Victoria is currently on the wrong side of a two-speed economy and when resources are involved, all the fame and culture in the world seem to pale into insignificance. However, many forget that Melbourne is still a desirable city in which to live and a slow period of a couple of years or so doesn’t take away from its fundamental strength.

The Residential Property Prospects Report 2012-2015, released in June by BIS Shrapnel, has forecast a slow performance for the Melbourne property market in the near term due to an excess of construction in the wake of the GFC, which may be slightly offset by lower interest rates and an increase in affordability.

“Without any supply pressures, median house prices in Melbourne are forecast to show little change and decline in real terms over the next three years,” says Angie Zigomanis, BIS Shrapnel senior manager and study author.

Zigomanis believes that the Melbourne market is in an especially tough place because it recorded the highest post- GFC rise in prices of any capital, growing 27% in 2009–10. This price surge coincided with record new dwelling construction commencement in 2010–11, which exceeded annual underlying demand.

ANZ head of property research and Melbourne resident Paul Braddick says the state is a victim of its own success.

“In the last five or six years, we’ve done very well on the back of growth in business investment, whether it’s non-residential building or roads and infrastructure, but the state government budget has tightened,” says Braddick.

“You’re not getting additional growth coming from public sector investment, so over the next 12–18 months, we’ll see a lot of the private projects completed, and then it’s not clear what will be there to fill in that void.”

Braddick says that recent over-investment in housing was sparked by stimuli that no longer exist.

“Melbourne house prices did extraordinarily well in 2010, on the back of the first homeowner boost and the Foreign Investment Review Board rule changes, which were temporary,” Braddick says. “Both of those were removed, so if both things were significant contributors to that gain, once you take them away, you’re going to see some downside in prices…We think there is probably a little more downside to prices in Melbourne, while I think that prices in Perth and Sydney look pretty close to the bottom now.”

Onwards and upwards

Like any type of investment, a struggling market brings forth opportunistic buyers, looking to get in at the bottom.

Rob Elsom, hockingstuart director and local agent, says sentiment has changed since the beginning of 2012, with optimistic buyers beginning to emerge.

“I’m seeing a lot more certainty in the marketplace than in the last couple of years,” Elsom says. “People were holding onto their cash for a little while, not really sure what was going on with the economy. A lot of upgraders now are aged 35–45 and haven’t been through any sort of deflated market, so after the uncertainty, the dust settles for a couple of years and, bingo, off they go again.”

Elsom says upgraders are purchasing good three- or four-bedroom family homes, within 8km of the Melbourne CBD and paying reasonably good prices.

“We are also seeing investors coming back into the market, because the share market is still fluctuating a great deal and also the first homebuyer benefits are diminished somewhat. With the first homebuyer boost, investors were being priced out of the market, because owner-occupiers were buying through emotion and prices were overinflated. Now, investors won’t have to compete with that so much.”

Elsom admits it’s tough for states and territories without the resources industry to rely on, but says that there are other drawcards for places like Melbourne.

“We’re still seeing a lot of people come to Melbourne from other parts of Australia, which is certainly not to do with the weather, but due to just wanting to live and work in this city,” he says.

A tree change is within range

Flexible workplaces and new roads and rail lines are enabling people to live in nice towns, while still being employed in the city, according to Elsom.

“People are happy to do the commute and many are working from home for two or three days a week,” he says. “A lot of people are therefore making that tree change into small country towns such as Woodend and Wallan to the north.

“Woodend was always on the way to Bendigo and people used to just drive through it. Then it was bypassed a few years ago and it has now become a sought-after destination. It is a quiet little town with great shops, and so many people are moving there it is ridiculous. Property prices have risen astronomically there and it’s only about 70km away from Melbourne.”

Closer to the capital

Elsom says suburbs such as North Fitzroy, Northcote and Brunswick in the inner north are benefiting from renewed investor interest, as is East Hawthorn in the inner-east. Meanwhile, suburbs such as Footscray and Melton in the inner-west are beginning to pick up, as well as bayside markets like Frankston and Chelsea.

“It’s a great time for investors to get back into these areas,” Elsom says. “We’ve seen a lack of rental properties on the market because investors haven’t been buying them, so, as a direct result we expect yields to increase.”