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Are you wondering what will happen to the Melbourne property market over the balance of 2021 and into next year?
Well… based on how the market has been performing so far it’s likely that will see high double-digit Melbourne house price growth in 2021, with most segments exhibiting strong price appreciation other than the inner city and high-rise apartment market.
While Melbourne housing values suffered because of its extended lockdown which severely impacted market activity in 2020 since late October the Melbourne property market has rebounded strongly despite it’s intermittent Covid related shutdowns.
Melbourne property values:
- rose 0.4% in the last week and auction clearance rates were at boom time levels over the weekend
- increased 1.3% over the month of July, and
- increased 10.4% over the last year.
And there is still plenty of growth left, as Melbourne property values have only recently reached their previous 2017 peak levels.
Currently, Melbourne’s house price growth is stronger than unit growth, and while most sectors of the market have been enjoying strong demand, the more expensive properties are now outperforming Melbourne’s less expensive properties.
Looking back the Melbourne property market has been one of the strongest and most consistent performers over the last four decades.
Over the last 40 years:
- The median Melbourne house has increased by 7.9% per annum
- The median Melbourne unit/apartment price has increased by 7.73%per annum
Obviously this wasn’t the same each and every year, as the Melbourne property market worked its way through the typical property cycles.
Over the last few decades, Melbourne won the mantle of the world’s “most liveable city” more times than any other city in the world.
Needless to say, the Covid related lockdowns endured by Melbourne led to some challenging times, but now both buyers and sellers are back, consumer confidence has picked up strongly and property transaction numbers have increased and house, auction clearance rates are strong and prices are rising, however, Melbourne’s inner-city apartment market still looks in bad shape.
Auction clearance rates in Melbourne have been very high – actually boom-time levels.
While there is a shortage of quality housing in popular areas across Melbourne, the lower-than-expected population growth has led to an oversupply of housing in some outer suburban new estates.
Villa units, townhouses, and family suitable apartments will be seen as affordable alternatives to houses in the highly sought-after inner eastern and south-eastern suburbs of Melbourne.
On the other hand, high-rise apartments in the many Melbourne CBD towers or close to universities are likely to underperform, remain vacant for a long time, and keep decreasing in value.
Houses in regional Victoria with easy access to the capital city are also in strong demand and should continue to increase in value.
Fast facts about Melbourne and its property market
Here’s the list of some vital points you would want to consider:
The Victorian economy is booming
For years the Victorian economy has been Australia’s strongest State economy creating more (and typically higher-paying) jobs than other states and once we get across the proverbial bridge the government has built for COVID-19, Victoria’s economy will surge again.
The Victorian economy was hit hardest by the COVID-19 pandemic due to the State’s extended lockdowns last year.
As a result the Victorian economy contracted by 6.1% over 2020, compared to -2.8% for the national economy.
But now the Victorian economy is rebounding and is likely to outperform the other states this year.
Source: Urban Property Australia
- First home buyers are back in the market buoyed by the HomeBuilder grant, historically low interest rates and the newly announced stamp duty concessions
- Melbourne’s population was growing at around 120,000 people per annum. That’s like adding a Darwin or a Ballarat each year to Melbourne’s population. Sure this will stop for a while due to the closing of our borders caused by Coronavirus, but will resume in due course.
- International and interstate migration will return once we get through these challenging times.
- There has always been strong foreign interest in Melbourne from tourists, migrants, investors and developers and in time this will return.
But remember… Melbourne is not one property market…
There are multiple markets in this diverse sprawling city.
It is divided by geography price points and type of property into many submarkets – this means you can’t just buy any property and count on the general Melbourne property market to do the heavy lifting for you over the next few years, so careful property selection will be critical.
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:
Melbourne House Prices
Over the last 4 decades, Melbourne property values have risen at the fastest pace of all capital cities.
Last year Melbourne house prices and market activity were adversely affected by its extended lockdowns but now Melbourne property is on the move again with dwelling price growth for the year to date of 8.8%.
The stats below for Melbourne price growth for the past year are low because of a number of very flat months during the 2020 lock downs, but as these months fall off the rolling 12 month stats, capital growth for Melbourne will show up as very strong figures.
MELBOURNE DWELLING PRICE TRENDS – Source: Corelogic September 2021
The following chart from Real Estate.com.au shows how buyers are actively back into the Melbourne property market.
At Metropole we’re finding that on-the-ground sentiment has changed completely with strategic investors and homebuyers already starting to feel a little FOMO (fear of missing out).
However, while house prices have been resilient, Melbourne rental rates are experiencing weaker conditions due to a higher supply of rental properties, and less demand.
At the same time is more buyers being active in the market, there is currently a shortage of good quality stock on the market.
Changes in Melbourne property prices over the past two years
Similar to the market in Sydney, despite the economic shock to the Covid-19 extended lockdown in Victoria, Melbourne’s housing market defied the odds with any price decline being short-lived.
By the end of 2020, the median hit a new record high of $936,073 which is $28,000 above the previous record in early 2020.
Dr. Nicola Powell, Senior Research Analyst at Domain explained:
“First-home buyers became active, utilising incentives, low mortgage rates and a deeper savings pot as Covid restrictions reduced discretionary spending.
Upsizing buyers were enticed by cheaper credit and altered their wish-lists post-lockdown.”
Over the past two years, 91% of Melbourne’s suburbs enjoyed house price growth as buyers continue to be attracted by affordability, with price growth even spread across outer areas.
All suburbs that Domain mapped in the North East of Melbourne rose annually, while 97% of suburbs in the West (Niddrie and Maddingley the exceptions) and 95% of suburbs in the South East (apart from Sandhurst and Dandenong) also enjoyed a price hike.
By December, Blairgowrie took the title as the suburb with the largest property price increase across Melbourne with a 24.8% rise.
