Most of the property market has remained resilient as the economy struggles with the impacts of the COVID-19 outbreak, but Melbourne continues to follow a downward trajectory following renewed restrictions. How will the Victorian capital fare in the remainder of 2020?
Over the quarter, Melbourne saw the sharpest decline in values of the capital city markets, led by declines in the inner east and inner regions, which have been impacted by the pause on international migration, and an acute decline in employment across tourism and hospitality, according to CoreLogic.
Meanwhile, Herron Todd White found that the capital city is currently seeing lower rental yields as a result of high rates of unemployment and reduced housing demand.
Further, over the next 12 to 24 months, Melbourne investors are expected to feel pain as the capital city faces the headwind of locked borders, which halted immigration and brought about a sharp decline in international students.
Moving away from the CBD, the report found that there remains established areas with stronger values as Melbourne residents adapt to the new norm of working from home, which increased demand for “well-presented older properties in established areas”.
“First home buyers in the Outer South East with job security are leading the way as confidence is returning to the Victorian property market, as individuals are motivated by affordability and the flexibility a house and build can bring them,” according to Herron Todd White.
“The newer suburbs within the City of Casey and Cardinia are mainly driven by first home buyers looking to take advantage of the current economic conditions to purchase properties with the help of government grants such as the First Home Owner Grant, where a $10,000 grant is available to those looking to buy or build their first home for less than $750,000.”
Still, despite divergent performance, CoreLogic predicted a downward pressure on the housing market moving forward as a result of the renewed restrictions across Victoria.
CoreLogic said that it is anticipated that the housing market decline will become more broad-based in the second half of 2020.
“The trajectory of the market is largely dependent on overcoming the current health crisis, which would allow the flow of people and economic activity to resume. A housing market recovery is unlikely until borders reopen and the labour market makes a consistent recovery,” CoreLogic said.
The Reserve Bank of Australia has held the official cash rate for the fifth straight month at 0.25 per cent, with Melbourne’s stage 4 restrictions weighing heavily on the national economy.
According to CreditorWatch CEO Patrick Coghlan, while business confidence is rising, the underlying economy is still being held up by government support, which means that the central bank might need to take action in the near future.
“By maintaining interest rates today, this is sympathetic to the balancing act our economy faces. However, there is concern that by extending the likes of the government’s business stimulus packages, we are simply kicking the can down the road,” Mr Coghlan explained.
“Once the likes of JobKeeper, JobSeeker, mortgage holidays and safe harbour do eventually come to an end, there will be a seismic shock to the economy as companies will have to either fend for themselves or admit defeat.”
Despite this prediction, GSFM’s adviser Stephen Miller believes that rates will remain unchanged between now and the end of 2022.
Property listing prices across NSW and Victoria continue to trend downwards, with Domain finding that 11.5 per cent of properties for sale in Melbourne are being offered at a discount – four times the rate of discounting displayed through 2019.
According to Domain, inner Melbourne, outer-east Melbourne and inner south are the areas using the strategy to tempt buyers the most, with inner-east Melbourne seeing the most sizeable change at 12 per cent of properties offered at a discount.
Herron Todd White’s latest Month in Review report showed that Melbourne housing values have dropped 1.1 per cent, while the numbers of owner-occupiers had increased in demand by 0.5 per cent and demand from investors has dropped by 0.3 per cent
Since March, Melbourne property values have fallen by 3.5 per cent, according to CoreLogic.
CoreLogic’s head of research Eliza Owen said: “Cyclically, Melbourne property is subject to more volatile growth rates and is also presenting strong declines off the back of very high growth rates through the previous upswing.”
“Structurally, there has been an enormous demand shock to the Melbourne property market with the closure of international borders, where Melbourne previously had the highest level of net overseas migration of the capital city markets.”
With the second wave of COVID-19 spreading throughout many Melbourne suburbs, including the west, many people and businesses are struggling to stay afloat and trying to make ends meet, Herron Todd White highlighted.
