Like Sydney, Melbourne has been showing “signs of life” after months of consistent property value decline, ultimately pointing toward market recovery. How can investors maximise wealth creation opportunities in the Victorian capital?
While fluctuations remain in some markets, mortgage broker Marissa Schulze believes that Australian property markets are generally headed toward better days.
The conclusion of the federal election, two consecutive rate cuts by the Reserve Bank in June and July, and the easement of rules on loan serviceability assessment have lead both industry experts and investors to become more hopeful that the property market is finally heading to “a state of stability”.
Over the next four to six months, Ms Schulze expects the changes to filter through, ultimately improving most people’s borrowing capacity.
Commenting on the cash rate call, which remained unchanged at 1.00 per cent in August, CoreLogic research director Tim Lawless said the resurgence in Sydney and Melbourne housing values was likely a key topic of conversation among the RBA board this month.
“In line with rate cuts in June and July, housing values in Australia’s two largest cities have recorded a lift, with dwelling values rising 1.9 per cent and 1.8 per cent in Sydney and Melbourne over the past three months. August data showed CoreLogic’s national index recorded its first month-on-month rise since October 2017 and five of the eight capital cities saw dwelling values increase,” Mr Lawless highlighted.
“Clearly housing market conditions are responding to lower interest rates as well as the recent loosening of loan serviceability rules from APRA and the positive influence of the stable federal election outcome.”
Apart from the confidence of experts, investors were also found to be more positive and optimistic about the future of property prices, according to a new survey by ME Bank.
Over 41 per cent of the surveyed households living in their homes expect their dwelling prices to increase during 2019-20, with higher proportions of owner-occupiers expecting market growth in Brisbane, Sydney and Melbourne.
Investors were similarly optimistic, with 46 per cent expecting the value of their properties to increase in the next 12 months.
Across capital cities, those in Sydney were the most optimistic about property values, with 54 per cent expecting an increase, followed by investors in Brisbane, with 50 per cent expecting increases, and then Melbourne, with 44 per cent.
While the continued tightness in housing credit, weakened new dwelling activity and record-low mortgage rates may hinder any spectacular improvement, Mr Lawless still expects a steady recovery for both Melbourne and Sydney, as well as other property markets that experienced a series of decline over the past months.
“Housing credit policies remain much tougher than they were prior to the [banking] royal commission as lenders continue to move away from the Household Expenditure Measure and examine borrower spending behaviours and expenses more closely,” he said.
“This ongoing tightness in housing credit is expected to keep a rapid rebound in housing values at bay, despite the lowest mortgage rates since the 1950s.”
Governor Philip Lowe further commented: "It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress toward the inflation target. The board will continue to monitor developments, including in the labour market, and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”
For the first time in nearly two years, Australian dwelling values are on their way up, based on CoreLogic’s home value index for the month of August.
According to the report, dwelling values have increased by 0.8 per cent Australia-wide — the first increase seen in nationwide property values since October 2017 and the largest rise in value seen in a month since April of the same year.
Housing value increases were reported in Sydney (1.6 per cent), Melbourne (1.4 per cent), Canberra (0.8 per cent), Hobart (0.5 per cent) and Brisbane (0.2 per cent), while value losses were reported in Adelaide (-0.2 per cent), (-0.5 per cent) and Darwin (-1.2 per cent).
August marked the third successive month of capital gain in Sydney, Melbourne and Hobart.
Commenting on the upward movement across capital city markets, Mr Lawless said that “the significant lift in values over the month aligns with a consistent increase in auction clearance rates and a deeper pool of buyers at a time when the volume of stock advertised for sale remains low.”
He added that demand and buyer’s confidence, as well as lower interest rates, tax cuts and a subtle easing in credit policy, are likely responses to the positive effect of a stable federal government.
“While the ‘recovery trend’ is still early, it does appear that growth trends are gathering some pace, particularly in the largest capital cities,” Mr Lawless offered.
Despite the value rise, properties in the $1 million bracket decreased across Melbourne.
During the month, 23.1 per cent of houses in Melbourne reached $1 million, down from 29.0 per cent in 2017-18, while 6.5 per cent of units sold for $1 million or more, down from 7.8 per cent.
Melbourne house and unit prices are forecast to increase by 1 per cent between June and December 2019, ending the year at approximately $800,000 and $470,000, respectively.
While this is comparable to other capital cities, Melbourne is set for further growth in the short term, ultimately attracting the attention of investors.
Next year, Melbourne property values are expected to rise by approximately 4 per cent, according to CoreLogic’s projections, thanks to strong employment and population figures, as well as low interest rates and a slowdown of new housing construction.
Despite the improving values, median time of houses and units sitting on the market was revealed to be significantly upwards across all capital cities throughout August, according to CoreLogic’s Property Market Indicator Summary.
Moreover, vendor discounts are also commonplace in all capital cities.
In Melbourne, specifically, houses spend around 37 days on market, while units are listed for around 35 days before being snapped up.
Meanwhile, the average vendor discount on the original listing prices for houses in the Victorian capital is 6.8 per cent, while units are going for approximately 5.8 per cent less.
