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Year in summary: Trends and predictions for the Melbourne property market in 2020

by Bianca Dabu | January 14, 2020
research
1 minute read

Year in summary: Trends and predictions for the Melbourne property market in 2020

January 14, 2020

After months of decline, the Melbourne property market has recovered and stabilised for the most part of 2019. Will the new year see a significant comeback from Australia’s second-largest real estate market?

According to Herron Todd White, 2019 was a year of two halves, and the May federal election was the turning point.

The royal commission and the federal election had an impact on the property markets of Australia, especially Melbourne and Sydney, the biggest markets in the country.

Property was generally subdued for the most part of the year, until the third quarter, when the reductions and removal of serviceability criteria led to an uptick in the market.

Median house prices in Melbourne increased greatly from the first to the third quarter of 2019 – likely a result of the property market stabilising from the conclusion of the federal election, two consecutive rate cuts by the Reserve Bank in June and July, and the easement of home loan serviceability tests.

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CoreLogic’s Tim Lawless said: “2019 will go down as the year when new records were set. In 2019, we saw the housing market move through the largest and longest correction on record, followed by a fast-paced rebound in values through the second half of the year.”

Further, housing turnover and new advertised stock levels fell to record lows in 2019, while interest rates and the concentration of investors in the market reduced to record levels.

Ultimately, Australia saw one of the fastest recovery cycles, “with housing values bouncing back rapidly over the second half of the year, led by Sydney and Melbourne where values are around 9.5 per cent higher since finding a floor in May,” Mr Lawless added.

Melbourne and Sydney’s premium value suburbs emerged as the biggest winners of the year. In fact, among the top 10 best-performing suburbs for growth, seven were located in Sydney or Melbourne and showed a median value of at least $1.1 million.

Moving forward to 2020, Mr Lawless said that markets are likely to be in “recovery mode” as housing prices catch up and then overtake their previous record highs.

However, the rapid rate of capital gains seen over the second half of 2019 is also expected to lose steam as stock levels rise, affordability deteriorates and the labour market weakens. Ultimately, while the pace of growth will remain positive, it will be slow for the most part, according to the property expert.

As housing values and housing demand rise, building approvals are expected to trend higher, leading to recovery of the weak residential construction figures late in 2019.

Additionally, Mr Lawless said: “Lower interest rates should support housing demand; however, lower rates could possibly dent confidence as households [are] spooked by concerns around the economy and household finances.

“First home buyer numbers [are] likely to fade as affordability impacts participation in the market, but investors are likely to be more active, chasing capital gains and opportunities for positive cash flow considering the inverted spread between mortgage rates and rental yields,” he said.

Despite uncertainties, Savills’ director of residential Chris Orr said that confidence levels will continue to rise in 2020, particularly in Sydney, where limited stock levels are the main driver of price growth.

“If we continue to see a lack of listings, we’ll no doubt benefit from similar price growth that we saw in the second half of 2019; however, my prediction is that we may start to see a larger number of listings from those who have taken the ‘sit back and see’ approach,” he said.

“This will have a balancing effect on prices being that supply begins to meet demand.”

“2019 will see the housing market end the year in positive annual growth territory, with capital city home values likely to be around 2.2 per cent higher over the full calendar year – a remarkable difference from 2018 when capital city housing values were down 6.1 per cent,” Mr Lawless highlighted.

Dwelling prices

Propertyology’s head of research Simon Pressley said that median dwelling values across property markets over the next five years are expected to outgrow the previous five.

Where the past five years saw values strengthening in only a select few locations, the next five years will see growth more widespread.

To make the most out of the market recovery, Mr Pressley advised investors to look at the medium-term fundamentals, including new building approval, economic growth, job creation and population growth when considering an investment property to ensure that they pick the right location.

The property expert also warned investors, particularly those in Sydney and Melbourne, to avoid being lured into thinking that expensive capital cities are set to begin a new market cycle, regardless of the significant price growth witnessed in the latter half of 2019.

“The 2019 mid-year momentum change in Australian property markets was triggered by the stimulus of three interest rate cuts. It’s a sugar fix of sorts, but it doesn’t change underlying fundamentals,” Mr Pressley said.

Over the past three years, median house prices in Sydney and Melbourne have increased by 2.4 per cent and 12.8 per cent, respectively.

In contrast, Glenorchy grew by 40 per cent, Bass Coast by 37 per cent, Macedon Ranges by 35 per cent, Snowy Monaro by 34 per cent, Baw Baw by 30 per cent and Geelong by 29 per cent, according to him.

Mr Pressley, therefore, encouraged investors to spend some time early in the new year setting financial goals – ultimately identifying locations that are likely to produce the best results over the long term.

“History is proof that the best performers often aren’t among the capital cities, so anyone who invests in Australian real estate without analysing the fundamentals of all options is accepting the very high odds that they won’t do anywhere near as well as they could,” he said.

“There’s never been a situation in our lifetime that borrower interest rates (investment expense) were so much lower than rental yields (investment income) like we have right now, and it seems increasingly likely that the RBA might cut again in February-March. This means that, even with a very small deposit, the annual cost to hold an investment property is near zero.

