What’s our mid-year forecast for the Melbourne property market?
We look at the current Melbourne market and give our insights into this fastest growing city’s latest property trends.
Melbourne’s population is booming. Recent figures from the Australian Bureau of Statistics found that Melbourne had the largest and fastest growth of all the capital cities with its population climbing 107,800 to 4.64 million – a jump of 2.4 per cent.
With this kind of growth, the consensus is that Melbourne will at some stage overtake Sydney as Australia’s most populous city.
This growth and the increasing need for more housing indicates strong capital growth, particularly for houses against the backdrop of a market already undersupplied. CoreLogic figures indicate that Melbourne home values are showing a substantial rise, increasing by 15.9% over the twelve months to March 2017. Being Australia’s second largest city with a diverse economic base it is perceived as relatively ‘safe’ for long-term property investment.
Demand Exceeds Supply
There are definitely more active buyers than sellers across the Melbourne property market. For quality properties—both houses and apartments—it is not uncommon to see five or six parties bidding aggressively. And the four or five who miss out, of course still require a property. We believe fewer properties are coming to market because of the high costs involved in moving e.g. stamp duty, agents’ fees and marketing costs. It seems that for many people choosing to stay where they are and renovate their properties is becoming an increasingly attractive option over selling.
Performance of Property Values
We believe there will be a continued increase in Melbourne values but at a significantly lesser rate than the previous 12 months. The gap in the median price for Melbourne houses and apartments is at a historical high with CoreLogic reporting that house values increased 17.2 per cent over the past 12 months while unit values have recorded a modest 5.2 per cent capital gain. We think the gap is likely to increase based on the supply of apartments:
- coming on to the market shortly
- under construction
- in the planning approval process
- undergoing feasibility.
Low stock levels, particularly of quality properties, and finance are two of the key determinants of potential growth or decline in Melbourne. Against a back drop of possible interest rate rises in the coming 12 months, there hasn’t been enough to materially negatively impact demand for properties – even with the recent decline in financiers’ offerings in the interest only mortgage product space.
Rental affordability in Melbourne is at or near a historic low. As such there is limited opportunity for landlords to significantly increase rents. Yields for houses are lower and the gap between house and apartment yields is likely to increase. The typical Melbourne house is now recording a gross rental yield of 2.7 per cent while unit yields are moderately higher at 4.0 per cent, according to CoreLogic figures.
Investing in Property – What to Look For
For those looking for a favourable investment property, it is important to identify the suburbs that are in the early stages of gentrification. In addition look for a type of property that has an inherent ‘scarcity factor’, e.g. historic houses. Ideally the property should be in need of a cosmetic or structural refurbishment or redevelopment where the owner can ‘manufacture their own capital growth’. By thinking laterally, there may also be opportunities to increase rental yield e.g. Airbnb.
Over– and Underperfomers
Remaining popular are historic houses located within 15km to the north of the Central Business District (CBD). In addition, historic apartments that cannot be replicated in high value inner city suburbs have positive growth prospects due to their ‘inherent scarcity’.
The modern apartments in Melbourne’s CBD, the inner-western suburb of Docklands and Southbank (just south of the CBD) are of concern not just in terms of oversupply but also due to the ‘generic’ nature of the supply with little to differentiate the properties in terms of build quality, building facilities, apartment size etc. These can be viewed more as a financial instrument (bond) than a property – they offer a relatively attractive yield but with very limited growth prospects. In many instances there is a decrease from the original purchase price.
Trends Affecting the Market
- Melbournians are increasingly happy to live on smaller blocks of land in well designed properties that maximise the effective utility of the available space and offer architectural or historical merit – ideally both. Also seen as ‘must-haves’ are ‘walkability’ to public transport and the latte lifestyle.
- A significant increase in interest rates e.g. 2 per cent within a 12 month period in an already relatively highly leveraged market would have a significantly negative impact.
If you are looking to invest in the Melbourne property market, Cohen Handler’s team of expert buyer’s agents can help you find the right property at the right price. Contact us now.