As of the second week of August, Melbourne has also experienced a nearly 25 per cent drop in new listings over the past 12 months.
Across all capital cities, the number of new listings has dropped by 21.2 per cent in comparison to figures from the past year.
Further supporting the signs that property supply was continuing to decline in the main capital city markets of Melbourne and Sydney, CoreLogic found that auction numbers were down by 5.8 per cent in Melbourne for the week ending 11 August, and 9 per cent in Sydney.
Both Melbourne and Sydney markets recorded clearance rates of above 70 per cent.
In the latest Finder RBA Cash Rate Survey, leading experts and economists revealed that, with $500,000, they are most likely to invest in the east coast of Australia.
Melbourne and Brisbane shared the top spot with 27 per cent of the votes each, claiming the crown as the most attractive capital city to invest property dollars in from Sydney.
In fact, Finder’s insights manager Graham Cooke said that the vast majority of economists are now steering clear of advising investment in the NSW capital.
“Sydney has traditionally been Australia’s darling in the property market, but it is no longer the belle of the ball,” he said.
Melbourne’s population story has been particularly compelling for both investors and owner-occupiers, thereby supporting the continuously improving buyer sentiment in the capital city, according to James Nihill, managing director of Patrick Leo.
As one of the world’s fastest-growing cities, Melbourne sees 100,000 people moving in each year and around 35 per cent of all overseas migrants gravitating there. Over the next four years, its population is set to further increase by 10 per cent.
Ultimately, Melbourne is predicted to surpass Sydney as Australia’s largest city by 2031, with a population of 7.7 million by 2050.
The extraordinary population growth, along with unemployment sitting at below 5 per cent, allows investors to be confident that housing demand will not slow down in the Victorian capital any time soon.
In order to deal with the unprecedented rates of population growth and ultimately ensure the continuous growth of Melbourne, the state government has decided to implement Plan Melbourne, with key projects such as the $11 billion Melbourne Metro, the $1.75 billion Regional Rail Revival program and the $972 million Melbourne Park sporting and events redevelopment.
The state government also recently announced plans to rezone 12 new suburbs for 50,000 new homes on the outer fringe.
With Victoria revealed as the best performing economy in Australia in CommSec’s latest quarterly State of the States Report, investors are encouraged to take advantage of the recovering Melbourne market, which now benefits from growing prices and improving buyer confidence, as well as positive essential property fundamentals including demand, population growth, employment and infrastructure.
Ken Morrison, chief executive of the Property Council of Australia, reiterated the importance of infrastructure investment to spur any significant growth across Australian cities.
The Infrastructure Australia’s 2019 Australian Infrastructure Audit recognised the critical infrastructure needs of our growing cities, especially the big four of Sydney, Melbourne, Brisbane and Perth.
“Australia’s big cities are not experiencing a one-off growth spurt. They’re being shaped by economic trends that have turned them into increasingly powerful people magnets,” Mr Morrison said.
“From the inner city to the urban fringe, we need the infrastructure to power the economy and support high liveability cities. If our big cities fail, the country fails.
“Infrastructure investment is vital, but it needs to be accompanied by good planning and strong governance to provide the right outcomes.”
Data from the Real Estate Institute of Victoria (REIV) found one-bedroom apartments has the highest rental yield in the state, hitting a median price of $347,500.
Following the metro area, three-bedroom houses in regional suburbs have the highest return.
REIV president Robyn Waters said: “The REIV’s analysis shows that Melbourne’s one-bedroom unit market is the most profitable for investors.”
“Considering that you only need to outlay $347,500 to buy a one-bedroom apartment in the city, it is a great market for people to dip their toe into property investment and be confident of a tidy return of around $450 a week.”
Ms Waters also pointed to regional Victorian towns as the leaders in thehigh rental yield list.
Three-bedroom houses in Moe generated a 6.6 per cent return and three-bedrooms in Stanwell returned 6.4 per cent, while one-bedroom homes in Stanwell hit over the 6 per cent mark.
Ms Waters said the results for inner city areas, such as Melbourne, Southbank, South Yarra and Docklands, “are largely due to their appeal to CBD workers, higher education students and their families as well as retirees”, as well as the value of proximity and the attraction to the CBD’s convenience and public transport.
“Given recent interest rate cuts, APRA guidance to loosen lending standards and the results of the federal election which has delivered stability, the REIV is starting to see an upturn in investor activity which is likely to continue as we approach the spring selling season,” she highlighted.
InvestorKit’s Arjun Paliwal advised investors to “buy based on the numbers” in order to get the best possible financial result.
“It’s all about supply and demand. A multimillion-dollar mansion sounds like the perfect investment property to own, but the fact is that very few people can afford to buy or rent those homes. That means demand is limited, which puts downward pressure on prices and rents, should there be major shocks in buyer demand, such as credit policy changes.”
“Conversely, a typical three-bedroom home in a good suburb will always be popular with a big chunk of Aussie families. That can put upward pressure on prices and rents due to the larger buyer base,” he said.