Melbourne continues to confound its critics, but could there be some truth amongst their cautions?
Whispers of concern continue to escape from the heat surrounding Melbourne’s property market. As it continues to defy expectations with an ongoing strong performance, it is perhaps not surprising that naysayers can be found. But can any truth be found among those niggling whispers?
When looking to the latest RP Data-Rismark Hedonic Home Value Index results, it is hard to tell. While Melbourne recorded a 1.8% growth in dwelling values over June, it recorded a decline of 2.4% over the quarter. The quarterly result makes it the weakest performing capital city for that quarter.
However, the results show that, over the 2013/14 financial year, after Sydney, Melbourne was the top performing city for capital gains. Its dwelling values were up 9.4% over that period.
The results also show that, once again, Melbourne recorded the lowest rental yields for both houses (3.6%) and units (4.1%) of any capital city. But, if the capital gain is combined with the gross rental yield over the year, Melbourne had a total return in excess of 12%.
According to RP Data’s Tim Lawless, the rate of capital gain is starting to trend towards a more sustainable level, hence there has been a slowdown in dwelling value appreciation.
Housing values were unlikely to slide, Lawless says. “What is more likely is that natural affordability constraints will start to dent buyer demand, as will the low rental yield scenarios that are very much evident across the largest capital cities of Melbourne and Sydney.”
Strong drivers fuelling market
Over the last 10 years, the Melbourne house market has averaged about 6% to 10% growth and it has a long-term average of 6.8% growth.
WBP Property Group CEO Greville Pabst says that, when these figures are taken into account, it is clear the market has enjoyed a particularly strong year to date. They also set the scene for the next six to 12 months, indicating strong growth will continue.
“It is not likely to slow down much over the next six months and it should finish up a good year if the market maintains momentum. Even if it drops back it will be a solid year.”
The reason for this is the number of drivers that are fuelling the market. These drivers include ongoing low interest rates, the return of confidence to the market, and its high inflow of migrants from both interstate and overseas.
“Further ahead, what could stall it?” Pabst says. “Unemployment is the big unknown. Also, if interest rates go up again… those factors could spoil the party.”
The perils of inner city apartments
Within the market, a sector which has long caused concern is inner city apartments. The existence of an oversupply is well-known, but less well known is the issue of quality.
A recent Melbourne City Council report estimated that 55% of the city’s tallest apartment buildings over 15 storeys are of “poor” quality. Common design flaws included cramped layouts, a lack of natural light, lack of ventilation, excessive energy use and poor storage.
The Future Living report’s authors claimed that, as long as it was possible to find tenants, the investors who buy 85% of the apartments in the municipality were not bothered by the quality issues.
Pabst said that investors should be concerned by the quality of the apartments that they buy. “The increasing trend to buy off-the-plan type properties is a minefield. People often can’t visualise what a property will be like from an artist’s impression. So they end up with properties that are not of the quality that they expected.”
Such properties don’t tend to perform as an investment class, and yet too many people were paying too much money for them, he continues. “Good property investment is about buying for scarcity. If you are buying into a tower of 100 apartments, at any given time there will be five or six for sale. So if you need to sell, it is just a race to the bottom to get a result.”
However, investors might want to consider buying in an older-style, lower density block of six to eight apartments. Given the major trend towards inner city living as a lifestyle choice, Pabst says such an investment could pay off, particularly in comparison to buying in a higher density block.
“People are prepared to live in smaller spaces in order to live in a desirable inner city area. So location is key to a good investment… and people want to live close to the heart of Melbourne in one of the great inner city villages like St Kilda or Carlton.”
Suburb to watch
Abbotsford
Like many of Melbourne’s inner city suburbs, gentrification is the name of the game in Abbotsford. Thanks to its position just 2km from the CBD, this suburb’s popularity is on the rise.
With extensive green spaces, several schools, good public transport and a thriving cafe and restaurant scene (which includes Little Saigon and the city’s craft beer hub), the suburb has many attractive features and lifestyle drivers.
But, while young professionals are starting to move in in droves, the tree lined streets of Abbotsford have yet to be fully “discovered”.
Daniel Atis, from Hocking Stuart, says prices are more affordable in Abbotsford than they are in neighbouring areas like Richmond. “As there are low vacancy rates in Abbotsford, it is easy to rent out property. Given it is cheaper to buy here, there is better value for your money and better returns on your investment.”
The suburb has long been dominated by Victorian terrace housing, which are largely subject to heritage overlay provisions, and there is little in the way of detached houses. In recent times, there has been a lot of development and apartments now form a significant part of the market.
However, Atis says that, to date, there doesn’t seem to be any difficulty renting apartments out, and nor has there been any impact on sales. In fact, he believes good growth can be expected in Abbotsford. “Given its current popularity, I can only see prices going up in the future.”
