Property market update: Melbourne, January 2020

According to ME’s general manager Andrew Bartolo, the recent property price recovery, as well as encouraging monetary policy and a long-term view of property growth, is driving current first home buyers’ sentiments.

“In the case of first home buyers, it’s as though it’s now or never – it has created a sense of FOMO,” Mr Bartolo said.

Over half of the respondents, or 55 per cent, predict prices to rise over the next 12 months, particularly in Sydney and Melbourne. This figure is in stark comparison to a mere 38 per cent of respondents who believed that prices will rise two quarters ago.

Further, strong house value growth is predicted for Victoria more than any other state, with 67 per cent of Victorian respondents predicting prices to go up – a 10 per cent jump from last quarter’s prediction and a 34 per cent jump from their Q2 2019 prediction.

“Considering a combination of market factors including the buzz of home value growth, a solid spring selling season, plus rate cuts and signs from the RBA that rates will stay lower for longer, it’s no surprise overall property sentiment has improved,” he said.

During the past quarter along, metropolitan house values surpassed $850,000 for the first time in Victoria, marking a 3.7 per cent rise in house prices and a 3.8 per cent rise in unit prices over the past three months, according to the Real Estate Institute of Victoria (REIV).

REIV president Leah Calnan said that the quarterly medians show the long-term strength of the state’s property market and a return to strong growth after a short period of uncertainty.

“These are outstanding figures; the Victorian real estate sector continues to soar and set new heights. Buying in Victoria is a great investment; house and unit values are growing across the entire state,” she highlighted.

“Anyone who invested here is getting a great return.”

Moving forward, stronger capital gains are expected across the capital city, particularly in the more expensive areas, where a gain of 11 per cent has been witnessed last year.

The apartment sector will also remain resilient despite higher supply levels due to more first home buyers supporting housing demand across the lowest points of the market.

Thanks to the First Home Owner initiatives, first home buyers or investors can try their hand at investing in 2020. Eligible first home buyers will be able to lend up to 15 per cent of the purchase price of a property.

Property values

New data from CoreLogic revealed that the national housing value index increased by 0.9 per cent in January.

Sydney and Melbourne saw the largest growth, increasing by 1.1 per cent and 1.2 per cent, respectively, while Hobart posted growth of 0.9 per cent, Brisbane of 0.5 per cent, Canberra of 0.3 per cent, Adelaide of 0.2 per cent and Perth and Darwin with 0.1 per cent.

According to Deloitte, prices are rising by $3,000 per week in Sydney and $2,500 a week in Melbourne.

In Victoria, units that went under the hammer in the past quarter also saw increased prices, breaking the $700,000 price point, REIV noted.

Suburbs from the eastern and south-eastern region of the state dominated the top quarterly growth list for both houses and units, with Mitcham, Nunawading, Blackburn South, and Blackburn North all recording growth above 15 per cent for the quarter and surpassing $1 million on their median house price.

However, while there is an apparent recovery across every capital city, the speed of growth has lost some momentum over recent months. In fact, the national dwelling index slowed from a recent monthly peak of 1.7 per cent in November to 0.9 per cent in January.

According to CoreLogic head of research Tim Lawless, seasonal affect could provide some explanation for the slowdown.

“The CoreLogic seasonally adjusted hedonic index implies the time of year shaves about 1 basis point of growth from the December reading and 2 basis points from the January reading,” he said.

“Factoring in the seasonal affect, the latest results indicate a reduction in the speed of growth across most markets, especially for Sydney and Melbourne where affordability constraints are once again becoming more pressing. As advertised stock levels rise over the early part of the year, we could see some further dampening of growth rates.”

Nationally, housing values recovered 6.7 per cent since finding a floor in June last year, but CoreLogic’s national index remains 2.2 per cent below the October 2017 peak.

“With housing values rising at the quarterly pace of 3.7 per cent, we are likely to see a nominal recovery in the national home value measure within the next two to three months.”

As property markets recover, housing affordability continues to be a concern for property investors and home buyers.

Demographia’s latest annual research found that Australia’s housing market remains among the least affordable in the globe, with five of its major markets (Sydney, Melbourne, Brisbane, Adelaide and Perth) listed as “severely unaffordable” as they record a median multiple of five and above – meaning that the median house price was over five times the median household income.

Despite an 18-month downturn, Australia’s major housing markets posted a median multiple of 6.9, the third-highest among eight national housing markets in the world, behind Hong Kong and New Zealand.

“Housing remains severely unaffordable in all of the major markets, and by a substantial margin in Sydney and Melbourne,” Demographia noted in its report.

In Sydney and Melbourne, median income households need at least three years more of income to pay for the median-priced house than in 2004 when the first Demographia Survey was published.

With a healthy balance of first home buyers and investors, Melbourne is expected to grow in value by 10 to 12 per cent over the next 12 months.

“The top end of Melbourne is now performing particularly well, with Eastern Melbourne increasing by 8 per cent in property value in November,” Mozo property expert Steve Jovcevski said.

Supply and demand

Over the past quarter, CoreLogic reported a significant increase in clearance rates and auction volumes, with the combined capital city clearance rate increasing to 70.3 per cent from 26,923 auctions, up from a clearance rate of 43.6 per cent from 25,894 auctions in the previous corresponding period.

All major capitals reported higher clearance rates in the past three months when compared with the same quarter in 2018.