“It’s been a deterrent for basically anyone thinking about investing in any way in the property market due to the uncertainty we are currently living in. No one truly knows how long this will last or how it will affect the property market,” the report said.
“It truly could make or break you if you did decide to invest in a property during these times.”
Data analysis by CoreLogic has revealed that there has been a significant increase in rental stock around inner-city areas around Australia, particularly in Sydney and Melbourne, since the onset of the coronavirus pandemic.
Ms Owen said that the regions with significant accumulations in rental stock have exposed many of the “pain points” spurred by the COVID-19 downturn, particularly the “gaping hole” in housing demand due to international border closures.
“The dominance of Sydney and Melbourne with regards to heightened rental supply highlights the much-localised nature of the shock to rental demand that has been seen since the onset of the pandemic,” she said.
She added that these trends have been placing downwards pressure on rents and upwards pressure on vacancy rates.
CoreLogic has analysed the increases in rental stock by SA4 region, which is defined by the Australian Bureau of Statistics (ABS) as broad regions of 100 to 300,000 people, which the property research group said provides a useful area of measurement because of its alignment with the labour force.
Across the 10 regions that have seen a rise in total rental stock, eight were across Sydney and Melbourne, while rental stock also rose in inner-city Brisbane and Adelaide Central and Hills.
These 10 SA4 regions that have seen a rise in rental listings between March and August altogether comprised 29.1 per cent of the net overseas migration to Australia over the year to June 2019.
Looking closer, some of the largest increases in rental stock were seen across inner Melbourne and Sydney city, as well as inner south.
Total rental listings have started to fall across most Melbourne regions as the city faces stage 4 restrictions to curb the second wave of COVID-19 cases.
For example, in Melbourne’s Southbank, rental stock has surged from 568 rental listings in the 28 days to 15 March to over 1,200 by 9 August.
In contrast, the year before the pandemic, total rental listings across Southbank averaged 450 listings a month.
Meanwhile, inner Melbourne, which has seen the highest surplus of rental stock since the pandemic began, saw total rental listings tumble by 8.1 per cent over the 28 days to 9 August.
Due to the relatively high levels of investors, particularly in inner-city apartment markets, the trends in rental supply and demand could indicate added downside risk for values in these areas until international borders reopen and labour market conditions tighten, according to Ms Owen.
According to CoreLogic, the combined capital city preliminary auction clearance rate improved across a higher volume of auctions overall. For the week concluding 30 August, there were 1,163 homes taken to auction over the week, up on the 1,064 the week prior.
Of the 837 results collected so far, 67.7 per cent were reportedly successful, which was higher than last week’s preliminary figure of 64.7 per cent.
This time last year a higher 1,615 capital city homes were auctioned with a final clearance rate of 70 per cent, the research found.
Adelaide has recorded the highest preliminary clearance rate for the week concluding 30 August at 83.9 per cent, followed by Canberra with a preliminary clearance rate of 75.9 per cent.
Melbourne’s preliminary figures show that just under half of the homes taken to auction over the week were successful (49.6 per cent), while the other half were reportedly withdrawn. This was down slightly on last week’s preliminary figure (50.3 per cent).
There were 167 auctions scheduled across the city, down on the 222 over the week prior. Of the sold results collected, 88.3 per cent sold prior to the scheduled auction date. One year ago, a much higher 768 Melbourne homes were auctioned, recording final clearance rate of 74.4 per cent, CoreLogic noted.
“The high withdrawal rate against an already low number of scheduled auctions, together with such a high proportion of properties selling prior to the auction event, rather than under the hammer, implies vendors have become increasingly reluctant to test the market through the lockdown period,” CoreLogic said.
Moving forward, Ms Owen said that research points to a subdued spring selling season this year.
According to her, the intention to sell and buy property is evidently linked to consumer confidence, which in turn has been influenced by case numbers of COVID-19 and the stringency of government response in impacting economic activity.
“The first is the physical limitation of buying and selling property under social distancing rules. Property sales may be less scalable as fewer people can physically inspect, show and value property,” Ms Owen explained.
