Property market update: Melbourne, November 2019

Most of the capital city markets will benefit from the interest rate cuts and loosening of credit restrictions, Mr Kumar said. Experts predict potential price growth for each capital city markets over 2020, with Melbourne leading the way.

The Victorian capital is expected to see a price growth of 11 per cent to 15 per cent in Melbourne if the current market conditions remain, or up to 12 per cent to 17 per cent if the cash rate is reduced to 0.5 per cent, we have a stable economy, and there is no APRA intervention.

In contrast, Sydney is expected to see a growth of 10 per cent to 14 per cent or up to 11 per cent to 16 per cent.

CoreLogic’s Tim Lawless believes that Melbourne will likely see a return to peak market prices as early as January, before the rest of the country.

Melbourne’s prestigious inner east has experienced much faster rates of growth, as values increased 8.3 per cent over the last three months.

Moving forward, experts believe that markets will be driven by first home buyers in 2020 as they take advantage of the lower prices and the government’s first home deposit scheme coming into effect.

Melbourne and Sydney, in particular, will remain solid as they continue to be home to about 40 per cent of Australia’s population.

The growth will be further supported by the number of major infrastructure projects underway, as well as the decentralisation plans that will see new major economic hubs and employment nodes created.

Melbourne’s Werribee is set to become the major employment district for the state of Victoria, which in turn will create new communities with more affordable property prices.

Property values

CoreLogic’s November Home Value Index found that the value of Australian properties grew by 1.7 per cent over between October and November 2019, which takes the median value of homes to $537,506.

This month’s increase is the fifth consecutive increase in the monthly index and the largest monthly gain since 2003, as well as the first positive annual growth since April 2018.

Over the month, four capital cities moved back into positive annual growth, including Hobart (4.2 per cent), Canberra (3.0 per cent), Melbourne (2.2 per cent) and Sydney (1.6 per cent). On the other hand, Darwin (-10.9 per cent) and Perth (-7.7 per cent) saw the largest declines.

According to CoreLogic, the positive results across the country were largely driven by “rapid recovery” in home values in Melbourne and Sydney.

The median dwelling price in Sydney, including both houses and units, was $840,072 in November, while the median value in Melbourne was $666,883.

Land values in Melbourne have also shown strong signs of recovery over the quarter, with stabilising prices and increasing volumes supported by strong population growth and the strong performance of the Victorian economy, according to the property service group Oliver Hume.

Land sales around Melbourne increased to an average of nearly 800 per month during the September quarter, which is significantly higher compared with around 550 per month in the June quarter and 500 per month in the March quarter.

Oliver Hume national head of research George Bougias said: “Victoria continues to perform well across a range of indicators, including population growth, retail trade, employment and construction work done.”

“Victoria’s relative economic and employment performance is an important driver of purchasers’ decision to re-enter the market and buy property either as owner-occupiers or investors,” Mr Bougias continued.

The median lot price for metropolitan Melbourne (gross prices, conventional lots) sits at $320,000 in the September quarter, up 2.6 per cent over the quarter and up 0.6 per cent over the year.

Meanwhile, research conducted by the Real Estate Institute of Victoria found that the outer Melbourne has recorded a 59.1 per cent boost in land values over the past five years, with the median price per square metre selling for $1,116 on average this year.

Metro and Middle Melbourne saw land values skyrocket, both recording a 41.8 per cent jump over the past five years, while inner Melbourne saw land values climb by 36.1 per cent and regional Melbourne saw them increase by 32.7 per cent over the same time period.

“Melbourne’s outer south-eastern and western suburbs are some of the fastest-growing parts of Australia,” REIV president Leah Calnan said.

“Seventeen suburbs across Melbourne have had their land value more than double since 2014. Victorian property is a growth asset; anybody who bought into the market five years ago would see an amazing return.

“Middle Melbourne suburbs near the city like Essendon West and Glenroy recorded 125 per cent growth. In the west, Brooklyn provides great value with a median price of $1,892 per metre squared, competing with neighbouring Footscray or Maidstone.”

As a result of improving buyer confidence, developers continue to offer buyers incentives and rebates to secure sales – around $15,000 to $30,000 per lot, or even higher in some estates.

Mr Lawless said that Melbourne and Sydney are ultimately seeing momentum building as their quarterly rate of growth, at 6.2 per cent and 6.4 per cent, respectively, sits nearly as high as when it peaked back in early 2015, just after the first round of macro-prudential changes.”

“The monthly numbers are even a little bit higher. Sydney saw monthly growth of 2.7 per cent – the largest month-on-month gain it has seen since 1988 – and Melbourne’s back to its strongest growth since 2009 at 2.2 per cent, so it looks like the market is probably just as strong as it was back when it was racing along between 2012 [and] 2017,” Mr Lawless highlighted.

“This really highlights how fast this rebound has been in those two markets, and I think we will probably see growth continuing into early 2020 while supply levels remain very low, which is creating quite a bit of urgency in the market.”

However, while both Sydney and Melbourne are tracking around the mid-20 per cent range for annualised capital gains based on the most recent three-month trend, there are likely to be some headwinds in maintaining the rapid recovery considering low wages and household income growth, as well as economic conditions losing momentum and housing affordability worsening once again.

