After experiencing the effects of softening market conditions for much of 2018, will the Melbourne property market see signs of recover this new year?
While the property markets of Sydney and Melbourne will not dive into free fall, contrary to popular assumption, both capital city markets are expected to reach their lowest point this 2019, according to The Housing Affordability: Sydney and Melbourne Housing Market Update report by KPMG Economics.
Melbourne is expected to have started its recovery by 2020, one year ahead of Sydney, largely due to the difference of the impact of local investors in the capital cities.
KPMG Economics’ Brendan Rynne said: “A relatively high level of increases in the stock of residential dwellings in both Sydney and Melbourne, a decline in financing for housing investors, and the tightening in APRA lending standards have all combined to drag house prices downwards.”
“But what we have also found is that dwelling prices in Sydney are much more sensitive to the demand created by domestic investors than dwelling prices in Melbourne. It is predominately this factor that is causing the difference in expected dwelling price growth between the two markets.”
The rising number of foreign students, tougher regulatory actions and taxation measures are also expected to affect property market conditions in Melbourne moving forward.
For the first month of 2019, buyers are placed in a powerful position as most capital city markets continue on a downward trend.
After declining by at least one per cent every month since November 2018, Sydney and Melbourne recorded the weakest market conditions over January 2019, with property values falling by 1.3 per cent and 1.6 per cent to $795,509 and $636,048, respectively
According to CoreLogic’s Tim Lawless, as a result of the acceleration of the rate of decline, the rolling quarterly fall in both capital cities was recorded at their fastest pace since the downturn commenced.
The most expensive quartile of housing stock leads the value decline, with the top quartiles in Melbourne and Sydney declining by 12.4 per cent and 10.8 per cent over the last 12 months, respectively.
“Although the more affordable valuation brackets across Sydney and Melbourne have seen some resilience to falls early in the decline phase, it’s clear that all segments of the market in Australia’s two largest cities are losing value.”
“We’re seeing most of the large capital cities apart from Sydney and Melbourne showing far less divergence between the valuations brackets, which may be attributable to healthier levels of housing affordability and an absence of stimulus for first home buyers,” Mr Lawless said.
Meanwhile, listings in most capital cities also dropped this month, with Sydney and Melbourne on the lead, falling by 20.2 per cent and 11.5 per cent, respectively.
Houses remained more popular than units, although average time for houses on market continued to rise in most capital cities. Hobart recorded the best time at 44 days for houses and 34 days for units while recorded the worst at 83 days for houses and 92 days for units.
Across most capital cities, vendor discounting was between 5.8 per cent and 8.6 per cent for houses and between 6.2 per cent and 8.8 per cent for units, with Canberra as the low-end exception for both houses and units and Sydney and Perth as the high-end exception for houses and units, respectively.
In terms of new home supply, the Australian property market might be up against its hardest year in nearly a decade, according to Master Builders Australia’s Shane Garrett.
During financial year 2018-19, new supply is expected to decline to 210,000, then to 197,500 the following financial year. By financial year 2022-23, new home supply could be as low as 175,900.
Mr Garrett said: “New home building was lifted to record levels in the middle of the decade by a combination of strong population growth, big house price gains, super low interest rates and keen demand from foreign buyers, but it is now facing into its toughest year in light of declining house prices and the fallout from the royal commission really starting to bite.”
“Several of the ingredients that made up this favourable mix are no longer in place. House prices have seen sizeable reductions in a number of key markets, while state governments have erected prohibitive barriers to foreign buyers.”
According to him, while the fundamentals of the Australian economy remains solid, highlighted by a robust labour market, but this is not being translated into stronger activity in the property market due mainly to credit crunch and decision paralysis ahead of the election.
“It is vital that we get urgent clarity from all parties on exactly what they will do once the federal election has been concluded.”
Like the general conditions of the Melbourne property market, auction clearance rates also saw a continuation of softening over the quarter.
Combined capital city clearance rate declined to 43.6 per cent over the quarter, down from 53.6 per cent over the preceding quarter and down by 62.3 per cent from the same quarter of 2017.
Melbourne’s clearance rates declined by 11.2 per cent to 45.4 per cent, following Perth, Adelaide and Canberra, which recorded declines ranging from 11.9 per cent to 13.4 per cent.
Over the last 12 months, rents were up nationally by 0.4 per cent while gross rental yields also rose to 4.01 per cent. Ultimately, rental conditions have outperformed housing values as yields went up in all capital cities in the past year, except in Hobart and Darwin.
Over the week, while most capital city saw declines in the rental market, Melbourne remained steady and maintained its median weekly rent of $451 per week.
CoreLogic’s Cameron Kusher said that while the general market conditions remains soft, Melbourne and Sydney’s rental market continue to be resilient due to significant investor demand.
