Property market update: Melbourne, May 2018

Essentially, Victoria’s state capital has taken over Sydney as the worst performing capital city this month.

According to CoreLogic’s Tim Lawless, this turn in the tide signals weakening housing conditions across Australian capital cities.

“The negative headline growth rate is a symptom of weakening housing conditions across the capital cities, led by Melbourne and Sydney where, previously, capital gains were national leading,” he said.

In contrast, regional markets are consistently rising, although not at the same pace as Sydney and Melbourne did years ago during their property markets’ boom.

Mr Lawless highlighted: “Regional markets are outperforming the capitals, affordable housing options are showing stronger conditions and the previously top performing regions are now amongst the weakest.”

Supply and demand

Despite the negative growth, Melbourne is still among the best performing markets in terms of property sales.

In fact, the median time in the market for houses in the capital city is only at 31 days—a stark difference to Brisbane’s 62 days and Perth’s 76 days.

Moreover, vendor discounting is at a low-end, especially for units where it sits at only 4.3 per cent.

Melbourne’s auction clearance rates are also deemed among the most successful, particularly during the last week of May.

Overall clearance rate rose to 61.6 per cent out of 1,079 homes, with 726 houses selling at a clearance rate of 58.3 per cent and 351 per cent of units selling at a clearance rate of 68.5 per cent.

The capital city is also the most notable choice for interstate and overseas buyers.

Buyer’s agents saw 15 to 30 per cent growth for both interstate and international buyer even as Melbourne’s property market is deemed to be on a decline.

According to Gavl’s Justin Nickerson: “With Sydney and Melbourne cooling off since last years’ frenzy, the market is looking more affordable which has led to interstate and overseas buyers coming back.”

“They’ve seen that there’s a lull which means now is a good time to buy before a surge happens again. Overseas buyers see cities like Sydney and Melbourne as always being desirable with jobs and infrastructure, so they’ll invest now to reap the benefits later,” he added.

Meanwhile, supply-wise, housing approvals in Melbourne held steady over the last six months while unit approvals were at historic highs.

These new supplies are mostly low-rise units, with less focus on high-rise units and townhouses.

“Difficulty with getting finance and the necessary pre-sales to proceed with large scale projects is likely to mean that, moving forward, houses and lower-density unit projects are likely to be the preferred options for developers,” CoreLogic’s Cameron Kusher said.

The continuous rise in dwelling supplies comes despite the fact that Melbourne has been listed as one of the 25 most expensive countries to build in globally.

Melbourne ranks 21st on the list indicated in the International Construction Costs 2018 report from Arcadis, while Sydney sits at the 19th spot and Brisbane at the 22nd spot.

These three Australian cities ranked with America’s San Francisco and New York, Europe’s London and Geneva, Canada’s Toronto, Middle East’s Riyadh and Asia’s Hong Kong, Tokyo and Macau.

Affordable suburbs near CBD

Even if Melbourne offers an expensive array of real estate assets, investors can still enter the premier market through suburbs in and around the CBD where properties are sold for $500,000 or less.

Some units located right in Melbourne’s CBD have a median value of $487,071.

Meanwhile, houses in Dallas, at 16.1 kilometres from the CBD, have a median value of $447,221, while houses in Coolaroo, at 17.2 kilometres from the CBD, have a median value of $475,400.

Overall, units remain more attractive to buyers and investors alike because of their affordability and their proximity to the capital city’s CBD.

According to Mr Kusher: “An increasing number of buyers are choosing to purchase more affordable units which offer the ability for owners to live in more desirable suburbs at a lower price point than purchasing a house.”

For those opting to purchase a house, you may have to move further away from the city centre to enjoy low purchase prices, he said.

Rental market

While investors might be in a tight spot given the negative growth in Melbourne, tenants can breathe a sigh of relief as the capital city remains one of the most affordable rental markets across Australia.

