Property market update: Melbourne, May 2019

Meanwhile, CoreLogic head of research Tim Lawless believes that markets that saw massive price drops, like Sydney and Melbourne, will bottom out by the first half of 2020.

These predictions were backed by several sweeteners in the past weeks, including the federal government’s announcement of plans to allow first home buyers to purchase property with just a 5 per cent deposit, as well as the Australian Prudential Regulation Authority’s (APRA) aim to discontinue the assessment of loan serviceability based on an interest rate of 7 per cent.

However, these incentives should not be the primary motivation for investors to enter the market, he said.

Instead, investors should be prepared – both personally and financially – to grab opportunities as they come now that the property markets are expected to settle.

“If prices bottom out in two to four months, investors sitting on the sideline, they will get in. They won’t need the government initiatives. If they see the data in two-three months, see the data is flattening, they will buy.”

Over the past 30 years, Melbourne has witnessed growth in its property market by 5.7 per cent, from $131,000 in 1990 to $645,123 in 2019, higher than Sydney, Brisbane, Adelaide, Perth and Darwin.

With consistent population, jobs and wage growth, as well as higher infrastructure spending, the Victoria capital is expected to rise once again as one of the best-performing property markets in Australia, offering long-term growth potential for property investors.

According to Right Property Group’s Victor Kumar: “We’ve got very strong fundamentals in our property market. We’ve got very strong fundamentals in our economy. We’ve got all these factors that are pointing towards a property market that’ll be a lot more buoyant rather than gluggy.”

“I’ve been investing for 20-off years, and I haven’t seen money this cheap for pretty much ever. The population growth is increasing substantially (and) it is certainly fuelling the demand.”

“Then, you look at Melbourne, specifically, we got the rail network being upgraded, so that you’ve got the rail from the airport into the city, you’ve got a freeway upgraded, you’ve got the hospital upgrades happening in Melbourne as well, and these three markets are fairly big markets.”

Property value

While property values across capital city markets are still generally declining, CoreLogic’s May 2019 home value index showed that the rate of the decline has significantly slowed down.

Over the month of May, dwelling values saw a decline of 0.4 of a percentage point – the smallest month-on-month decline on national values since May 2018.

Mr Lawless said that the decline slowdown was sparked mainly by Sydney and Melbourne.

“This improvement is primarily being driven by a slower rate of decline in Sydney and Melbourne where housing values were previously falling at the fastest rate of any capital city.”

“Sydney values were 0.5 of a percentage point lower over the month, while Melbourne values were 0.3 of a percentage point lower, the smallest decline in values across both cities since March last year,” he highlighted.

Leading the capital city declines in May is Darwin with 1.6 per cent. This was followed by Perth with 1 per cent, Brisbane with 0.5 per cent, Hobart with 0.4 per cent and Canberra with 0.2 per cent.

Only Adelaide bucked the declining trend, recording a value rise of 0.2 per cent instead.

Housing Industry Association’s Tim Reardon said that, with the HIA affordability index rising by 2.2 per cent over the quarter, housing affordability has made “the most significant improvement” since September 2013.

“Affordability in Sydney deteriorated to an extent that, in June 2017, it required two average Sydney incomes to be able to afford repayments on an average Sydney home. In just over a year, this has improved to only requiring 1.8 standard incomes to purchase the same home.

“Similarly, in Melbourne, the affordability index has improved by almost 10 per cent in a year,” according to him.

“With the completion of new homes remaining at elevated levels, affordability is poised to continue to improve.”

Over the last three months, Melbourne is seeing 76.3 per cent of sales selling for less than the original listing price. Ten years ago, the figure sat at 49.2 per cent.

Luxury markets

Over the past 12 months, despite the recent cooling of their property markets, Sydney and Melbourne recorded a yearly price growth of 2.4 per cent and 1.8 per cent, respectively.

In fact, the Prime Global Cities Index - Q1 2019 report by Knight Frank showed the Victorian capital on the 22nd position of the top international cities for luxury residential price growth, following Brisbane and Sydney and preceding Perth.

According to Knight Frank’s Michelle Ciesielski, the luxury markets are being sustained through the creation of more millionaires, whose numbers are expected to grow by 21 per cent from 2018 to 2023, with a total of 116,049 millionaires in Sydney and 68,888 in Melbourne.

“Over the past five years, four millionaires were created every day in Sydney… [and] this is expected to rise to 11 millionaires per day over the next five years.”

“In Melbourne, we saw three millionaires created per day over the same period, with projections it will rise to seven millionaires a day over the next five years,” she said.

Supply and demand

New listing volumes were down in most capital cities except in Hobart, Darwin and Adelaide, where rises were seen by 9.7 per cent, 4.9 per cent and 3.3 per cent, respectively.

