Property market update: Melbourne, May 2020

Property prices and construction activity are expected to fall throughout 2020 and into 2021, before a “modest” recovery in the back end of 2021, largely due to the closure of borders, which limits the new overseas arrivals and thereby curtails the largest source of population growth.

“Net overseas migration currently accounts for around 240,000 people or nearly two-thirds of Australia’s population growth… The federal government estimates Australia’s net overseas migration will fall by more than 85 per cent in 2020-21 (from 2018-19 levels) due to international travel bans instituted in response to the coronavirus,” ANZ Research added.

“This drop in population growth will remove a major driver of economic growth and housing demand, at least for a period.”

Sydney and Melbourne markets, in particular, are expected to be most impacted by the decline in population growth.

In the year to June 2019, Sydney’s population grew by 87,000, with 85 per cent of those newcomers being overseas migration.

In Melbourne during the same period, the numbers are also significant, with 77,000 overseas migrants accounting for 68 per cent of the total population growth of 113,000.

However, RPM Real Estate Group pointed out that, while there has been a period of bleakness following the declaration of the pandemic, signs of buyer activity in April and May are promising in “pointing to a potentially earlier than expected recovery”.

According to their latest research, real estate platforms reporting an increase in international buyer enquiries, and sales offices are experiencing higher visitation when comparing the first two weekends of April to the first two weekends in May.

While the result for the Melbourne market was a relatively modest 638 lots, it was still above the previous trough being 499 lot sales during the same time last year.

RPM CEO Kevin Brown said: “The situation we find ourselves in is totally unprecedented, and we can’t accurately crystal ball what’s to come; there are just too many unknowns at play.”

“Australia’s response to COVID-19 has been swift and effective compared to many other countries, so we believe that will bode well for the property market in the medium to [longer-term]. However, we do expect the June and September quarters to show falls on the back of cancellations and price contractions.”

Ultimately, investors are being reminded that the pain in the property market will be short-lived, with property prices expected to bounce back post-pandemic.

Research conducted by the Property Investment Professionals of Australia found that, five years after each of the recessions or economic downturns over that time period, capital city house prices saw a significant increase.

Five years after the recession of 1973 to 1975, Sydney median house prices had increased 100.7 per cent, followed by Perth and then Brisbane, as the economy grew after the downturn.

A few years later, following the economic downturn of 1982 and 1983, Melbourne led the property pack with median house price growth of 67.7 per cent, while other capital cities were not far behind, boasting growth in the 50 per cent to 64 per cent range.

PIPA chairman Peter Koulizos said that while some areas outperform others due to a variety of economic reasons, including employment, capital cities continue to grow.

“The moral of the story is don’t panic. Property has shown its resilience through economic shocks before, and we have no reason to expect it won’t do so again,” he said.

Property values

Australia’s property market fell by 0.4 per cent over the month of May, five of the eight capital cities experiencing a price drop – representing the first drop for most since June 2019.

The latest CoreLogic figures showed Darwin as Australia’s most impacted city, falling by 1.4 per cent, while Australia’s second-largest market, Melbourne, fell by 0.9 per cent. Sydney fell for the first time since the health pandemic began, falling by 0.4 per cent.

However, contrary to doom-and-gloom headlines following the COVID-19 pandemic and its subsequent effects on the economy, market conditions are returning to normal and seeing an increase in volume.

Ultimately, data showed better-than-expected results as the national economy was battered by COVID-19’s impact, according to CoreLogic’s head of research Tim Lawless.

“Considering the weak economic conditions associated with the pandemic, a fall of less than half a percent in housing values over the month shows the market has remained resilient to a material correction,” he highlighted.

“With restrictive policies being progressively lifted or relaxed, the downwards trajectory of housing values could be milder than first expected.”

According to CoreLogic, the top of the market caused most of the overall falls in property values, with the most rapid decline in housing values recorded across the top quartile of the Melbourne and Sydney markets.

Melbourne’s most expensive quartile of the market recorded a 1.3 per cent drop in values over the month, compared with a 0.6 per cent fall across the broad “middle” of the market and a 0.3 per cent fall across the most affordable quartile.

Similarly, in Sydney, the top quartile was down 0.6 per cent, while the lower quartile posted a 0.1 per cent increase in values.

Mr Lawless noted that the quartiles experiencing price drops now are the very same sectors of the market that were recording the most significant rise in values during the most recent growth phase, before the COVID-19 pandemic put a halt to market activity.

