Why Melbourne’s houses have better long-term prospects than Sydney’s

The Melbourne property market has suffered more than any other market from Covid -19.

Having endured a prolonged lockdown, many are wondering what's ahead for Melbourne real estate.

Well property expert Pete Wargent recently reassured those interested in Melbourne suggesting now is a great time for for prospective homebuyers in Melbourne to prepare to buy.

“There are a few critical drivers for this including the strongest long-term projections for population growth in the country, houses that are materially more affordable than in Sydney, and currently a significantly softer property market in comparison to Sydney” Mr Wargent said.

Prices in Melbourne have declined by about 5½ per cent since their recent peak in early April 2020 according to CoreLogic, the largest fall recorded across the major capital cities, while mortgage rates have fallen to ultra-low levels, so there are now opportunities presenting themselves for homebuyers to negotiate hard on well-located houses”.

This means that housing affordability in Melbourne has improved materially, at least in terms of mortgage serviceability”.

Ultra-low interest rate to drive price increases CEO of RiskWise Property Research Doron Peleg said that :

“although there has been a dramatic disruption to international and internal migration in 2020, and to the Victorian economy, homebuyers should recognise that the COVID-19 virus will eventually pass, and when it does we forecast that the long-held link between the cost of borrowing and housing prices will reassert itself”.

 House Price Growth Versus Interest Rates

“Indeed, we expect 2021 to be a strong year for houses in Melbourne, with significant capital growth forecast to play out” Mr Peleg said.

“In terms of its house price-to-income and mortgage serviceability ratios, while Melbourne is relatively unaffordable in global terms, importantly it’s significantly more affordable than Sydney” Mr Peleg said.

 Mortgage Serviceability Ratios

Melbourne to become Australia most populated city in Australia

Pete Wargent said that the annual population growth of Melbourne has consistently the strongest in the country since 2012, with annual population growth in FY2019 of well over 2 per cent, before COVID-19 struck.

“Based on the ABS data, it’s previously been projected that in 2026 Melbourne will have a larger population than Sydney, although this does depend upon where you choose to draw the respective city boundaries” Mr Wargent said.

“Melbourne had also been projected to have more than 6 million residents in 2030 and around 9 million residents in 2050. While the former number will be revised due to this year’s borders closures, the medium-term growth trajectory for Melbourne remains crystal clear”.

Melbourne Population Projections

Melbourne enjoyed stronger price appreciation

Mr Peleg of RiskWise said that Melbourne has in recent years presented a housing market that is stronger than that of Sydney, as amply demonstrated by the consistent price appreciation for houses during that period.

“Melbourne enjoyed strong capital growth until February 2020, with housing values surpassing their September 2017 peak. On the other hand, despite posting the most rapid recovery trend across the capital cities, Sydney housing values remain 3.7 per cent below their 2017 peak” Mr Peleg said.

“The price increases are in part connected to the stronger population growth in Melbourne, both from overseas and interstate”.

Purchasing opportunities

Mr Peleg said that those considering buying a home should seek suburban houses where the budget permits, rather than looking for units in the inner suburbs.

“From a capital growth perspective, we forecast a strong outlook for houses in Melbourne in 2021, but the market for units is much more likely to be flat” Mr Peleg said.

Wargent  said that demand from investors had been exceptionally low from through the second and third quarters of 2020, due to high levels of uncertainty as well as the logistical issues of buying in Melbourne.

“We do know that investor demand can be a key driver of housing price cycles these days, and investor demand has been at a low ebb in 2020” .

“However, with interest-only loans now more readily available, and from mortgage rates of around 3 per cent, we can expect to see more investors coming back into the market next year”.

Peleg highlighted some of Melbourne’s undersupplied suburbs where houses have an exceptionally good outlook for the next five years.

These included several middle-ring suburbs where the pipeline of new detached homes is low, and demand is expected to increase due to their relative affordability at a time of record low mortgage rates.

Melbourne suburbs where demand is set to outstrip supply

Me Peleg also noted that there is a strong outlook for several suburbs in the increasingly commutable city of Geelong, due to its relative affordability, lower density, and proximity to the coast.

Time to buy for Melbourne houses

However, Wargent warned that units in some areas carry significantly higher level of risk, with some locations recording a significant oversupply in the pipeline close to Melbourne’s Central Business District.

Doron Peleg said that RiskWise reports have consistently highlighted the risk of oversupply for units in central Melbourne.

“But the oversupply is somewhat localised, and there remains a systematic undersupply of houses in Melbourne’s landlocked middle-ring suburbs”.

Wargent  concluded that Melbourne’s downturn has afforded a rare opportunity for homebuyers with the budget to buy a suburban home to negotiate and buy well.

“The paradox of recessions is that they tend to bring great uncertainty, but often also opportunities.

For those homebuyers with stability of employment, a solid deposit, and a reasonable buffer, the best time to buy a house in Melbourne is likely to be as soon as practicable”.

Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on

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About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.