Although substantial price rises were also recorded in Portsea, Flinders, Ventnor, McCrae, and San Remo on the Mornington Peninsula.
“[The data shows] lifestyle and holiday locations are beginning to accelerate in price as working remotely becomes normalised and international borders remain closed,” Dr Powell said.
Suburbs including Bacchus Marsh, Capel Sound, Darley, Diggers Rest, Manor Lakes, Mickleham, The Basin, Werribee, Wollert and Yarra Glen, have also continued to show annual growth over the past two years.
Melbourne houses are outperforming apartments
Melbourne has seen a record high in the difference between house and unit medians at 52.4% as of June.
Melbourne has also seen the weakest rental market performance since the onset of COVID-19, and as a large portion of rental stock are units, this has dampened demand across the segment.
This also likely explains some of the weakness in the Sydney unit market, where rental demand was similarly affected by a lack of overseas migration.
Unlike Sydney however, Melbourne has seen similar rates of disparity through the 2017 and 2018 calendar years, when the house price premium on units averaged 46.3%.
A prolonged period of high unit supply, and development of high-density stock, kept unit values relatively low through this period.
This dynamic may shift through the remainder of 2021, as ABS data points to a fall in construction of units, and a rise in the construction of new houses.
Furthermore, affordability constraints across the housing segment, which could be amplified by the end of HomeBuilder and temporary stamp duty discounts, may guide more first home buyers back to the unit segment of Melbourne.
So…is it the right time to get into Melbourne’s property market?
Melbourne property prices have been climbing at a breathtaking pace in 2021 with more growth expected as strong demand from buyers outpaces the volume of new listings coming onto the market.
This has been good news for homeowners but heartbreaking for house hunters.
At the same time, there have been mixed messages in the media about what’s ahead.
Of course, there’s always the Negative Nellies wanting to tell anyone who is prepared to listen to them the market is about to crash, but other more solid commentators are suggesting our property market is slowing down.
And I agree, I believe the pace of capital gains has peaked, but I’m not suggesting home values are about to dip, far from it.
Rather I believe we’ve moved from a peak rate of growth to a pace of capital gain that will be more sustainable and there’s plenty of life left in the Melbourne real estate market with property values likely to keep increasing throughout 2022 and into 2023.
Australia’s economy has experienced the V shape recovery everybody has been was hoping for, but nobody really expected such strong economic growth, employment growth and this financial security will underpin Melbourne’s property market moving forward.
Currently, economic green shoots are appearing with the recession now over, many new jobs being created and over 90% of the jobs lost in the early part of the pandemic now restored.
However, some sectors of the Melbourne housing market will continue to languish this year.
The sectors of the Melbourne real estate market likely to underperform most moving forward will be:
- Apartments in high-rise towers – in fact, this is these properties are likely to be out of favour for quite some time.
- Off-the-plan apartments and poor quality investments stock (as opposed to investment-grade) apartments, particularly those close to universities.
- Established homes in the outer suburban new housing estates, where young families are likely to have overextended themselves financially and with many people will be out of work for a while. Currently, many first home buyers are taking advantage of the various incentive packages including HomeBuilder to buy newly constructed homes, leaving established houses in these locations languishing.
NOW READ: Is now a good time to buy property?
Long Term Melbourne Property Market Trends
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 percent of apartments in Melbourne are smaller than 50 square meters, 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.
The problem is many overseas buyers are purchasing these properties which will become the slums of the future.
2. 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 the 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.
The end result for property investors in Melbourne is that the inner and middle-ring suburbs will (generally) out-perform the averages for suburbs located further from the city.
3. Be mindful of a Melbourne inner-city apartment oversupply
Melbourne’s property market has been typified by strong population growth and 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.
While the population growth, Mainly from overseas migrants, was soaking up soaking up much of this new dwelling stock, the CBD is now over-supplied with too many new apartments.
With too many development projects either completed, begun or approved in recent years, the risk for property investors in Melbourne is that there is currently an oversupply of properties in and around Melbourne’s CBD.
And until our international borders are open, and tourists and in particular students return, it is likely that this oversupply will be soaked up meaning there will be no capital growth and sluggish rental growth on your investment – so avoid Melbourne CBD and near CBD properties.
4. Make the most of Melbourne properties through negative gearing
While most investors understand the concept of negative gearing, just in case you’re not 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 in Melbourne 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 favors wealthy landlords.
Of course, negative gearing is more favorable for taxpayers who earn high incomes, and just to make things clear…
Negative gearing is not an investment strategy – it’s just the way a property is financed at a particular point in time.
A strategic approach to choosing an investment property in Melbourne
We believe that 80% of your property’s performance is related to its location (one that outperforms the averages ) and 20% or so is related to buying the right property in that location.
Here are some of the factors to look for when selecting an investment-grade property:
1. Buy a property below its intrinsic value
I’m a big believer in buying property below its intrinsic value – that’s why I avoid new and off-the-plan properties, which generally attract a premium price tag.
I also look for properties with a high Land to Asset ratio – but remember apartments have an attributable land value underneath them
2. Buy a property in a location that outperforms the averages
In other words in an area that has a long, proven history of strong capital growth and one that is likely to continue to outperform the averages, and this is largely because of the demographics in the area and the future economic prospects for the area.
These suburbs tend to be those where a large number of owner-occupiers desire to live in the area, because of the lifestyle choices of the offer.
I look for suburbs where wages (and therefore disposable income) are 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.
3. Buy a property with a twist
An investment must have something unique, or special, or different or scarce – some ‘X-factor’ that makes it stand out from its neighbours – in order to land on my shortlist.
4. Buy a property where you can manufacture capital growth
An ideal investment is one in which you can manufacture capital growth through refurbishment, renovations or redevelopment.
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