The Melbourne property market has been one of the surprise performers over the last few years.
Many commentators predicted the Melbourne market would slump citing factors such as: strong rising property prices, the death of manufacturing in Victoria, an oversupply in CBD apartments and rising unemployment.
However the markets have confounded the pundits and kept rising.
In fact, after the booming Sydney real estate market, Melbourne has been the best performing capital city market over the last few years.
But…is it too late to get into the Melbourne property market?
Like most things in real estate the answer is – it depends.
While some areas still have strong growth ahead, certain sub markets should be avoided like the plague.
I’m going to examine this in detail in this blog (which is a little longer than normal, so if you’re looking for a particular element of the Melbourne property market, use these links to skip down the page.
Melbourne’s Many Markets
1. MELBOURNE PROPERTY MARKET PRICES
2. LONG TERM MELBOURNE PROPERTY MARKET TRENDS
3. MELBOURNE’S AVERAGE RENTAL YIELD
What’s So Special About Melbourne?
4. MELBOURNE’S DEMOGRAPHICS
5. MELBOURNE’S LAYOUT
6. MELBOURNE’S INFRASTRUCTURE
7. MELBOURNE’S ECONOMY
8. MELBOURNE’S GROWTH
9. MELBOURNE’S CULTURE
What types of properties perform well in Melbourne?
10. MELBOURNE HOUSES
11. MELBOURNE TOWN HOUSES
12. MELBOURNE UNITS
13. MELBOURNE FLATS AND APARTMENTS
14. COMMERCIAL, RETAIL AND INDUSTRIAL PROPERTIES
How do Melbourne’s areas compare?
15. MELBOURNE’S INNER CITY
16. MELBOURNE’S BAYSIDE AND SOUTH-EASTERN SUBURBS
17. MELBOURNE’S EASTERN SUBURBS
18. MELBOURNE’S WESTERN & NORTHERN SUBURBS
Advanced Strategies & Things to Look For
19. TAKE ADVANTAGE OF HIGH STANDARDS
20. AVOID POOR QUALITY APARTMENTS
21. MELBOURNE’S INNER AND MIDDLE RING
22. PROPERTY OVERSUPPLY
23. NEGATIVE GEARING IN MELBOURNE
How do I choose an investment property in Melbourne?
24. INTRINSIC VALUE
25. OUTPERFORMING AVERAGES
26. PROPERTIES WITH A TWIST
27. POTENTIAL CAPITAL GROWTH
How can I keep up with the market?
28. NEWS, UPDATES AND ADVICE
29. INVESTMENT ADVICE
Clearly Melbourne isn’t “one” property market
There are multiple markets in this diverse sprawling city; divided by geographic location, price point and property type.
Currently some markets are still hot, while others are not.
So to help you better understand what’s going on in Australia’s second largest property market are 29 things you should know if you’re considering investing in Melbourne property:
1. Melbourne Property Market Prices
Over the past couple of years Melbourne home values have risen at the second fastest pace of all capital cities.
Auction clearance rates have consistently been high and discounting and time on market levels have fallen across the city over the year showing strong market depth from a range of home buyers and investors.
As at the end of the first half of 2015 CoreLogic reported:
Melbourne median house price: $615,000; up 11.2% on the previous 12 months.
2. Long Term Melbourne Property Market Trends
Historically, the city’s property market has gone from strength to strength. In 1966, the median house price in Melbourne was just $9,400.
Values have doubled six times since then, with the median crashing through the $100,000 barrier in 1988, and pushing through the half-million dollar mark in 2010.
However dwelling price growth in Melbourne has been very fragmented. While some suburbs has just chugged along others are strongly outperforming.
Many inner south eastern, more affluent suburbs have well outperformed these averages. In particular suburbs property prices for homes within top Victorian government school enrolment zones have rocketed up to 32 per cent over the past year.
3. Melbourne’s Average Rental Yield
While over the long term rentals have grown in line with property values, more recently rental growth has remained moderate.
The average rental income from an investment property in metropolitan Melbourne was $365, according to the Department of Human Services in Victoria, rising 2.4% from the previous year.
