After an unprecedented property boom, the Melbourne market started to soften in 2018—a trend further enhanced by the tightening of credit and other regulatory changes in the market. Will the Victorian capital recover soon?
Across Australia, confidence in the growth of property markets has slipped, according to the results of the ‘ANZ/Property Council Survey’.
Confidence in the property industry garnered 15 points for the last 12 months—its lowest result since September 2013. While expectations for housing capital growth over the same period declined to -23 index points, with the lowest being NSW at -60, followed by Victoria at -43.8, the ACT at -13.8 and Queensland at -5.1.
Western Australia and South Australia are the only states that recorded positive results at 7.3 and 27.9, respectively.
Among the reasons behind the decline in confidence on the property market are the tightening access to finance, softening forward work schedules and an increasingly negative view of the economy, Property Council of Australia’s Ken Morrison said.
“It’s crucial that our policy-makers take the longer term view and support sensible policies that sustain and stimulate the growth of Australia’s biggest industry which supports 1.4 million jobs and delivers the places our growing population needs to live and work.”
“The global economy headwinds are picking up, foreign investors have been turned away, credit availability has tightened and our largest residential markets have softened rapidly,” according to Mr Morrison.
The relatively high level of increases in dwelling stocks and the decline in financing for investors are also deemed to have dragged house prices down and, therefore, decreased consumer confidence.
However, contrary to doom-and-gloom headlines that say Melbourne and Sydney will go into free-fall, The Housing Affordability: Sydney and Melbourne Housing Market Update report by KPMG Economics found that both markets are actually expected to move into growth territory in the near future.
In fact, Melbourne is expected to recover in 2020 and Sydney will follow suit the year after.
KPMG’s chief economist Brendan Rynne said: “With more than 800,000 foreign students studying at Higher Education, Vocational Education, Schools and ELICOS institutions in Australia, and adopting a higher occupancy rate than the average per dwelling, the accommodation demand for foreign students would have been around 87,300 dwellings in Sydney and 78,500 dwellings in Melbourne in 2018.”
“Our housing update shows that the tougher regulatory actions and taxation measures by both federal and state governments we identified last year have had a significant effect,” said Mr Rynne.
“There has been a falling-away in foreign interest, notably from China, and lending to domestic buyers has got stricter, while housing supply has increased. This is why prices have declined—but we believe that process will reach its peak over the next few months and then go into reverse later this year.”
Capital city asking prices in the past month rose by 0.4 per cent for units to $571,600 and declined by 0.9 per cent for houses to $924,500.
Year-on-year, Canberra saw the strongest asking price gains for both houses and units, while Sydney, Darwin andall experienced price declines.
Brisbane and Hobart, meanwhile, recorded increases in house asking prices and declines for unit prices year-on-year. On the other hand, Adelaide and Melbourne recorded decreases in house asking prices and increases in unit asking prices over the same period.
Across the country, loan numbers declined by 11.9 per cent while loan sizes also fell by 1.8 per cent, which the Real Estate Institute of Australia claimed as the largest quarterly decline since March 2017.
Auction clearance rates were also down to 61 per cent as of 17 December 2018—significantly lower from 75 per cent clearance rates in 2017.
Overall, approximately 30 per cent fewer properties were sold via auction and 22 per cent fewer properties were sold via private sale, according to Gil King, CEO of the Real Estate Institute of Victoria.
As negative as it sounds, Mr King said that these declines may actually be a sign of something good for the property market.
“The property boom of 2017 could not be sustained and a levelling or correction of the market is a good thing in the context of housing affordability already being a pressing issue in Melbourne.”
Like most experts, he remains hopeful that the market will pick back up in 2019 as lulls are usually cyclical.
Like property values, new house approvals also decline in most states, with Victoria noting the largest dwelling approval fall of 14.6 per cent, followed by NSW, Western Australia, South Australia, Queensland and the ACT. Northern Territory held steady while Tasmania recorded a rise in approvals.
“This weak result shows just how much the current credit squeeze is weighing on the home building sector,” Housing Industry Association’s Diwa Hopkins highlighted.
As anticipated, overall listings declined over the holiday period due to vendors withdrawing advertising and inspections over Christmas and New Year.
However, the declines in some capital cities were more than expected, according to SQM Research. In particular, Sydney, Melbourne and Canberra saw listings decline by 17.7 per cent, 17.2 per cent and 15.5 per cent respectively.
