I’m worried about the Melbourne property market

I’m a little worried about the Melbourne property market.

Now that’s probably not something you expected to hear from me, especially since I’ve added another six  Melbourne investment properties to my portfolio in the last few years alone, but the truth is…. I am a little worried. Melbourne, Australia

And it’s not the current slowdown we’re experiencing that concerns me.

The Melbourne property market peaked in November 2017 and is experiencing a soft landing after 5 years of strong price growth.

Property values are now 4.4 % below their peak.

However, over the past five years, median property prices in Melbourne have increased by 41.5% and over the past decade they are 77.3% higher.

While Melbourne’s property prices are likely to fall by a little further, they will be underpinned by a robust economy, jobs growth Australia’s strongest population growth and the influx of 35% of all overseas migrants.

But overall Melbourne is experiencing a soft landing, with no crash in sight.

But this is what’s worrying me…Melbourne

Now… I’ve seen this before – the signs of overbuilding – the usual exuberance from property developers.

Take a quick drive through the city or across some of the surrounding suburbs, and you will see first-hand how much development is taking place in Melbourne.

Or open Saturday’s paper to see the huge number of new development projects coming out of the ground – and there are even more on the drawing board.

That’s because over the last few years Melbourne’s property market has been underpinned by strong economic and population growth and developers were looking to take advantage of this while they were still in a low interest rate environment.

In fact we’re adding more than one M.C.G.’s worth of people to population each year! 

At this rate at population will increase by close to 10% over the next four years.

And this is likely to continue for some time yet because of our strong economy and all the new jobs this creates.

Melbourne Population Growth

melbourne

Add to this historic low interest rates and significant investment  from overseas buyers and this has encouraged a tremendous round of new developments.

In fact too many developments and huge ones at that and the wrong types of dwellings –  this is what worries me.

The push was  encouraged by our previous Planning Minister Matthew Guy (who is now leader of the State Opposition) but during his term said he wants to Manhattanise Melbourne which is being transformed into a city of giants, with more than 20 new skyscrapers taller than 200 metres being constructed or planned.

Urban Melbourne, which tracks developments, recently counted 23 towers above 200 metres being proposed or under construction.

It cited a “gobsmacking” figure:

Since the Rialto became the city’s first 200-metre-plus tower in 1986, only six more 200-metre-plus towers were built in the next 28 years.

But look what’s happened this property cycle…
A couple of years ago The Age listed the top 10 new giants in order of height showing Southbank is the favoured location, with six of the projects in the precinct, which is home to Eureka Tower and Prime Pearl.

Melbourne's new towers

Source: The Age.

Urban.com.au uses projects marked as Planning Assessment, Approved, Registration & Sales and Under Construction in the following statistics to give an idea of the construction pipeline.

 

Rank Suburb Number of Dwellings
1 Melbourne 20,035
2 Southbank 16,015
3 South Melbourne 6573
4 Footscray 6526
5 Docklands 6276
6 Box Hill 5645
7 West Melbourne 4980
8 Richmond 4402
9 South Yarra 4124
10 Doncaster 3808
11 Preston 3369
12 Brunswick 3044
13 Brunswick East 2828
14 North Melbourne 2793
15 Moonee Ponds 2749
16 Collingwood 2668
17 St Kilda 2618
18 Port Melbourne 2493
19 Coburg 1792
20 Hawthorn East 1757

 

So why am I worried?

One concern is the oversupply of the wrong type of property that is looming, and that’s why I’d be very very careful to avoid buying properties in or close to the CBD – either newly completed or off the plan.

While our population growth has soaked up much of the new supply, there has been minimal capital growth and rental growth over the last 10 years for properties in and surrounding the CBD  including areas such as Docklands and Southbank. 

graphic-mel-new

Most of us don’t really want to live in those big high rise monoliths.

Another issue is the standard of some of these buildings, with reports suggesting Melbourne is riddled with poor quality apartments, many  with windows that are not openable, nor having particularly good views.

And at street level, we  will have a situation where there is insufficient open space, wind tunnels and overshadowing effects.

The inner suburbs of Melbourne are also facing a shortage of public parks and sporting grounds

The council has estimated that by 2031 the municipality will be facing a shortfall of 12 ovals and 12 soccer pitches, as its residential population hurtles towards 200,000 people…

Melbourne University professor of urban planning Brendan Gleeson said in the past 10 to 20 years the state government had failed to properly plan for public infrastructure in Melbourne’s inner, middle and outer suburbs.

Does this mean we should avoid the Melbourne property market?

Well first of all there is not one Melbourne property market – there are different markets based on geography, price points and type of property.

And as I explained, personally I have not been avoiding investing in the Melbourne property market… Propertyupdate Victorian Property Melbourne

However I have been very selective investing in specific segments of the Melbourne property market.

In particular old homes in affluent, gentrifying, middle ring suburbs. Ones which I intend to pull down and develop into townhouse complexes.

On each of these properties there will  eventually be two (not 200) modern townhouses aimed at an affluent tenant demographic.

And our clients have been investing in Melbourne villa units and townhouses which  have a significant land component and are scarce.

In particular we love the old villa units as they usually have renovation potential and you can “manufacture” capital growth in this current low growth environment.

We tend to buy these int he inner south east and bayside suburbs and they make great long term investments.

This is a very different market to the inner-city high-rise apartment market

WHAT CAN YOU DO TO STAY AHEAD?

As signs point to softer growth conditions for Australian property over the coming months, independent professional advice and careful consideration will be as important as ever in navigating Australia’s varied market conditions. melbourne

If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.


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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'I’m worried about the Melbourne property market' have 2 comments

  1. Avatar for Property Update

    October 13, 2018 Aseel Khasrawy

    Hi Michael, how do you think the outer suburbs of Melbourne will perform over the next few years?
    Thanks
    Kaz

    Reply

    • Avatar for Property Update

      October 14, 2018 Michael Yardney

      Good question Kaz
      During the booming markets in the last few years, at a time of lower interest rates, the outer suburbs performed very strongly – in fact in many cases better than some inner and middle ring suburbs.
      But moving forwards the interest rate effect has run its course, and with poor or no wages growth in these locations, together with the fact that some young families who bought there having over extended themselves – – many of these locations will inderperform – the ripple effect is reversing itself.

      Reply


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