Melbourne has been determined by the Urban Land Institute and PwC to have the best property investment and development prospects, overtaking Sydney and Singapore. Is it the best time to come back to the capital city after it has come off a property boom?
According to the Emerging Trends in Real Estate Asia Pacific, Melbourne’s number one ranking was largely due to constrained office supply, good yield spread in comparison to the cost of debt and sovereign bonds and a market that is considered to be deep and liquid while also having a solid rental growth potential.
While Melbourne’s residential market showed signs of improvement in the past few months following the end of the property boom, the capital city’s office and industrial investing ultimately raised its status.
The report found that office and retail yields are currently at 4.5 per cent and industrial yields are at 5.5 per cent, attracting international investors.
“The survey results for this year’s Emerging Trends in Real Estate® Asia Pacific report shows that many investors in the region are looking to Australia’s largest cities for investment opportunities,” said Susan McDonald, ULI Australia chair and Mirvac head of retail.
“Both Melbourne and Sydney are core markets at heart but we are seeing that with the number of investable assets significantly lower than in Japan there is strong competition to place capital, especially with so many international players looking to buy.”
The opportunity to add value to their real estate assets also attracted investors, particularly now that the tight lending environment makes property purchases and refinancing significantly harder.
According to Tony Massaro, partner at PwC Real Estate Advisory: “The sheer weight of institutional capital, both domestic and foreign, has pushed yields down further in core markets, with most investors reporting that finding assets to purchase continues to be difficult.”
“From a lending perspective, continuing pressure on banks from the royal commission and rising US interest rates will tighten lending even further, particularly for developers.”
While the commercial and industrial property markets are thriving, the residential property market of Melbourne currently witnesses its softening state following an unprecedented property boom a few years ago.
Home values in Melbourne have decline by 0.4 of a percentage point, higher than Sydney and Adelaide, according to CoreLogic’s Property Market Indicator. Meanwhile, Brisbane and held steady and did not move.
CoreLogic’s Cameron Kusher said that Sydney and Melbourne have become considerably cheaper, but they remain substantially more expensive than other capital cities.
In fact, Melbourne’s value gap—compared to other capital cities, excluding Sydney—is the widest it has ever been.
“Historically, the value of houses in Melbourne has been quite similar to those in Brisbane and Perth; however, this is no longer the case,” Mr Kusher said.
Melbourne’s median dwelling value is currently at $665,044, with the most expensive properties found in the Outer East at $745,094, Inner South at $901,581 and Inner East at $1,127,558. Meanwhile, the rest of Melbourne’s areas are below the capital city median, with West Melbourne being the most affordable at $578,992.
While dwelling values are expected to reduce further over the coming months and years, Mr Kusher said that any significant reduction in housing costs back to historic premiums would take a long period of declines or flat housing market conditions.
The economic strength and populations of both Sydney and Melbourne are also likely to counter the possibility of significant price declines.
As values decline, so do listings. During the final week of November, listings were up across most capital cities except Sydney, Melbourne and Brisbane—with Sydney leading the decline at 9.9 per cent.
Melbourne joins Hobart and Canberra as the top performers in terms of average time on market for houses at 34 days, 29 days and 27 days, respectively.
According to Mr Kusher, despite being one of the top performers, the days on market in the Melbourne property market is trending higher, providing buyers with more choice and less urgency.
As median days on the market continue to go in most capital cities, vendors are likely to adjust their price expectations lower or withdraw their property from the market in the meantime.
Vendor discounting across most capital cities was between 4.5 per cent and 7.5 per cent for houses and between 5.5 per cent and 10.6 per cent for units—with Canberra as the low-end exception and Darwin as the high-end exception.
More than 75 per cent of properties that sold over the three months to October were less than their original purchase price, according to CoreLogic Property Pulse. Only 7.0 per cent of properties sold for their originally listed price and the remaining 17.6 per cent sold for more than their listed price.