For investors, this means an average rise in rental income of $8-10 per year.
The Eastern metropolitan area fetched the highest median rent at $490, while Port Phillip and Stonnington in the Southern metro generated the highest rental return by suburb, achieving $1,050 and $1,150 respectively, according to a report from the Department of Human Services.
What’s so special about Melbourne?
4. Melbourne’s demographics
As Australia’s second-largest city, Melbourne is home to around 4.35 million people.
The culturally diverse and creative city is home to residents from an estimated 180 countries, who speak over 233 languages and dialects and follow more than 100 religious faiths.
Of the 130,000-odd thousand people who live in Melbourne’s inner city (the CBD), more than half are aged between 15 and 34, and they are generally living in single-person households or as couples without children.
According to Census data, this is strongly influenced by the high number of higher education students (both domestic and international) that reside in the city.
5. Melbourne’s Layout
A well-planned city that is amply serviced by a range of public transport options, Melbourne is laid out under the ‘Hoddle Grid’, so named after its designer Robert Hoddle, which runs roughly parallel to the Yarra River.
As with most large cities, greater Melbourne is divided into ‘east’ and ‘west’ neighbourhoods; those in the east are more established and generally considered more affluent, while those in the west are more affordable, newer suburbs with less established reputations.
6. Melbourne’s Infrastructure
Melbourne residents enjoy the use of some of Australia’s most advanced and well-connected systems of road, rail and tram infrastructure, which give locals plentiful options when deciding how to get around the city and its surrounding suburbs.
The city received a perfect score of 100 for its world-class infrastructure in the 2013 EIU Liveability Report, where ongoing investment in Melbourne’s infrastructure was highlighted as being one of the factors that keeps Melbourne at the top of the index.
Meanwhile, Melbourne Airport handles more than 30 million passengers annually along with 350,000 tonnes of air freight, making it Australia’s largest air freight hub.
The city is also home to a number of world-renowned universities.
However as Melbourne suburbs sprawl further and further out from the CBD, the difference in level of amenities between the inner suburbs and the poorly serviced outer suburbs is becoming more glaring, causing people to pay a premium to leave closer to the CBD and the better serviced inner suburbs.
7. Melbourne’s Economy
As a cosmopolitan, creative city that is served by a number of industries, Melbourne residents enjoy employment in diverse industries, from tourism, hospitality and entertainment to commerce, industry and trade.
The unemployment rate presently hovers around 6% in the inner city, growing to 6.5-7% in the inner and north east, and 8% in Melbourne West.
Like much of Australia, Melbourne is transitioning from a manufacturing state to one driven by service industries, which is creating strong job growth and resultant overseas and interstate migration.
While the economy may not be as robust as it was, the momentum of the Melbourne property market is creating a “wealth effect” for many of its residents who are feeling wealthier as the value of their homes keep increasing.
8. Melbourne’s growth
Melbourne is one of the fastest-growing cities in the country, adding a robust 1,800 people a week to its population, which now stands at 4.4 million, according to the latest ABS figures.
Think about that…growing at just under 2% per annum, this means Melbourne’s population will increase by around 10% over the next 5 years!
A large chunk of this growth is happening in Melbourne’s outer west, where the number of residents has increased by a figure equal to the population of Hobart over the last decade.
South Morang, for instance, a neighbourhood in the city’s outer north, is now the fastest-growing suburb in Australia, with 80 people a week moving to the area in the year to June 2014.
In fact, seven of the country’s top 10 growth areas were outer suburbs of Greater Melbourne, with international migration a big driving force behind Melbourne’s population growth.
By the way…
Just because there is significant population growth in these areas doesn’t mean there is strong capital growth of property values in these areas.
In fact there isn’t!
9. Melbourne’s culture
The city of Melbourne is nothing if not multicultural, with dozens of different cultures and nationalities – 140 to be exact – living side-by-side.
The city’s Multicultural Hub was launched as a friendly, supportive environment for Melburnians of all cultures to get together and work, share and learn, while the city’s diverse and awarded restaurant scene is highly influenced by immigrants from diverse backgrounds including Chinese, Italian, Greek and Lebanese.