“Sydney and Melbourne are both seeing the impact of significant demand from investors over recent years, along with a substantial ramp-up in new housing supply (largely apartment), much of which was purchased by investors,” Mr Kusher said.
Rental yields also improved by 1.4 per cent to 3.20 per cent for houses and by 0.7 of a percentage point to 4.41 per cent for units.
However, vacancy rates in Sydney and Melbourne continued to rise this month, as in all capital cities except Hobart and Adelaide, which remained steady.
Melbourne recorded a vacancy rate of 2.2 per cent, following Brisbane with 3.2 per cent, Sydney with 3.6 per cent and Darwin with 4.3 per cent.
According to Domain’s Dr Nicola Powell: “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.”
The rise of short-term letting, which supports the increasing tourism numbers and spending, stands as one of the factors that keeps the Melbourne rental market afloat, along with the entire state of Victoria.
As indicated in the results of the National and International Visitor Surveys, tourism expenditure in Victoria rose by 8.6 per cent to $28.2 billion over the last 12 months, while total visitors to and within the state 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 were up by 6.8 per cent to 25.4 million.
According to Real Estate Institute of Victoria’s Gil King: “Holiday accommodation is no longer confined to hotels, holiday parks and hostels as it was up until a decade or so ago. These days, many tourists (particularly families) are choosing to stay in privately-let holiday rentals which has stimulated the market for investment properties, particularly Inner Melbourne apartments and houses in beachside towns.”
“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.”
The rise in tourism has also brought significant improvements to jobs growth and economic development across the state, thus supporting the overall recovery of the Melbourne property market, Visit Victoria’s CEO Peter Bingeman said.
Although Melbourne has remained resilient over the past months, the softening conditions in the property market are expected to remain for a significant period, ultimately making the capital city a buyer’s market.
As such, investors are advised against selling properties in order to avoid incurring loss due to negative equity. Instead, experts encourage them to take advantage of buying opportunities now that prices are declining.
In order to avoid missing out, investors must always be ‘mortgage-ready’ amid a tighter lending environment, according to mortgage broker Ross LeQuesne.
“You want to be able to move quickly and take advantage of the opportunities as they present themselves,” he highlighted.
“To be finance-ready means you have a pre-approval in place. To get a pre-approval, you need the necessary documentation such as your bank statements, your payslips, credit card statements, ID and so forth. You want all of those handy to be able to apply for credit.”
“And, of course, look after your living expenses, because that's what the banks are going to be looking at. Keep records and documentation from as far back as 12 to 18 months.”
Between the federal elections and the results of the banking royal commission, the lending landscape is expected to see more changes in 2019, which is why investors are also encouraged to engage property professionals, where appropriate, in order to understand market movements and ultimately make the most out of the Melbourne property market despite its softening conditions.
Mr Le Quesne said: “Quite often, like in anything, it's not what you know, it's who you know. When you’re able to establish this kind of relationship, if a good deal comes up, the agent will be on the phone to you quickly and you will be able to take advantage of that knowing that they're pre-approved and ready to go.”
“It's a changing market now that, often, it's better to have a buyer's agent because you need to have a read on the market and a true understanding of how it might fluctuate. If you're not using a buyer's agent, you're probably competing against a lot more well-educated, sophisticated, professional buyers.”
The Real Estate Institute of Victoria found that being located in a school catchment area in Melbourne can result to more than $400,000 worth of property growth as school access remains a major consideration for buyers with school-aged children.
Median house prices within the school zone range from $1,621,000 to $1,700,000 while houses bordering the one-kilometre radius are priced between $1,210,000 to $1,300,000.
REIV president Robyn Waters said: “Location within a well-regarded public primary school zone is important for increasing numbers of parents who plan to send their children to a public primary school followed by a private secondary college.”
“Parents are weighing up the cost savings of sending their children to a good public school rather than spending thousands on fees at a private school.
“Most of these schools require proof of residency such as a council rates notice, utility bills and/or driver’s licence, a statutory declaration of residence, or a minimum leasing arrangement of 12-months from a Licensed Real Estate Agent and many only offer school tours for families who live within the designated zone.”
Some of the most popular schools that influence house prices are Kew High School, McKinnon Secondary College, Mount Waverley High School, Camberwell High School, Box Hill High School, Frankston High School, University High School, Balwyn High School, Lloyd Street Primary School, Hampton Primary School, Malvern Central School, Preston West Primary School, Fitzroy Primary School, South Primary School, Altona Primary School and Valkstone Primary School.
The National Australia Bank (NAB) also cited the suburbs of Ballarat, Frankston, Melton, and Werribee as areas in Victoria that are likely to enjoy above average growth in 2019.