“Geographically, the rising trend of a greater share of properties selling with a discount is being driven by the Sydney and Melbourne markets where buyers have endured a long period of low advertised stock levels, rapidly rising prices and intense FOMO,” Mr Kusher said.
“As housing market conditions have weakened, buyers have more stock to choose from and far less urgency. They are gaining more leverage, negotiating harder and a growing proportion of vendors are selling at prices lower than their original advertised price.”
Clearance rates across the country have declined to 40 to 45 per cent, which experts said was indicative of a softening market.
After a five year growth, residential building activity in Victoria is expected to come off the growth cycle and decline until 2021, according to Fiona Nield, executive director of Victoria at the Housing Industry Association.
In fact, the current forecast of new home starts are predicted to drop by 34.8 per cent by financial year 2020–21, which is expected to leave total housing starts of under 50,000, just below the average of the last decade.
One of the greatest factors that influence the home building activity is the current home lending landscape, where ordinary home buyers facing constraints when accessing finance.
“Slower processing and a reduction in lending is weighing significantly on the housing market. The impact on residential building activity will become more evident as we progress into the new year,” Ms Nield said.
Still, despite the decline, the Victorian property market is unlikely to deliver any harsh side effects to the local economy due to the state’s strong labour market and consistent economic growth that continue to fuel demand for more housing.
Master Builders Australia’s chief economist Shane Garrett also believes that the home-building market will remain resilient amidst warnings over significant reductions in the availability of credit, as long as investors pay attention to their serviceability.
“Finance is where the greatest challenge lies, but supply conditions are relatively abundant at the current time both in terms of the number of new homes being built and being made available to the market and also the very large available stock of second hand or existing dwellings as well.”
“The performance of residential building has proven more resilient than expected in light of the unfolding credit crunch and less favourable conditions in Australia’s largest housing markets,” according to Mr Garrett.
Moving forward, the tougher financial environment is likely to take its toll on the volume of new home building, with the largest reduction expected to be seen on the amount of larger apartment projects.
At the end of the day, there is enough work that needs to be done across Australia—enough for both investors and homebuilders to breathe a sigh of relief, according to Housing Industry Association’s principal economist Tim Reardon.
“We've gone from 230,000 starts per year to 215,000 starts per year. Interesting, but shrug your shoulders. Australia’s a great place to live—the land of milk and honey, with 28 years of continuous economic growth.”
The Rental Affordability Index report from National Shelter, Community Sector Banking, SGS Economics & Planning and the Brotherhood of St Laurence found that the number of Australians opting to rent has increased from 25 per cent of households to 30 per cent between 1995 to 2015, driving prices up for landlords.
Apart from the introduction of the capital gains tax reduction and negative gearing in the 1990s, the report said that the the current state of interest rates and a widening income inequality have pushed for the rise in renting, with more middle- to high-income households renting longer.
“There is less social and aﬀordable housing stock available than there once was a decade ago. As a result, more low-income Australians are pushed into the private rental market and pay unaﬀordable rents,” the report noted.
“As it stands, 44 per cent of all low-income households are in housing stress, compared to 35 per cent in 2008. This rises to 51 per cent for households in NSW, or 62 per cent when considering just households in the bottom income quintile. For investors, vacant properties are still worth holding on to and are often held on to for long-term capital gains.”
Hobart stands as the least affordable capital city in all of Australia to rent in, with a rental affordability index (RAI) of 101 as of June 2018, followed by Greater Sydney with an RAI of 113, Greater Adelaide with an RAI of 114, Greater Brisbane with an RAI of 123, Greater Melbourne with an RAI of 127, ACT with an RAI of 128 and Perth with an RAI of 144, making it the most affordable Australian capital city to rent in.
Meanwhile, vacancy rates declined in most capital cities, with Hobart slipping to just 0.3 of a percentage point and Melbourne falling to 1.6 per cent from 1.7 per cent during the quarter, with just 9,320 dwellings available for rent.