What types of properties perform well in Melbourne?
10. Melbourne Houses
Decades ago, the Australian property market was dominated by demand for freestanding houses.
The appetite for ‘the Australian dream’, complete with a comfortable home on a big block with a picket fence and a pet dog, was insatiable, and home buyers as well as investors flocked to houses as a preferred investment type.
Today, the concept that land goes up in value is still well recognised, but not all land is created equal.
What’s more, changing demographics and evolving family situations have shifted dynamics to the point where more Melbournians are trading backyards for balconies meaning apartments, units and townhouses can be just as highly sought as freestanding homes.
With median house values in Melbourne virtually doubling in the last decade, many people can’t afford freestanding homes, so they smartly start their home buying or investment journey with apartments instead.
11. Melbourne Town Houses
The term townhouse originally referred in British usage to the city residence of a member of the nobility, as opposed to their country estate.
Today the term refers to medium density (often multi story) dwellings that may be, but not necessarily, terraced (row housing) or semi detached.
12. Melbourne Units
Units (sometimes called villa units) is the name given to single-story, older-style dwellings, mainly built in the 1960s and 70s.
Today, developers rarely build in this style because it’s not as profitable as building ‘up’.
13. Melbourne Flats / Apartments
If you invest in a flat you are generally buying an apartment that has other dwellings attached to it; these could be above or below, next door, or a combination of the above.
They are the preferred style of accommodation for young Melbournians and are generally easy to tenant and therefore, if well located, make great investments.
14. Commercial, Retail and Industrial properties
Commercial properties, (retail shops, factories, warehouses and office spaces) are in a very different league residential property and out of the domain of the every-day investor.
Whilst there are many benefits of investing in commercial properties, they are more suitable for the sophisticated and experienced investor, particularly as they are more yield-driven than capital growth-driven.
Consider it this way: for most advanced investors, your job is to build your asset base.
Once your portfolio is big and robust enough, you begin transferring into a cash flow strategy and at this point, a commercial property can be a good investment.
How do Melbourne’s areas compare?
15. Inner City
Melbourne’s inner city core has a population of around 29,450 people, a figure that is expected to double to 59,900 over the next 20 years.
As a result, there is much more property development activity in Melbourne CBD than anywhere else in the larger metropolitan area, with the majority of these developments comprising of high-density high-rise apartment buildings.
The area of Southbank, just south of Melbourne’s CBD, currently boasts over 9,000 distinct dwellings, the majority of which are family households (45%).
The number of residential properties is set to rise to more than 26,000 over the next 20 years.
Currently I’m worried by the large number of poorly built inner city apartments on the market or planned for completion.
Many, in fact most, of these are being bought by overseas investors and as these are likely to become the slums of the future.
16. Bayside and South-Eastern Suburbs
Melbourne’s south eastern suburbs boast distinct communities, neighbourhood attributes and differing property growth cycles. However while intricate, they’re considered by many to be the best Melbourne property investment suburbs.
17. Eastern Suburbs
These include some of the most affluent areas of Melbourne – the residents of the eastern suburbs enjoy a median personal income of $1,164 per week, according to ABS figures.
Around 33% of properties are owned outright or mortgaged here, with 20% of housing comprised of townhouses or semi-detached homes, and only 33% of residential properties being high-rise apartments.
This is a dramatic difference from the inner city, where apartments are the dominant dwelling type.
18. Western & Northern Suburbs
While the outskirts of Melbourne’s west and north is home to several of the city’s fastest-growing outer-suburban areas including Truganina, which increased by 18%, Tarneit (16%), Point Cook (12%), Melton South (11%) and Wyndham Vale (10%).
However these more blue collar areas have lower average wages growth and therefore lower ability to sustain capital growth.
19. Melbourne has high standards
Melbourne has repeatedly been named as the world’s most liveable city by the Economist Intelligence Unit’s liveability survey, and for very good reason!