The largest decline was seen in Sydney at 25.5 per cent, followed by Melbourne at 24.6 per cent, Canberra at 18.1 per cent and Perth at 17.2 per cent.

Despite the decline, CoreLogic found that Australia has 5.3 months’ worth of housing supply available for purchase – the highest figure since 2012.

Melbourne, in particular, is performing above the national average at 5.9 months, which is another seven-year high, due to a slower rate of sale and higher stock for sale.

According to CoreLogic’s Cameron Kusher: “The months of supply figure highlights why the housing market is generally falling.

“Credit conditions are tight, which means fewer buyers, and generally leads to a slower rate of sales. Although vendors have responded by bringing fewer new properties to the market, total stock for sale remains elevated leading to a heightened months of supply figure.”

Days on market

Meanwhile, houses remained more popular than units across capital cities, but the average time for houses on market generally fluctuated during the final week of May, with Melbourne, Darwin and Canberra reported declines, Brisbane and Perth recorded rises and Sydney, Adelaide and Hobart held steady.

Hobart had the fastest time on market for houses at 38 days again, followed by Melbourne, Sydney and Canberra at 46 days for the former and 50 days for the two latter.

On the other hand, Perth, Darwin and Brisbane had the slowest time on market at 87 days, 79 days and 73 days, respectively.

For units, Hobart was also the fastest at 39 days, while Perth, Brisbane and Darwin were the slowest at 89, 84 and 78 days, respectively.

Over the past three months, Melbourne’s days on market nearly doubled, sitting at 43 days –significantly higher compared to 27 days this time last year.

Mr Kusher said: “The rapid rise in time on market is symptom of higher supply (advertised stock levels across the combined capitals are at their highest level for this time of the year since 2012) and less demand (capital city settled sales are down 16 per cent year-on-year).”

“Overall, the data points to a longer period of negotiation before a sale. This reflects the conditions of tougher finance and fewer buyers.”

Current vendor discounting across capital cities was between 5.2 per cent and 8.3 per cent for houses across most capital cities and between 6.7 per cent and 9.5 per cent for units, with Canberra as the low-end exception and Darwin as the high-end exception.

“In order to have the best chance of achieving a sale, [the vendor] should set realistic prices, maximise their marketing campaign to ensure their property stands out from the competition and be prepared to meet market expectations,” Mr Kusher highlighted.

Growth driver

Apart from consistent population growth, infrastructure spending also has great impact on the improvement of the property market.

CBRE’s A New Train of Thought report said that investment into metro rail infrastructure is planned to increase by 107 per cent over the next seven years, and it is predicted to flow through into the residential property market, particularly in capital cities such as Sydney, Melbourne, Brisbane and Perth.

“We estimate that associated real estate development projects within railway station suburbs in the rail projects outlined herein will reach ~$28 billion over the next 10 years,” the report noted.

The Melbourne Metro Tunnel, earmarked for completion between 2021 and 2023, will see 49 projects for high-density residential introduced to the market.

Commercial and retail developments are expected to be along the rail line, particularly in the Arden precinct.

As a result, Arden is expected to provide property for 5,000 residents by 2031, with a long-term goal to turn the area into a residential hub, the report noted.

Further, the North Melbourne station is expected to spur the growth of mix-use developments, which includes high-density residential. A further 5,000 residents are expected to be added over the next decade, creating the need for 85 dwellings per hectare in order to house those residents.

Hotspots

The Real Estate Institute of Victoria (REIV) found the best rental yields in one-bedroom apartments in Melbourne and Southbank at 6.6 per cent and 5.8 per cent, respectively, and Docklands at 5.5 per cent.

According to REIV president Robyn Waters, the good performance of the said locations is largely due to their allure to a wide demographic.

Moreover, they offer an affordable entry point for budding investors, with the median price for one-bedroom markets in Melbourne and Southbank situated at $347,000 and $394,250, respectively, while two-bedroom units in Docklands run for a comparatively pricier median of $620,000.

“Positive results for these inner-city areas are largely due to their appeal to CBD workers, higher education students and their families as well as retirees, all of whom value proximity to the CBD with all it has to offer and access to public transport,” Ms Waters said.

Other Melbourne suburbs offering affordable one-bedroom units are Carnegie, Richmond and South Yarra, all registering yields of 5.3 per cent, as well as Prahran at 5 per cent.

Meanwhile, high-yield two-bedroom unit markets can be found in Melbourne and Southbank, both at 5.3 per cent.

“Given the impending interest rate cuts, APRA guidance to loosen lending standards and the results of the federal election which has delivered stability, the REIV hopes to see an upturn in investor activity during the last half of 2019.”

The latest CoreLogic Property Pulse report, on the other hand, cited areas close to the city centre as the best performers, with the Melbourne city area growing by 2.2 per cent over the last month.

In contrast, the Inner East was home to the largest declines, with Ashburton topping the lot at a decline of 18.8 per cent.