A look into Victoria’s residential property market: Q4

“I think there were two pronounced developments: the first being there was a broad acceptance that an improvement in the market is here to stay in terms of price growth,” Mr Gradwell said.

“Auction results have been strong, and there are greater levels of stock on the market and rising transactions. It’s not just a short-term sugar hit, which people might have been expecting, and the realisation that a stronger market is here to stay is why we’re seeing more people in the market keen to purchase.

“Secondly, the supply-demand imbalance continues. Over the final quarter last year, we finally started to see some positive signs regarding the construction pipeline, which has been a long time coming. We’re not talking about a sharp rebound, rather some green shoots emerging by way of building approvals starting to stabilise rather than continuing to fall. Building approvals fell more than 25 per cent from the peak and have now recovered just 3 per cent.”

Further, housing finance also picked up for the construction of new dwellings for both owner-occupiers and investors, according to Mr Gradwell.

“[Therefore] we have reason to be more optimistic about the construction cycle than we were three months ago.”

Taking a look at both economic and property indicators, Mr Gradwell cites a “mixed” bag.

“On the economic front, the recent bushfires and coronavirus present some challenges. For people directly [impacted] by the bushfires, it’s catastrophic, but the impact on the broader economy is likely to be temporary. There will be some rebuilding stimulus, which the federal government has already announced that will go directly to these communities,” Mr Gradwell explained.

“Coronavirus will have a larger impact. A recent ANZ Research note forecast the bushfires to take 0.2 per cent off GDP, while coronavirus will shave off 0.5 per cent due to the impact on tourism and foreign students. And, unlike the bushfires, there won’t be any stimulus measures.

“…In terms of property indicators, we’ve seen some tentatively positive numbers coming through in building approvals.

“This is important given they were at very low levels throughout 2019 for both apartments and detached houses. Of course apartments were hit harder, which reflected concerns over build quality and cladding issues, which were more prominent in Sydney but still had an impact in Melbourne.

“That said, it’s worth highlighting the large lead and lag times before getting product onto the market. Even if building approvals start to pick up today, there will still be a housing shortage in the short term.”

Going forward

Mr Gradwell said 2020 is shaping up to be a good year from a housing standpoint.

“Anticipated rate cuts will further entrench growth in prices for existing and new dwellings across both detached housing and apartments. Prices are already above the previous peak for units and apartments in Melbourne,” he said.

“We’ll continue to see a pretty solid presence of first home buyers in the market. But it gets complicated because price growth doesn’t help affordability, which is already challenging. While the new home loan deposit scheme will help 10,000 first home buyers a year, it won’t affect a material change.

“The demand and supply dynamic will put upward pressure on prices initially, but building approvals and construction should start to accelerate in the second half of the year. That’s the key challenge; supply can take 12-18 months to come through, and the delay could put further pressure on both housing prices and rents.

“Vacancy rates are already low, and if we’re not building enough for the remainder of the year, it’s likely the vacancy rate will continue to fall and result in continued rent increases.”