What’s the outlook for the Melbourne property market?
That’s the BBQ talk on the weekends nowadays and it’s a very different discussion to a couple of years ago, during the heady days of the Melbourne property boom.
But in reality the news isn’t as bad as the media makes out.
Recently QBE released its Australian Property Market Outlook – 2018-2021 and they suggest that by June quarter in 2019, the median house price is expected to bottom out falling to $820,000, which is around 8.4% lower than the December 2017 quarter median.
Obviously some segments of the Melbourne property market are likely to fall more than that average (we’re looking at you off the plan properties and outer suburbs), while some segments of the market are holding their own.
Here’s a summary of QBE’s forecast based on BIS Oxford research:
Melbourne house market
Melbourne house prices increased by 69% over the five-and-a-half years to December 2017, although prices have recently started to retreat.
Strong population growth, a dwelling deficiency and falling interest rates have been key drivers of this upturn, with solid economic conditions and employment growth maintaining a positive purchaser sentiment.
Buyer activity House prices increased at a much stronger rate than the unit market, which has been affected by oversupply.
Since the start of the year, with upgrader and downsizer activity starting to taper, and a decline in investor activity coming through, the median house price declined by 4.3% over the six months to June 2018.
Investors were a significant component of the upturn, encouraged by tight vacancy rates and low interest rates.
Prices increased across the metropolitan region, with the strongest growth rates recorded in the inner and middle ring suburbs over the five-and-a-half years to December 2017.
Melbourne has benefitted from strong growth in first home buyer activity due to increased stamp duty concessions from 1 July 2017.
Although house prices have been declining since the start of 2018 across the metropolitan area, the more affordable outer suburbs have maintained their prices since the start of the year, with very minor declines recorded.
The biggest falls, which have caused the decline in metropolitan median house prices, have come from the inner and middle ring suburbs.
There was a 24% decline in prices in Inner ring Melbourne.
This was the result of mainly lower value houses transacting particularly in City of Melbourne and City of Stonnington, and highlighting the difficulty in selling higher value houses in the current market.
While first home buyer activity is strong, non-first home buyer loans have reduced slightly since the end of 2017 and investor demand has been steadily trending downwards as credit conditions continue to tighten.
Demand and supply
Demand for new dwellings has been strong in Victoria.
Over the three years to June 2018, the total population has grown by an average of 144,660 persons per annum.
The level of population increase has been 21% higher than in New South Wales over the same period.
Victoria is estimated to have experienced record levels of underlying demand in 2017/18, with both high net overseas and interstate migration inflows contributing to demand.
Robust demand for property has led to a strong supply response.
Total house commencements are expected to reach a record level by the end of 2017/18, at around 38,300 starts – a similar level to the previous peak in 2009/10.
Weaker investor demand and the easing in non-first home buyer demand appears to be having an influence on the Melbourne market.
With affordability already strained in Melbourne, the recent out-of-cycle increase in interest rates is also likely to have some impact on demand.
By the June quarter in 2019, the median house price is expected to fall to $820,000, which is around 8.4% lower than the December 2017 quarter median.
Population growth is expected to slow over the next three years.
This will suppress construction activity and contribute to restrained price growth. Once the stock deficiency starts to rise from 2020/21, house prices are also expected to start rising.
Economic growth is also forecast to accelerate as further new dwelling activity is triggered and business investment begins to improve after being subdued.
Continuing affordability challenges means that any upturn is likely to be modest, and by the end of 2020/21, the median house price is expected to remain lower than the median price as at June 2018.
Melbourne unit market
The median unit price across Melbourne hasn’t grown as strongly as the median house price in recent years, with the unit market facing a significant volume of new supply relative to the housing market.
While house prices increased by around 69% over the five-and-a-half years to December 2017, unit prices increased by 27%.
Over the first half of 2018, unit prices have fallen back slightly by 1.2%.
Supply The increase in dwelling supply in Melbourne since 2011/12 has occurred on the back of surging unit construction.
Construction of attached dwellings increased at such a rapid rate, that by 2015/16, commencements for attached dwellings were higher than for detached houses for the first time on record.
Unit construction has fallen back a little but remains at very strong levels.
Even with the significant supply coming onto the market, the overall market remains in deficiency, given the growth in population.
However, the reduction in overall investor demand, tighter lending by the banks and falling prices is likely to lead to a reduction in new unit commencements over the next three years, which in turn will decrease new supply.
The median unit price is expected to decline by 3% over 2018/19, and then remain relatively flat over the following two years.
The market will face a significant volume of new supply over the next couple of years, while at the same time, investor demand and population growth weakens.
By June 2021, the median unit price is expected to be around $545,000, which is some 2% lower than the June 2018 quarter median.
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