What’s driving the market at the moment?
Melbourne is a population growth story - the general consensus from demographers being that Melbourne will overtake Sydney as Australia’s most populous city - its a question of when. As such Melbourne is a capital growth story - more people require more housing – against a backdrop of a market already under supplied.
What are the key strengths and weaknesses for each state and how will they play out in the next 12 months?
Perhaps Melbourne’s key strength is the forecast for continued aggressive population growth. Being Australia’s second largest city with a diverse economic base it is perceived as relatively “safe” long term investment for property.
How can investors tap this to make money?
Identify the suburbs that are relatively early in their gentrification journey. Look for properties in those suburbs that have an inherent a "scarcity factor". If the house has the ability for a cosmetic or structural renovation where the owner can “manufacture their own capital growth” - so much the better. Think laterally re-opportunities to increase yield e.g. Airbnb.
How do you see the supply and demand situation, in general for each state?
Melbourne - There are more buyers than sellers. For quality properties– both houses & apartments - it is not uncommon to see three or four parties bidding aggressively. The two or three who miss out still require a property.
Which areas worry you in terms of oversupply?
CBD, Docklands, Southbank are concerning not just in terms of oversupply but the “generic” nature of the supply with let to differentiate the properties in terms of build quality, building facilities, apartment size etc.
How do you see property values performing in the year ahead?
Continued increase in Melbourne values but at a significantly lesser rate than the previous 12 months.
What would bring about this growth (or decline)?
Availability of stock & finance are two of the key determinants or potential growth or decline in Melbourne. Stock levels are still relatively low– particularly in terms of quality properties. In part we think less properties are coming to market because - as prices have increased the costs of moving - stamp duty, agents fee & marketing costs have made staying where you are & renovating a relatively more attractive option. Availability of finance - against a back drop of possible interest rate rises in the coming 12 months hasn’t been enough to materially negatively impact demand for properties– neither has the recent decline in financiers offerings in the interest only mortgage product space.
How will it affect the market for houses vs that for units?
The gap in the median price for Melbourne houses & apartments is at a historical high. We think the gap is likely to increase based on the supply of apartments– a. coming on to the market shortly b. under construction c. in the planning approval process d. under going feasibility.
What would be the biggest and most significant game changers to watch out for? Specifically, which game changers would affect the market for houses, and which would affect those for units?
Melburnians are increasingly happy to live on smaller blocks of land in well designed properties that maximise the effective utility of the available space & offer architectural or historical merit – ideally both. This needs to be coupled with walkability to public transport & the latte lifestyle. A significant increase in interest rates e.g. 200 plus basis with a 12 month period in an already relatively highly leveraged market would have a significantly negative impact.
What areas are set to outperform and underperform? Why?
Overperform - Historic houses within the 12km to the north of the CBD.
Underperform - Modern apartments in CBD, Docklands, Southbank. These can be viewed more as a financial instrument (bond) than a property– they offer a relatively attractive yield but with very limited growth prospects - & in many instances a decrease from the original purchase price.
How do you see rental yields performing? Why?
Rental affordability in Melbourne is at or near a historic low. As such there is limited opportunity for landlords to significantly increase rents.
How does the yield for houses compare to that for units?
Yields for houses are lower & the gap between house & apartment yields is likely to increase.
What types of properties in each state will provide the best opportunities for growth (e.g, units, reno potentials, etc.)?
In Melbourne historic houses - which have an inherent scarcity factor - in suburbs with 12km of the CBD & enjoying train access to the CBD. If the house has the ability for a cosmetic or structural renovation where the owner can “manufacture their own capital growth” at a cost less than the works & the house is in a suburb relatively early in its gentrification journey– its growth prospects look particularly encouraging.
Which option seems to be riskier? Why?
The media I think have taken a simplistic “singular” view of the Melbourne apartment market & focused heavily on the negative story re new apartment oversupply in the CBD, Docklands, Southbank. Historic apartments that can not be replicated in high value inner city suburbs are a very different proposition due to their inherent scarcity. Their growth prospects are far move positive– particularly as house prices continue to rise.
