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This is why Melbourne’s property market is so strong

Melbourne population explodes
It’s more than three years now since I first started writing about a looming oversupply of apartments in the capital cities at and by 2014, I’d even started quietly hyperventilating about the coming high rise bust.Melbourne population explodes
Seemingly everyone now at last knows that there is an oversupply in the post.

The Reserve Bank of Australia (RBA) recently reported that a total of 16,000 apartments will be completed in inner Melbourne over the next two years, creating fears of a glut of high rise stock.

As at the end of June 2016 there were 66,671 dwellings under construction in Victoria, including some 46,676 attached dwellings, with the completions just beginning to flow in (apartment commencements in the state actually peaked all the way back in Q3 2015).

The contrarian in me takes the view that when everyone has become certain of something, maybe it’s time to look at a few alternative angles.

For example, there’s one potential problem with the calculations of apartment oversupply – they tend to assume that population growth doesn’t increase to absorb the supply.
Yet in Melbourne the population is not only increasing, it’s positively exploding!

Build & they might come

In regional Victoria population growth ex-Geelong has all but ground to a halt, while Greater Melbourne has become a veritable magnet for migrants from overseas, from interstate – from Western Australia and Adelaide, in particular – and from the state’s own regional centres.

I must admit, Melbourne is not my favourite of the capital cities, so it’s a bit of a mystery to me!

Obviously, this dynamic must be driven by strong employment growth.

It’s certainly not the beaches or weather!
Over the year to June 2016 the state population increased by an unprecedented +123,131.

Compare this to some of the historic annual increases in Victoria’s population, such as the year to March 1994 (+7,754), or the year to December 1997 (+33,252).

Absolute population growth in FY2016, wasn’t just a bit faster than the long run average, it was on another planet at well over double the long run average.

 

Build & they might come

The wrap

If numbers of this magnitude are sustained, while a temporary oversupply of certain property types and in certain locations is of course possible – largely new high rise apartments – in aggregate, even with an industry operating at close to capacity the notion of an ‘oversupply’ becomes all but obsolete.Build & they might come The wrap

After all, the present population growth rate of +2.1 per cent per annum implies that the state population would increase by more than 1.4 million over the next decade!
Given that so many new apartments apparently sit empty owned by mainland Chinese investors anyway, I’m not sure what difference over time 16,000 inner city units will make to the established homes market in the face of these almighty numbers.
Of course, the main risk to this argument is that the rate of population growth slows down, particularly as and when the residential construction sector fades (population growth only runs as high as this when sufficient jobs are being created to sustain it).
There is also the apparent risk of non-settlement, but the government has relaxed the rules to allow failed new apartment settlements to be resold to other non-residents.

Don’t get me wrong, I’m not saying new, high rise apartments are a good investment.

They aren’t, and never have been.

But looking at the astonishing growth in international students in this month’s figures, it’s at least worth considering whether Tim Gurner’s argument that parts of suburban Melbourne are becoming undersupplied (widely treated with derision) may have a grain of truth in it.



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About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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