Melbourne’s top quartile values are still 13.9 per cent higher than they were a year ago, while Sydney’s top quartile is up 16.5 per cent over the year.

Despite the falls, the overall outlook is more positive than first expected, largely due to a shift in consumer sentiment.

“The reduction in values through May comes as transaction activity in the market shows more positive signs. The CoreLogic estimate of sales activity bounced back by 18.5 per cent in May after a drop of 33 per cent in April,” Mr Lawless highlighted.

By mid-May, onsite auctions were reinstated in most states and territories and property inspections were gradually opening up. 

Supply and demand

CoreLogic found that the week concluding 31 May saw 867 capital city homes scheduled for auction, with preliminary results returning a 65.9 per cent clearance rate – representing a steady incline from the previous week as restrictions ease across many states and territories.

The number of auctions held this week was the highest since the week ending 19 April.

In Melbourne, 259 homes were scheduled to go under the hammer this week. So far, 192 auctions have been reported, returning a preliminary success rate of 71.9 per cent. The previous week saw a final clearance rate of 68.0 per cent across 168 auctions.

In Sydney, 469 homes were scheduled for auction this week, returning a preliminary clearance rate of 68.1 per cent across 320 results. In comparison, last week saw 309 homes were taken to auction with a success rate of 65.0 per cent.

“As mentioned over the previous few weeks, with restrictions easing across many states and territories, we will likely see the number of homes taken to auction continue to increase,” CoreLogic noted.

Looking at the bigger picture, CoreLogic’s findings suggest that residential property sales declined about 40 per cent over the month, with the magnitude of decline fairly uniform across different parts of the country and generally driven by a decline in consumer confidence.

Further, CoreLogic’s data on listings shows the amount of stock available for sale is approximately 25 per cent lower than it was around the same time last year.

According to CoreLogic’s Eliza Owen: “The low level of listings signals a tough period for those developing and selling residential real estate, but it also signals a lack of distressed sales flooding the market. In other words, not many people are selling because not many people have to sell.”

“It is likely that reprieve on mortgage repayments has protected people from distressed sales, at a time of rising unemployment, falling wages and falling numbers of hours worked.”

Prime Minister Scott Morrison has earlier acknowledged the threat that a COVID-induced decline in migration could pose to residential property market activity.

Mr Morrison made specific reference to the impact of subdued levels of migration on the residential construction sector, adding that the issue has been a “key topic of discussion” between all levels of government.

The government is expecting net overseas migration to fall to approximately 34,000 in 2020-21, well below levels needed to maintain GDP growth – estimated at around 160,000 to 210,000.

“There’s obviously a big gap there. It’s a short-term gap, but it’s going to be one of the real impacts of this crisis because our borders aren’t going to open up any time soon,” the Prime Minister said.

As borders remain closed to overseas migration and unemployment rises, new housing demand is likely to see a continued decline, with Sydney and Melbourne arguably showing a higher risk profile relative to other markets due to their large exposure to overseas migration as a source of housing demand, along with greater exposure to the downturn in foreign students, stretched housing affordability and already low rental yields that are likely to reduce further on the back of rising vacancy rates and lower rents.

Apart from subdued population growth, rising unemployment and concerns about job security, expectations of price falls, larger households due to people wanting to save money, some forced sales, and restrictions on transacting real estate would be among the main drivers of prolonged weakness in the housing market, according to Domain economist Trent Wiltshire.

“Property sales are likely to decline by even more than prices,” he highlighted. 

Rental market

Rent prices are also likely to be more affected by the COVID-19 pandemic than property prices, according to CoreLogic’s Eliza Owen.

CoreLogic recorded a -0.4 (of a percentage point) decline in rent prices nationally across Australia over the month, led by Hobart, where rents declined by -1.1 per cent.

“Rental markets have been particularly dampened by falls in employment. This is because jobs have fallen by about a third across accommodation and food services, and arts and recreation services.

“These are industries where workers are generally young, on less income and are more likely to be renters,” Ms Owen said.

Metropolitan Melbourne, in particular, have seen rental prices fall following a month of some improvement in vacancy rates across the state, according to the latest monthly rental data from the Real Estate Institute of Victoria (REIV).

Median rents for houses are now more affordable at $470 per week, down from February’s $480 per week, but still higher than the same time last year.