According to the recent Rental Affordability Index by the National Shelter, Community Sector Banking and SGS Economics & Planning, Melbourne requires only 25 per cent of the household income for rent.

House rents in the capital city dropeed by 0.7 per cent to $534 a week, while unit rents rose by 0.7 per cent to $410.

Other cities with affordable rents include Brisbane and Perth, which require 25 per cent and 21 per cent from the household income, respectively.

Meanwhile, Sydney is considered unaffordable as it requires 27 per cent from the household income, or around $726 a week for a three-bedroom house and $525 a week for units. This is preceded only by Hobart, which requires 29 per cent of the household income.

Due to its relative affordability, the Melbourne rental market recently saw its vacancy rate drop by 1.3 per cent, according to new SQM figures.

Growth drivers

Aside from consistent demand for property and a strong rental market, two other factors that will continue to sustain the Melbourne property markets are interstate migration and infrastructure growth.

Migration

Skilled migration into Melbourne and Sydney sits at over 100,000 per year, and as it continues to follow the same pattern in the near future, experts foresee an unprecedented demand for housing in the capital cities.

Aside from jobs, affordability is also among the main reasons why owner-occupiers and investors move interstate and consequently drive growth into the city’s suburbs.

Casey, with a median house price fo $565,000, saw 6,051 arrivals; Wyndham, with a median house price of $520,000, saw 5,225 arrivals; and Melton, with a median house price of $460,000, saw 3,844 arrivals.

The more affordable outer-ring suburbs will continue to be attractive as Melbourne’s median house price still sits at $828,000.

Propertyology’s Simon Pressley said: “Melbourne is Australia’s second most expensive city, but its population is growing strongly and most of those people want to own a property as part of putting down roots in their new city.”

“Affordability will continue to be the deciding factor for buyers in the years ahead, which augurs well for many of these outer-ring locations,” he highlighted

Infrastructure

Melbourne is expected to benefit from the $75 billion-investment in transport infrastructure, which will be rolling out across Australia over the next 10 years.

Of the said amount, $5 billion will be dedicated to the Melbourne Airport Rail Link while $9.3 billion will be dedicated to the Melbourne to Brisbane Inland Rail project

Aside from upgrading access to key facilities and improving traffic flow, these initiatives will create more than 16,000 direct and indirect jobs during construction and ultimately boost the local economy.

Peter Koulizos of the Property Investment Professionals of Australia strongly encouraged investors to buy within walking distance of this new infrastructure to enjoy good returns on their investments.

He said: “If investors can find out where the infrastructure is going to be built, then if you can buy within walking distance of that new train station—400 metres or five minutes—then you could do quite well,”

Strategy

Melbourne is nowhere near the property boom that it saw years ago so for investors who want to invest in its market, experts advice implementing a ‘long-term approach’.

Aside from the fundamentals present in the area, the rapidly increasing population figures will also work to keep the capital city’s property market alive, according to RiskWise Property Research’s Doron Peleg.

As the country’s fastest growing city, the population in Melbourne is expected to exceed five million by 2021.

After another 29 years, the city’s population could sit at 8 million—surpassing Sydney as the most populated Australian city by 2030.

“Due to this strong population growth, the Melbourne market has shown its resilience. As per CoreLogic, dwelling prices in Melbourne have increased by 3.7 per cent and in the past quarter they have declined by a very modest 0.7 per cent,” Mr Peleg said.

If investors hold their assets long enough to see this change, then they are likely to benefit from its positive effects on the local economy.

The property professional encouraged investors to pick freestanding houses in the western and northern suburbs where there are reasonable access to CBD. These areas are projected to experience sold capital growth in the medium- to long-term, according to him.

Moreover, townhouses and large apartments in small unit blocks, located near amenities and the CBD and are well-suited for families, are also expected to benefit from long-term growth.

For more specific data and information on the Melbourne property market, visit Smart Property Investment's Best Suburbs page.

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