“So, whether you’re using cash or equity in existing property, do something proactive for your future and get in the game this year.”

Supply and demand

ANZ’s associate director Daniel Gradwell said that there have been two main developments in Victoria’s residential property market in 2019, which comes down to the differences in supply and demand.

On the demand side, house prices in the established market are rising at a solid rate, ultimately displaying a fairly material turnaround.

“The latest rate cut announced in early October will also start to flow through the market, providing further support. It shows everything being talked about in the last three months about improved borrowing power and interest rates is having the intended impact,” Mr Gradwell said.

On the other hand, the construction side has been showing weakness as building approval continuously fell for the last three quarters. Currently, it is at its lowest level since 2012, with further declines expected to occur.

According to Mr Gradwell, Victoria is not building as much to satisfy the demand and absorb the rapid population growth.

“Prices are rising on one hand, but it’s hard to get building approval off the ground, especially medium- to high-density sales. Pre-sales are really hard to come by. It reflects people’s concerns over building quality and cladding issues, especially in Sydney,” he said.

“Construction – whether it’s housing or infrastructure or commercial property – has large multipliers in terms of flow through to the rest of the economy, which is part of the overall weakness we are seeing.”

Moving forward, he believes that prices will keep rising even before the effects of the October rate cut flows through the market, primarily due to a “fairly solid sentiment” in the market.

ANZ Research’s latest Housing Update report forecasts annual price growth in Melbourne peaking in mid-2020 in the low double digits.

While shortage of supply will remain a key issue that may add to price pressures, Mr Gradwell said that the property market will eventually start to see new listings and turnover get back to historical normal numbers, particularly in the next six months as the positive impact of the improved access to finance becomes more apparent.

Apartment market

As the Australian population continues to grow, the demand for apartment living has also become more significant through the years.

Since the end of 2000, 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).

Melbourne’s property market, in particular, is being propped up by the growth in apartment buildings. In areas where the median prices have risen over the last 12 months, a full 79 per cent are apartment markets.

Following the post-boom downturn, the apartment market’s role in Melbourne’s turnaround proves the shift in living expectations and demand in the capital city.

At the moment, the biggest issue that the apartment market faces is the presence of defects.

Across Queensland, NSW and Victoria, the five most common apartment defects are internal water leaks (42 per cent), cracking to internal or external structures (42 per cent), water penetration from outside (40 per cent), guttering faults (25 per cent) and defective roof coverings (23 per cent).

These defects – even just the possibility of them – could dampen the enthusiasm of buyers and investors, thus negatively impacting the overall growth of the property markets.

While the Australian state governments are looking to tackle the problem with legislation, apartment markets may continue to be more challenging for investors as defects and the overproduction of space put downward pressure on prices.

Still, however challenging, the apartment market will thrive as a decided shift away from the traditional “Australian dream” in which a family will own a house emerges and the convenience and lifestyle “value-adds” of apartment living kickstart an irreversible trend across the entire country.

Ayre Real Estate’s Adrian Wilson shares his top predictions for the apartment market this 2020:

1. Stock levels will keep tightening as interest rates continue to be reduced.
2. Sales of properties prior to auction will continue to be popular and are likely to increase.
3. Properties priced $3 million-plus will favour two-stage marketing campaigns, conducting an off-market period first, and if not sold, listing actively online for auction or private treaty.
4. Inner-city lifestyle locations, such as Circular Quay, Barangaroo and Hyde ParkHyde Park, SA Hyde Park, QLD, will continue to attract interest from downsizers selling in the suburbs and looking for a luxury apartment.
5. Rental rates to remain steady, or increase marginally, across the board with number of available properties reducing due to supply issues constraining with more owner-occupiers buying.
6. Investors looking for yield are returning to the market with interest rates at record lows.
7. Increasing trend of buyers relocating between east coast cities: Sydney, Brisbane and Melbourne.

Other 2020 predictions

Apart from the shifts in supply and demand as well as the movements in the apartment market, foreign and interstate investment, population growth, technology, health and wellness will also play major roles in shaping the property market in 2020.

Foreign and interstate investment

Savills Australia and New Zealand’s CEO Paul Craig said that, aside from the downsizing trend, lower interest rates, loosening of banks’ lending requirements and continued foreign buyer interest will also play a big part in how the property industry will fare in 2020.

Australia will continue to attract foreign capital supported by a cheap Australian dollar, positive yield spreads to debt enabling positive funding from leverage and the lag effect of cap rate compression due to some scepticism of further runs in yield as the country witnesses a record yield lows/highs in valuation, he said.

Further, 2020 will see the commercial office sector continue to compress and the industrial sector continue to attract capital.

“We are concerned about the low growth in rents; however, the inbuilt rent bumps of 2-3 per cent will support overall,” he said.

“Retail is an interesting asset class and, perhaps with tough retail sales turnover, a forgotten asset class with opportunities… Retail is worth looking at, especially supported by population densification and rising or changing socioeconomic conditions of the surrounding demographic.”