“The second is the economic uncertainty generated by stage 4 lockdowns. As consumption falls and unemployment spikes, vendors feel less confident selling their property and getting their desired price.”
Ultimately, the second round of restrictions across Victoria is likely to create a weaker “spring selling season” than in previous years, she said.
Despite a downward trend, Herron Todd White highlighted that not all suburbs are created equal as some suburbs are currently faring better than others.
According to their research, newer suburbs within the City of Casey and Cardinia are ones to watch, noting that these areas are mainly driven by first home buyers looking to take advantage of the current economic conditions to purchase properties with the help of government grants such as the First Home Owner Grant.
Investors looking to also take advantage of this climate are predominantly looking for well-presented older properties in established areas, as they are closer to the CBD and within close proximity to public transport, shopping centres and schools.
“By purchasing an older property in an established suburb, investors can take advantage of renovation grants that provide a grant of $25,000 as long as they will spend a minimum of $150,000. Investors are eager to get started as their property will realise its capital gains,” Herron Todd White said.
Meanwhile, the inner and outer east regions are seeing demand “largely coming from existing owners investing in their own properties and undertaking partial or complete renovations of existing dwellings”, particularly in suburbs such as Blackburn, Mooroolbark, Doncaster and Ashburton.
Further, the foreign investor market has been strong and steady in Mount Waverley and Glen Waverley for a number of years. The allure of purchasing run-down properties and redeveloping the site with brand new homes has been an attractive and profitable enterprise for local building businesses.
“This has not stopped due to the COVID-19 pandemic. In fact, the volume of to-be-erected valuations we are completing in these areas over the past four months has suggested that there has been a spike in these developments,” according to the report.
Investors looking for affordability would benefit from Melbourne’s western suburbs, which boasted some of the most affordable investment opportunities within Melbourne with high rental yields pre-COVID-19.
The west’s rental yield average for houses sits 31 per cent above Melbourne’s gross rental yield of 2.7 per cent.
The highest median house price growth has been recorded in new suburbs over the past five years, led by Aintree, Weir Views and Fraser Rise, all located in the City of Melton. Their price growth ranged from 218 per cent in Aintree, where the median price is $617,000, to 136 per cent in Fraser Rise, where the median is $598,000, according to data provided by realestate.com.au.
“Investors in Melbourne’s west vary in many fashions. It’s an attractive region for both first home buyers and those seeking an investment property with an aim of rental returns. Being the highest developing region in Australia, with new estates scattered across the region, the most common type of property for those investing is residential dwellings,” Herron Todd White said.
“With affordability being the driving force within the area, most opt for a large-scale builder such as Metricon or Porter Davis to build their home due to the much lower construction prices than that of smaller, private building companies.
“Melbourne’s south-west has a completely different investment property market as it steers away from affordability and into quality and prime location. With the residential dwelling market being much higher within this region, many investors look to the unit and apartment sector due to its affordability.”
With construction well advanced onsite, developers are expected to deliver a finished product that will comprise 396 apartments, 21 office suites and six retail premises. It will also feature a range of amenities including a large open terrace garden, outdoor entertaining area, alfresco dining spaces, and contemporary function facilities.
Notably, Box Hill stands as one of the largest metropolitan activity centres in Melbourne, firmly established as the pre-eminent growth centre for the eastern suburbs of the capital city.
The area has grown 18 per cent over the past five years, which is higher compared with the broader metropolitan Melbourne growth rate of 12 per cent.
According to MaxCap’s co-founder Brae Sokolski, the company was attracted to the investment given the strong dynamic in the market in that part of Melbourne.
“Throughout the [COVID-19] pandemic, we have led the real estate industry in continuing to actively lend to creditworthy projects, providing support to our clients at a critical time,” he said.
Acknowledging the tough economic climate, Panoroma, Hexa Group and MaxCap are proud to acknowledge that around 2,300 jobs are expected to be created throughout the project’s approximate two-year construction duration.
As of mid-July 2020, over 70 per cent of the project stock has been pre-sold.