Boasting excellent healthcare services, premium education facilities (including world-class universities), a stable and diverse economy, solid investment in infrastructure and a thriving, creative culture, it’s easy to see why Melbourne an incredible 97.5 out of 100 – ahead of Vienna (97.4) and Vancouver (97.3).
With such a high standard of living and ready access to good quality facilities and amenities, it comes as no surprise that people continue to choose to call Melbourne home.
In addition, the median house price is high: $669,000 with an upper quartile of over a million dollars, the second highest median price in the country (behind Sydney).
20. Avoid Melbourne’s poor-quality apartments
Just because Melbourne has a well-deserved reputation for quality, that doesn’t mean the city is flawless – far from it.
In fact, the Melbourne CBD (Central Business District) is riddled with poor quality apartments, with one report stating that an estimated 55 per cent of the city’s tallest apartment buildings are of “poor” quality, with common design flaws.
No one wants to live in a sub-standard apartment, regardless of how affordable it is, and there are only so many people who would find a hotel-sized apartment appropriate for full-time living.
The fact that an estimated 40 per cent of apartments in Melbourne are smaller than 50 square metres, according to the Melbourne City Council’s planning department, shows just how big this issue has become – particularly when you consider that the minimum size a single bedroom apartment can be in Sydney, London and Adelaide is 50m2 or above.
Not only are the apartments lacking in breathing room – literally – they’re also flawed in a number of other ways, with kitchens placed in hallways, a lack of ventilation and natural light, and poor storage.
All of these design faults make these types of developments less attractive to potential tenants, which reduces the desirability of these properties.
Investors would be well advised to steer clear of apartments that don’t tick all the boxes.
Shoebox-sized living spaces, alongside common design flaws in the building itself, should raise some serious red flags for buyers.
21. Look for Melbourne’s best properties in the inner and middle ring suburbs.
Studies – and time – have shown that properties close to the city’s CBD (but not in it) and in bayside suburbs close to water will increase in value more quickly than other properties and suburbs.
The demand for property is higher in these regions, as there is no land available for release, but the areas remain close to employment or desired locations.
Not only are properties closer to the CBD closer have better access to amenities and more employment opportunities, but transport costs are often lower and, as a result, people are willing to pay a premium to live there.
22. Be mindful of a Melbourne property oversupply
Melbourne’s property market has been typified by strong population growth, with almost 90,000 people moving into the city every year.
To keep up with surging housing demand, there have been a huge number of new developments – mostly in the form of high-rise apartment buildings, in and around the CBD – that have been approved.
But this is leading us to a city over-supplied with too many new inner city apartments.
With such a large number of development projects either completed, begun or approved in recent years, the risk for property investors is that there will be an oversupply of properties in and around Melbourne’s CBD.
23. Make the most of Melbourne properties through negative gearing
While most investors understand the concept of negative gearing, but for those who are not yet up to speed, here’s a quick refresher:
A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and depreciation – exceed the income it produces.
Since the costs of producing an income are generally deductible against the taxpayer’s other income, property investors can effectively offset some of the interest expense against their wages.
Why would anyone go into a business deal to make a loss?
Generally it’s because property investors hope that their income losses will be more than offset by their capital gains when they eventually sell (or refinance) their property.
And in Australia capital gain is not taxed unless you sell your property, and then it is concessionally taxed; again evoking the argument that it favours wealthy landlords.
Of course negative gearing is more favourable for taxpayers who earn high incomes.
How do you choose an investment property in Melbourne?
24. Buy a property for below its intrinsic value
25. Buy a property that outperforms the averages
In an area that has a long, proven history of strong capital growth is one that is likely to continue to outperform the averages, and this is largely because of the demographics in the area.
These suburbs tend to be those where a large number of owner occupiers desire to live in the area, because of lifestyle choices of offer.
I look for suburbs where wages (and therefore disposable income) is increasing above average. This translates to being an area where locals are able to and prepared to pay a premium price to live there, putting a financial floor under your investment property.
26. Buy a property with a twist
27. Buy a property where you can manufacture capital growth
How can I stay on top of current information?
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29. Take advantage of investment advice
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