“What the data also shows us is that no market is the strongest for a sustained period of time… Trying to time the market is not only extremely difficult for most investors, the transactional costs of buying and selling multiple times, including stamp duty and capital gains tax, eat up a significant chunk of your potential profit,” Mr Koulizos said.

According to him, most investors have neither the skills nor knowledge to expertly select the best markets to invest in over the short term.

“Most people are only thinking of the potential price uplifts when they try to time a market and naively don’t consider the inherent risks involved in such a market gamble,” he said.

To further reduce the risks, investors are advised to do their research on the market cycle, look at growth drivers on the suburb level, buy a well-located property that is appealing to several demographics, negotiate well, implement a long-term buy-and-hold strategy and remain vigilant with the possible changes to the lending landscape.

Growth drivers

Now that the capital city markets are starting to experience modest price growth following the market correction, Melbourne stands out as a solid choice for investors as it is supported by strong levels of government infrastructure spending, robust population growth and a stable local economy, according to Patrick Leo’s James Nihill.

The house and unit prices in the Victorian capital are expected to increase by 1 per cent between June and December 2019, ending the year at approximately $800,000 and $470,000, respectively.

Melbourne is also set for further growth in the short term – an attractive benefit for property investors.

In 2020, the property values in the capital city are forecast to rise by approximately 4 per cent, based on CoreLogic’s projections, primarily due to strong employment and population growth, as well as low interest rates, a slowdown of new housing construction, a positive chance in buyer sentiment and high auction clearance rates.

Melbourne’s population, in particular, along with unemployment sitting at below 5 per cent, is expected to drive growth into the property market over the coming years.

The Victorian capital remains one of the world’s fastest-growing cities, with 100,000 people moving to Melbourne each year and some 35 per cent of all overseas migrants gravitating towards the capital city. Over the next four years, its population is set to further increase by 10 per cent.

In fact, Melbourne is predicted to surpass Sydney as Australia’s largest city by 2031, with a population of 7.7 million by 2050.

To deal with the unprecedented rates of population growth, the state government has planned to initiate Plan Melbourne, which will include key projects such as the $11 billion Melbourne Metro, the $1.75 billion Regional Rail Revival program and the $972 million Melbourne Park sporting and events redevelopment.

Moreover, 12 new suburbs will be rezoned for 50,000 new homes on the outer fringe.

Further supporting growth in Melbourne is the positive local economy, which has been confirmed by the CommSec’s latest quarterly State of the States Report revealing that Victoria has the best-performing economy in Australia.

“Investors can breathe a collective sigh of relief that the housing market correction is over. Prices are now starting to show growth, buyer confidence is growing, and the only way from here is up,” according to Mr Nihill.

“It is undeniable that Melbourne presents unrivalled investment opportunities backed by the essential property fundamentals – demand, population growth, employment and infrastructure.”