Moreover, the property market is yet to be tested on higher supply levels as advertised listing numbers have remained seasonally low throughout spring due to low new listing numbers and an increased rate of absorption as buyer demand lifts.

“With selling conditions looking very strong, there is a high probability that listing numbers will show a material lift through the first quarter of 2020, which will test the depth of the market, and likely ease some of the urgency that is contributing to higher prices,” according to Mr Lawless.

Supply and demand

During the final week of November, 2,599 homes went under the hammer, returning a preliminary auction clearance rate of 72.9 per cent, according to CoreLogic’s latest Property Market Indicator Summary.

Moving forward, CoreLogic anticipates auction numbers to increase by around 14 per cent, leading to the biggest week of auctions held so far this year.

“Clearance rates across the largest cities have mostly remained above 70 per cent since July, implying that vendors remain in a strong selling position,” CoreLogic said.

“With advertised supply remaining low and buyer demand rising, FOMO is once again becoming a factor in the market as buyers sense some urgency to buy before prices rise further. With auction volumes set to rise, it will be important to see whether clearance rates can hold up under the increased level of supply being brought to market over the coming weeks.”

Melbourne saw 1,217 auctions and a preliminary auction clearance rate of 73.2 per cent on the same week. One year ago, the clearance rate was just 41.4 per cent across 1,132 auctions.

Sydney, in comparison, saw 934 auctions and a preliminary clearance rate of 82.3 per cent. One year ago, 1,035 auctions were held and the clearance rate came in at 44.8 per cent.

According to CoreLogic: “Over the next few weeks, we will see the depth of buyer demand tested, with an increase in the number of properties taken to auction.”

Meanwhile, Melbourne’s land market saw sales jumping up by 48 per cent over the last quarter, marking an uplift in gross lot sales for the sixth consecutive month, according to the RPM Real Estate Group’s Residential Market Review.

Melbourne and Geelong’s land market increased 48 per cent from the previous quarter, representing 2,657 sales.

RPM’s head of communities Luke Kelly said that “move-up” buyers are ultimately encouraged to sell their current home and upgrade to a new house and land package primarily due to renewed confidence and increasing housing values in the established market.

“This buyer cohort is supporting still prevalent first home buyers who comprise 68 per cent of owner-occupier purchases, providing a more balanced land market,” Mr Kelly said.

“Although Melbourne’s median lot price rose marginally to $315,500, we’re finding that continued incentives in the order of 5 per cent to 10 per cent, which equates to sub-$300,000 pricing, and well-priced titled stock [are] attracting still price-sensitive buyers.

“If buyer confidence continues to strengthen, incentives and rebates continue to materialise into net median pricing under $300,000 and the median lot size remains under 400 square metres, we will likely get back to a stable and sustainable market by mid-2020.” 

Rental market

While other parts of the market are recovering, Melbourne’s rental market is currently seeing rents at a standstill, according to Propertyology’s Simon Pressley.

Melbourne’s vacancy rate is currently steady at about 2 per cent, but oversupply, particularly for apartments, as well as affordability pressures, which generally caused the recent downturn, continues to impact the market, he said.

“While Melbourne’s economy is still strong, the construction industry became overstimulated during Melbourne’s last boom, so beware the wishful thinkers who are hoping for a sustained bounce to Melbourne’s property market,” Mr Pressley said.

Melbourne in 2020

ANZ’s associate director Daniel Gradwell said that there have been two main developments in Victoria’s property market, which ultimately comes down to the differences between supply and demand.

On the demand side, house prices in the established market are rising at a solid rate, at around 3 per cent.

“The latest rate cut announced in early October will start to flow through the market, providing further support. It shows everything being talked about in the last three months about improved borrowing power and interest rates is having the intended impact,” Mr Gradwell said.

On the other hand, the construction side has been a weakness for the capital city.

Building approvals have been falling for the last three quarters and are at the lowest level since 2012, with further declines likely to occur. Overall, the east-coast state is “not building as much as we need” to absorb still rapid population growth, according to Mr Gradwell.

“So, prices are rising on one hand, but it’s hard to get building approvals off the ground – especially medium- to high-density sales. Pre-sales are really hard to come by. It reflects people’s concerns over building quality and cladding issues,” he said.

“Remembering also it’s hard to turn the tap on overnight. Large lead times are required to get projects off the ground.

“Construction – whether it’s housing or infrastructure or commercial property – has large multipliers in terms of flow through to the rest of the economy, which is part of the overall weakness we are seeing.”

Looking towards the end of 2019, Mr Gradwell believes that prices will keep rising before the October rate cut ultimately starts to flow through the system, largely due to there being “fairly solid sentiment” in the market.

Melbourne’s annual price growth will likely peak in mid-2020 in the low double digits.

“A key issue is there is still a real shortage of supply. While the number of listings is picking up, it’s still really low for this time of year, which adds to price pressures. I do think we will eventually start to see new listings and turnover get back to historical normal numbers,” Mr Gradwell concluded.

“On the construction side, in the next six months we should start to see approvals tick up again. Historically speaking, every time we’ve seen access to finance improve, it filters through to a pick-up in approvals.

“Given ongoing population growth, especially in Victoria, we have to keep building more housing.”