More Australian investors have also got their eyes on interstate markets, with 45 per cent of investors looking to buy outside of the state that they live in over the next 12 months and 63 per cent of investors considering rentvesting whereby they rent in one location and invest in another, according to the 2019 PIPA Investor Sentiment Survey.

PIPA chairman Peter Koulizos said: “Borderless investing as a bona fide property investment strategy had blossomed over recent years. More and more investors are recognising that there are myriad investment opportunities around the country rather than being blindsided by what’s happening in their own backyards.”

“Australia has eight capital cities and dozens of major regional areas, which have property markets at different stages of the market cycle at the same time.

“Savvy investors always consider the locations that offer the best market fundamentals as well as prospects for capital growth over the medium to long term. They chose not to follow the masses, but to invest in locations before prices start to rise, such as in Sydney in 2012 and in Melbourne not long after.”

Population, technology, health and wellness

RobertsDay’s co-founder and director Mike Day said that drop in car ownership, smaller houses, walkability impacting property prices, residential blocks atop shopping centres and “mini Melbournes” in outer suburbs are some of the 2020 trends that could have a flow-on effect on the nation’s property market.

Where communities used to be built around vehicles, the new year will see them built around pedestrians, cyclists and “light” modes of public transport such as e-bikes, trams and buses. Millennials and baby boomers will drive the demand for these changes, according to Mr Day.

Other trends that are likely to impact the property market in 2020 are the growth of “mixed-use” developments and the emergence of “overlapping use” buildings; growth in sustainable and affordable mobility on demand in suburbs; increase in the supply and demand for townhouses; the rising significance of “Walk Score”; and a separation of roads, bicycle paths and pedestrian paths.

Ultimately, whatever takes place in the next 12 months, as the beginning of a new decade, will set a precedent for the next 10 years, according to Mr Day.

“As our population grows and innovative new technologies and ideas emerge, future generations will look back at the 2020s and point to it as a decade that reshaped our cities – especially our outer suburbs – more than any other decade in the last century,” he said.

Strategy

Despite the expected recovery of the property market, Property Club’s Kevin Young advised investors in certain suburbs to hold onto their properties rather than sell during 2020 in order to emerge as long-term winners.

According to him, sellers’ regret is a common issue during the past 50 years with property owners regretting selling their properties too early ahead of a major bounce in their local real estate market.

Research shows that houses that sold for a profit are typically held for 10.0 years and units for 8.8 years. In contrast, house owners that sold at a loss typically held their property for 5.8 years and units that sold at a loss were generally held for a similar period of 5.7 years.

Further, investors had a greater likelihood of reselling their properties at a loss compared to owner-occupiers, with 11.3 per cent of owner-occupied properties resold at a loss compared to 17.4 per cent of investment properties.

“It is therefore critical that property owners who are considering exiting the property market and selling their properties do not do so in markets that are at the bottom of their property cycle or in recovery mode,” Mr Young said.

The top 10 markets where you shouldn’t sell, according to him, are Brisbane, Gold Coast, Townsville, Ipswich, Newcastle, Melbourne, Sydney, Adelaide, PerthPerth, TAS Perth, WA and Darwin.

In order to make the most out of the changing and overall challenging market conditions, CoreLogic advised investors to be smart about the decisions that they will make beginning this new year.

Generally, the Australian property market is in state of flux, according to the report.

“Over the quarter to July 2018, there have been dwelling value declines in Melbourne, Sydney, Perth and Darwin. Conversely, Hobart, Adelaide and Brisbane have had increases. Yet regional areas – excluding Western Australia – have either had small declines or reasonable increases over the same period. Nationally, the number of sales has declined 9.8 per cent year-on-year to July 2018,” CoreLogic noted.

“At the same time, the annual change in rent values has slowed, sitting at only 1.6 per cent nationally in July 2018. Some areas are stronger than others: Sydney and Darwin rents have declined over the period, while Melbourne and particularly Hobart have maintained momentum to the end of July. Demand for investment finance is dropping.

“If you’re an existing property investor or just looking to start your portfolio, it’s important to be realistic about the changing market to determine the best strategy for you.”

CoreLogic’s top 10 tips to help one invest well are:

1. “Do your homework”
2. Consider the location
3. Determine whether you’re going to build
4. Understand future ROI opportunities
5. Weigh up the type of investment
6. Determine possible renovation work
7. Consider DIY work
8. Walk away if you have to
9. “Sweat the details”
10. Protect your investment

Finally, CoreLogic strongly advised investors to make sure they are insured and never underinsured.

“You undoubtedly know that insurance is essential, but double check to determine you are not underinsured,” CoreLogic said.

“Whether you own or are considering buying an apartment, be aware that improvements made to your lot by you or previous owners may not be completely covered in the strata insurance taken out by the owners corporation.”

 

Track the major market movements in Melbourne and get to know more about the capital city’s growth drivers and hotspots through Smart Property Investment’s Property Market News page.

Year in summary: Trends and predictions for the Melbourne property market in 2020
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