Meanwhile, property resales across capital cities resulted in over $14 billion in profits, with Sydney and Melbourne contributing the most, according to the latest edition of the CoreLogic Pain & Gain report.
During the September 2018 quarter, Sydney and Melbourne accounted for 31 per cent and 24.7 per cent of resale profits, respectively.
The profitability of both capital cities even had a bleed-through effect to nearby regional areas, CoreLogic’s Cameron Kusher said.
Similarly, new home sales also saw a rise during the month—a welcome change after consecutive months of declines.
HIA found that new sales rose the most in South Australia by 7.4 per cent, followed by Victoria with 7.3 per cent, Western Australia with 2.2 per cent and Queensland with 2.1 per cent. Only New South Wales record a new sales decline, dropping by 3.3 per cent.
While the new home sales figure puts a positive spin on the current market cycle, Geordon Murray of HIA said that there may be certain factors that could hamper the recovery of the softening markets.
“Given the softening of the Sydney and Melbourne housing markets and the fact that the tight credit environment remains an issue for borrowers, we are not confident that the lift in sales in November marks the end of the downward trend seen throughout 2018.”
“Tighter credit conditions facing owner-occupier borrowers are now weighing on the detached house building market, illustrated clearly by the reduced levels of new home sales and building approvals.”
“With the new home market already looking vulnerable, policy-makers will need to proceed cautiously when responding to the commission’s recommendations,” according to Mr Murray.
The Domain Rental Report for December 2018 quarter found that house rents in Melbourne increased by 2.3 per cent to $440 per week, while rental yields improved by 1.4 per cent to 3.20 per cent.
On the other hand, unit rents remained stable at $410 per week, while rental yields improved by 0.7 of a percentage point to 4.41 per cent.
According to Domain’s Dr Nicola Powell, rental prices will continue to rise albeit at a slower pace.
“Despite a large pipeline of new apartments hitting the rental market in recent years, competition has been driven by strong population growth. However, with interstate and overseas migration slowing from their historical highs, we could see demand soften over the longer term.”
Overall, moving forward, there will be a slow recovery from historical lows for gross rental yields as dwelling values decline and rents rise, she said.
“The numbers show that, nationally, rents are holding firmer relative to dwelling values given the improvement in rental yields.” Dr Powell highlighted.
Meanwhile, Melbourne’s vacancy rates rose 1.9 per cent from 1.6 per cent, with 10,808 rental properties available
Moving into the new year, experts consider an increase in tourism numbers and spending as a major growth opportunity for investors with short-term lets and apartments in Victoria as well as for those selling apartments to families of international students.
The National and International Visitor Surveys found that tourism expenditure in Victoria rose by 8.6 per cent to $28.2 billion over the last 12 month, and total visitors to and within the state also rose by 8.2 per cent up to 82.3 million.
Local overnight spending in the state was also up by 9.8 per cent to $14.6 billion, while the number of visitors was up by 6.8 per cent to 25.4 million.
A huge part of the rise in spending was attributed to Asian countries, including India, China, Japan and Indonesia.
Mr King said: “Melbourne was ranked the third-best student city in the world in 2018 and welcomed 200,000 international students in 2017. The families of these students are a big contributor to Melbourne’s tourism success and, in some instances, are incentivised to purchase property here.”
“We’re going to make sure that the visitor economy continues its phenomenal growth in the future with strategies like Victoria’s Golf Tourism Strategy 2018–2023 and partnerships with the likes of the NRL, Rugby Union and NGV,” Visit Victoria’s CEO Peter Bingeman added.
As Melbourne continues to soften, experts strongly encouraged investors who want to stay in the market to chase long-term investment opportunities ito allow their portfolio to thrive through the ebbs and flows of market cycles.
Simply speaking, whether the market is on an upward or downward trajectory, investors must make decisions based on the fundamentals of property investment, according to buyer’s agent Paul Glossop.
Instead of picking properties in boom areas, he advised picking ‘fundamentally strong assets’ that will provide stable cash flow.
“Cash flow is going to be a really important component in what's going to drive the interest of investors over the next three or four years,” the buyer’s agent said.
“Try not to get too excited by boom markets and too downcast about flatter markets and even potentially declining markets. As long as you’re well resourced and you have a good cash flow for when things are a little bit slower, you’re good, because it’s about long-term goals and long-term gains.”
