20th March 2009

The correction phase continued to push house values lower in Melbourne, following strong gains in early to mid 2008.

"Melbourne is currently in the eye of the storm where buyers are sitting on their hands watching and waiting," says Mark Armstrong, director with Property Planning Australia and joint-director of The Property School.

"The penny dropped after home buyers left the market in 2008, and we're still in a nothing market."

Despite this current correction, Armstrong believes many positives remain for investors with a buy and hold strategy, and he encourages them to acquire quality property while the market is down.

"There is no doubt that Sydney and Melbourne are the markets that will create a better upside for investors as we move through 2009 and onwards," he says.

The main driver to this will be share market investors. Armstrong says share market investors will begin to leave the volatile asset class and return to the traditional safe havens, like property, in areas where growth is long overdue.

"Sydney and Melbourne have previously had long term average gains of 10% per annum over the past 10 years or so. Yet due to the rise in shares since 2003, property has not been as popular and these cities have underperformed greatly," says Armstrong.

"Sydney has grown by less than 1% per annum over the last five years and Melbourne has grown an average of about 4.5% per annum during the same period."

Armstrong says now that investors are beginning to pay attention to property again, these capital cities will experience definite price escalation.

"The levels of enquiry have already begun to pick up in Melbourne. More buyers are starting to do their research and when people do their research it is only a matter of time before they act. It is a clear indicator," says Armstrong.

First home buyers and investors to drive growth

Monique Wakelin director of Wakelin Property Advisory says the first home buyer market will be the most dominant market across 2009.

"We're seeing more activity coming through in the lower price range under $600,000, predominantly from the first home buyers."

Wakelin says investors will eventually come back into the market, but the shaky economic climate makes it difficult to predict when this will happen.

"There is no doubt that 2009 is going to be driven more by first home buyers than investors, because of the Government grants," Wakelin says.

"In saying this, investors will be sure to follow hot on their heels. Although it is difficult to forecast at the moment, we are seeing that anecdotally, the demand is building from investors looking to get back into the market."

Armstrong has a similar view. As holding costs reduce and owner occupier confidence drops off, he believes particular parts of Melbourne will entice investors back into buying and give the market some shape again.

"Melbourne may only grow by 4% to 5% over the next year, but when you look closely you will find some of the key investment hotspots, that have strong rental demand and high rents, will subsequently have growing competition from investors," he says.

"These areas will usually be controlled by 50% or more investors. Some examples being the apartments in South Yarra, the single fronted terraces in Northcote, Brunswick, Kensington, Flemington or Yarraville in the west of Melbourne."

Areas to watch

For affordability reasons, Armstrong nominates the inner to middle ring suburbs of Melbourne, such as Box Hill, Camberwell and Preston, as just a few areas to keep on investor radars.

"These suburbs were developed in the very early urban sprawl of the 1960's and 1970's period communities. They have good levels of infrastructure, shops, schools, and well developed parklands, and these will start to attract renters who are being pushed put of the inner city for the same reason buyers are - affordability," he says.

Armstrong says many tenants can no longer afford to rent a one bedroom unit in South Yarra for $320 a week, and are now much more prepared to rent a two bedroom villa unit in Camberwell a bit further out from town, for the same price, and share the cost with another tenant.

"These kinds of suburbs are only between 10kms to 15kms from Melbourne anyway, and they tend to hug the transport and shopping areas providing convenience for tenants," says Armstrong.

Similarly, Wakelin suggests the inner northern suburbs of Melbourne, such as north Melbourne, Brunswick, Moony Ponds, Ascotvale, Thornberry, Flemington and Kensington.

"These suburbs combine a community and village atmosphere with relatively better affordability than some of the other suburbs in the eastern suburbs of Melbourne. They're on the map but not quite as expensive. They're still lovely suburbs and they've got huge potential," says Wakelin.