Despite the rising prices in the rental market, the latest edition of Urbis’ Apartment Essentials report shows that the Australian apartment market is continuing to “flatline”.
“The national apartment market will continue to see lower sales volumes with a less consistent flow of new apartment marketing launches, buyers sitting on their hands and banks slowing the credit flow to developers, resulting in fewer construction commencements,” Urbis’ director Clinton Ostwald said.
Across the major capital cities, Brisbane recorded the most amount of sales at 420, followed by Melbourne with 330, Perth with 236, and then Sydney with 46, with two-bedroom, two-bathroom apartments emerging as the most popular apartment type.
Meanwhile, Sydney apartments are currently the most expensive at $833,152, followed by Brisbane at $736,065, the Gold Coast at $727,685, Perth at $635,805 and then Melbourne at $600,558.
Amidst the softening property market of Melbourne, investors are provided the opportunity to continue growing their portfolio through the ‘buying and yield’ strategy, particularly during December when there's not so many buyers around and it's easier to bag a bargain, according to Real Wealth Australia’s Helen Collier-Kogtevs.
Cash flow can help investors stay afloat as the property market makes its way towards recovery. The golden standard is yields of at least 6 per cent.
Capital cities are especially abundant with cash flow opportunities, Ms Collier-Kogtevs said.
“I’m seeing on a daily basis now that some great deals are coming through. Properties that are selling at $600,000 are now getting kind of high $400,000’s, properties up in the millions are now getting in the hundreds of thousands; so there’s certainly plenty of opportunity for investors.”
“I see it as a fabulous time to for those that have already got their finances sorted, their budget sorted, they’ve got a savings plan … their credit files are clean, so they’re paying their bills on time, because that’s now becoming more important.”
According to him, the margin between gross yields and deposits is now the widest it’s ever been, but despite the changes in the cost of money, gross yields for property remains stable.
In other words, yields have been consistently immune to the unpredictable movements of the property market, particularly in recent times, when some of the biggest markets continue on to the softening phase, the economist said.
“The highs and lows of capital growth have always been a hook to investors. The cycle always rises on the back of speculative investors wanting to get in on higher prices but if we take that roller coaster ride out of it, residential investment offers tremendous positives in the form of yields that are highly tax-advantaged.
At the end of the day, the property market of Australia is indeed changing, but for experts and smart investors, it’s all business as usual, according to Right Property Group’s Victor Kumar.
In today’s changing market, success comes down to being able to adjust and make decisions around the new landscape, keeping in mind the end goal that has inspired you to start the investment journey in the first place.
“Markets change, and in the years coming up, vendors will become a lot more negotiable because there's less buyers in the market. We can jump back in and be very selective on the properties that we buy so that we're buying based on today's fundamentals, not what used to work three years ago.”
“Now more than ever, you should really get some professional advice and professional guidance to shut out the noise and concentrate in the areas that does make sense because there's just so much other good news out there.”
“People need to sort the wheat from the chaff and just not focus on the negative stuff. Just go forward, business as usual. This is history repeating itself—just dressed differently,” Mr Kumar said.
While the end of the property boom has left the state’s real estate quite expensive, Melbourne, along with Sydney, is now showing signs of improvement in affordability, according to the Housing Industry Association.
Real Estate Institute (REIA)’s Malcolm Gunning said: “It's a cash flow game. Don't look at your prices every single day to see whether it's going up or down. Wait 10 years and then review your prices. You'll probably see it in a very different position.”
“In markets like this, the seller loses a bit of momentum, but the purchaser has all the momentum. Stay your course, know your numbers, and making sure that your cash flow position is fine. Don't get carried away. Property is still the biggest asset cloud in Australia."
Among the top performing suburbs in and around Melbourne, based on annual median growth, are:
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Check out Smart Property Investment's Best Suburbs page to know more about the top-performing suburbs across Australian states and territories.