Metropolitan units are also cheaper to rent, from $450 per week in February down to $430 per week.

While there has been some improvement in vacancy rates, with metropolitan Melbourne recording 2.3 per cent for two consecutive months, Victoria needs vacancy rates of 3 per cent to 4 per cent to maintain a healthy market, according to REIV.

Commenting further on the figures, REIV president Leah Calnan said Victoria’s temporary measures in place due to COVID-19 make it “challenging to gauge the real situation but the underlying strength of the Victorian property market is undeniable”.

“Victoria’s rental accommodation supply is growing, more rental homes are now available but there remains a need for more properties to be listed to cater for growing demand. The state government needs to work more closely with property owners, to help build a reliable supply of rental accommodation in Victoria,” she explained.

Herron Todd White’s May 2020 Month in Review also highlighted how the COVID-19 pandemic “left the property market in the inner Melbourne suburbs and CBD in limbo” as it caused a spike in vacancy rates and an oversupply of rental stock in the heart of Melbourne.

Ultimately, experts believe that Melbourne and Sydney rental markets may have a harder time recovering compared to other capital city markets as the sudden halt in overseas migration leaves them more vulnerable to an influx in supply compared to markets such as Perth where these levels have been much lower.

2020 outlook

Despite uncertainties and negative predictions for capital city markets, there could very well be a silver lining in the Victoria capital, especially for first home buyers.

According to Herron Todd White, it’s an ideal time to be jumping onto the property ladder for beginner investors, especially with the city’s agents reporting that more investors are deciding against new investments for fear of receiving no rental income due to COVID-19’s impact on employment.

Buyers with job security who are looking into the property market prior to the pandemic are, therefore, urged to “take advantage of the current market conditions as sellers are more open to negotiation”.

Highlighting record-low interest rates and the state government’s first home buyer’s grant, which currently stands at $10,000 for metropolitan homes and $20,000 for newly built regional homes, Herron Todd White dubbed the Melbourne market as “favourable” for those looking to buy their first home.

Buying opportunities are further supported by incoming infrastructure, including the Neometro’s development, which is set to benefit the property market of Brunswick, one of Melbourne’s growing inner-city suburbs.

MaxCap Group, a leading commercial real estate debt specialist, proudly announced the closing of a construction finance facility for Neometro’s development on 5 May 2020, supporting the development of design-focused, higher-end residential projects by one of the most established and trusted players in the Melbourne apartment market.

To date, the Neometro has developed in excess of 300 apartments, in the highly sought-after suburbs of Fitzroy, Brunswick, South Yarra and St Kilda.

Less than five kilometres north of Melbourne’s central business district, 17 Union Street is a sustainable seven-star energy-rated, mixed-use development comprising of 39 residential apartments, two ground floor retail units and a rooftop garden.

The site is close to retail, hospitality and educational institutions and is located directly opposite Jewell Train Station.

At the end of the day, investors need not panic about the current state of the Australian property market, La Trobe Financial’s chief investment officer Chris Andrews said.

“The property market is in hibernation, and conventional price signals – like auction clearance rates and the things we often look at being really useful leading indicators – for the time being, they are sidelined,” he said.

While commentary and analysis around the property market will continue, investors are advised to “always remember when you are reading that – it’s based on a small number of unusual transactions”.

Post-hibernation, Mr Andrews said housing supply “is likely to be sticky and unresponsive.”

“The effect on the supply side is just beginning to show in the data, so expect a decline in approvals to accelerate over the next few months as banks restrict credit to developers and prospective purchasers put plans on hold. This will help put an effective floor under house prices,” he said.

Even with a conservative economic outlook, house prices are predicted to retrace by no more than 8 to 12 per cent.

Still, when compared to the increases seen in Sydney and Melbourne just over the last 12 months, where Sydney was up 14.3 per cent and Melbourne was up 12.4 per cent, property holders generally have substantial buffers in place, Mr Andrews highlighted.

“When you take into account the substantial lead time in getting the project to approval, and then of course actually completing the construction post-approval, you can get a sense of the stickiness of the supply side as we come out of the hibernation phase,” he explained further.

“That’s the sort of dynamic that’s driven the resilience of housing markets in prior correction events. If you want to baseline your thinking about property in a moment of volatility, there it is.” 

Ultimately, there’s “certainly no need for particular concern or panic about the property markets at present,” Mr Andrews concluded.