At the end of the day, Australia has a very good economy and that will keep the property markets afloat in the coming years.
Melbourne, for one, remains as the ‘population growth powerhouse’ of Australia, with its population rising by more than two per cent per annum.
“We go back to the fundamentals of this country and we are looking very, very stable. We've got five-year interest rates. Interest in money is not going anywhere. The cost of money is not going anywhere. Anyone who's fearing price hikes of two or three per cent is going to be waiting a long, long time,” according to Mr Glossop.
Right Property Group’s Steve Waters also advised investors to prioritise cash flow management and liquidity to maximise investment opportunities in the property market this 2019,
Moreover, investors must be able and willing to adjust their strategies based on personal circumstance and the movements of the market, which could mean having to sit on the sidelines instead of actively buying—a strategy that takes as much confidence and sophistication as other active investment strategies.
“This is sort of connected with having good cash flow management and knowing their situation. They don't feel obliged or pressured to buy when they don't think it's the right time to buy because they're not pegging themselves against other investors. Some of the best investors I've seen have had the confidence to make that decision,” Mr Waters said.
Investors can also benefit from seeking opportunities across emerging markets instead of staying in their own backyard or following trends, according to the property expert.
“It's bargain time. Find great properties under market value, in the affordable belts. It is that simple.”
“I think too many people are trying to complicate it. There's so much data out there and there's so much rhetoric that it’s confusing the consumer. But if you just break it down to the real basic form, this is a normal market. The market has just gone back to normality.”
Depending on the state of the local and national economy, experts believe that by 2020 Melbourne and Sydney will have bottomed. This will then be followed by modest upward movements.
According to CoreLogic’s Tim Lawless: “Gut feel is we'll probably move through the downturn sometime in 2020. From there, we'll start to see a gradual upswing in prices. Sydney and Melbourne will be quite similar, even though the population growth and the economies are a little bit different. I think we'll probably see both markets behaving quite similarly.”
“If you find out where the bottom is, you're probably guaranteed a 15 per cent uplift in about 18 months to 2.5 years.”
Voted as one of the most liveable cities in the world and listed as an international investment hotspot in the entire Asia-Pacific region, beating out Sydney and Singapore, the Melbourne property market will remain far from any catastrophic downfall.
Urbis’ Mark Dawson said that Melbourne’s reputation along with its strong population growth is likely to push up property investment moving forward.
“It's a stability and growth story that people have been drawn to in Melbourne: a safe haven. Melbourne’s been one of those strong, stable and steady performers over recent years, rather than having the same rapid accelerated peaks and troughs that other markets have experienced.”
“If you’ve got a reasonably long-term view, then the next 12 to 18 months [would] probably have some good buying opportunities for you. Take advantage of those positive buyer conditions and pick up on the upward trajectory that you’ll get over time,” he said.
When looking for investment opportunities, investors are advised to look for new infrastructure projects as it is typically a sign of a budding hotspot.
A new infrastructure project can mean job creation, and more jobs can mean a stronger economy, which eventually translates to more people wanting to live in a given area.
Suburbanite’s Anna Porter cited the $16 billion North East Link railway project as one of the major opportunities in Melbourne.
Apart from alleviating some congestion issues, Ms Porter said that it could also be a game changer for the residential property market.
“This is the same with the Melbourne rail infrastructure, whilst the area is set to benefit from the other improvements such as the Ring Rail, which will provide Melbournians with a second metro line, this isn’t the catalyst for housing growth in the immediate future.”
Other suburbs that performed well in 2018 may also remain in the spotlight for 2018.
These include, which has the highest gross rental yields for units among all suburbs within 10 kilometres of a capital city, and Melbourne, which recorded the highest total value of sales for units.
Finally, locations in the outer Melbourne area also saw the most growth in the Victorian property market for 2018.
“For Metropolitan Melbourne, REIV data shows the largest annual increases in the median house price were consistently found in Outer Melbourne with suburbs such as Keysborough, Roxburgh Park, Officer, Wyndham Vale and Rosebud recording rises of up to 20 per cent,” Mr King said.
Wyndham Vale, located 30 kilometres south-west of Melbourne, experienced strong conditions, with median house price increasing by an impressive 17 per cent over the past year to $480,000.