The highest clearance rate was recorded in Sydney (74.9 per cent from 9,546 auctions), followed by Melbourne (72.8 per cent from 12,870 auctions), Canberra (68 per cent from 937 auctions), Tasmania (62.2 per cent from 53 auctions), Adelaide (57.4 per cent from 1,385 auctions), Brisbane (45 per cent from 1,615 auctions) and Perth (39.5 per cent from 517 auctions).

According to CoreLogic’s head of residential research Eliza Owen, the rise in auction activity has coincided with the rebound in property prices.

“As prices in Sydney and Melbourne rose 6.2 per cent and 6.1 per cent, respectively, over the quarter, a corresponding increase in auction market activity is expected. Vendors have been responsive to higher prices, with auction volumes up by 4 per cent year-on-year,” she said.

In terms of supply, official figures show new building approval falling to a seven-year low over the past three months.

However, HIA senior economist Geordan Murray believes it is not a reflection on the markets, but rather the lag time between buying a block of land and building a new place.

Further, Master Builders chief economist Shane Garrett believes that the results can be attributed to a “number of one-off factors, including the reputational issues around apartments during the middle of last year as well as the adverse fallout from the banking royal commission and its detrimental impact on credit,” he said.

Rental market

Melbourne’s rental market has witnessed an unchanged quarter, with median rent prices still trending 2.3 per cent lower than they were at the same time last year.

House rents remain at $430 for the last three quarters and are at the same level as they were heading into 2018, while unit rents are sitting at $420 per week, which is $10 higher than they were at the end of 2018.

Rent on a typical unit has increased 11 per cent over the past three years to reach this point despite the city’s apartment construction boom also having occurred, Domain reported.

Relative to other locations, Melbourne’s vacancy rate has remained relatively low despite a slight increase over the past 12 months, while rental yields have risen modestly for both houses and units.

Pure Property managing director Paul Glossop said about the lacklustre yield: “Two things are at play from what the data suggests. Definitely a hangover from peak approval in 2014, 15 flowing onto completions in 16, 17, 18 and 19,” Mr Glossop said.

“In addition to that, well over 50 per cent of all finances in 2014 in the Sydney market and almost 50 per cent in Melbourne a year later was to investors. On top of the construction boom, we had a record conversion of owner-occupied properties, which created more stock without having to build more stock.”

From the end of 2000 to now, there have been more than 667,000 apartment buildings, flats or units built across the nation. This figure has been led by NSW (259,000), Victoria (174,000) and Queensland (143,000).

With robust population growth, Melbourne’s rental market is expected to see growth demand and modest rise in median rents through 2020.

However, Domain noted that yields are likely to fall in 2020 as interest rates full further and property prices increase.

“In Sydney and Melbourne, the markets are at the peak of vacancy, moving markets sideways before tight vacancies in three or four years driving yields up,” Mr Glossop highlighted.

For investors who want to retire off yields, Mr Glossop suggested diversification of assets and long-term investment.

According to him, people who have invested in the market over a 10-plus year cycle, “stuck to the same basic principles” and have seen rates grow are the investors that can get ahead from a yield perspective.

“They have been in the game for a minimum 10 years, they have focused on buying some growth assets, some cash flow assets and over time they have manufactured both growth and cash flow through developments, granny flats etc,” Mr Glossop explained.

“They have also focused on paying down their principal typically within a two- to five-year time frame of buying the property, so it’s not just rents going up, it’s also the capital base is diminishing,” Mr Glossop explained.

Hotspots

The Victorian government has announced 32 projects as successfully receiving funding from the latest round of the state’s “Growing Suburbs Fund”, which will deliver $50 million to community facilities, better services and more opportunities across 10 of Melbourne’s rapidly growing interface councils.

Successful projects include playgrounds, sporting pavilions, and family centres, with the state government reporting that they will see councils “building stronger, more inclusive communities, and improving access to vital services”.

Big winners from the grants include the Caroline Springs Football and Netball Club as well as the Caroline Springs Cricket Club, which will soon have a new sporting pavilion.

Among the city councils set to see the effects of such funding include: Cardinia Shire Council, Casey City Council, Hume City Council, Melton City Council, Mitchell Shire Council, Mornington Peninsula, Nillumbik Shire Council, Whittlesea City Council, Wyndham City Council, and the Yarra Ranges Shire Council.

Melton City Council, in particular, is set to see three new projects benefiting from the scheme: a community recycling facility, an early learning centre and a community pavilion.

According to Victoria’s minister for local government Adem Somyurek: “It’s exciting to see the range of projects this year, including playgrounds, parks, early learning centres, recycling and community sporting facilities”.

“Each one will deliver for families in fast-growing communities.”

Investors seeking capital growth will also do well to look into the top 10 subregions for annual change in dwelling values recorded by CoreLogic.

Melbourne-inner east took out the top spot, with dwelling values increasing 12.1 per cent, followed by Sydney-inner west and Sydney-Baulkham Hills and Hawkesbury, both at 8.8 per cent, Melbourne-inner at 8.0 per cent, Sydney-city and inner south at 7.7 per cent and Melbourne-inner south at 7.6 per cent.

Rounding out the top 10 for greatest change in annual dwelling value growth was Sydney-Ryde at 6.5 per cent and Sydney-Sutherland, Sydney-Eastern Suburbs and Sydney-Northern Beaches, all at 6.3 per cent.