Melbourne’s Housing Market

Melbourne’s property slowdown may have a silver lining. Experts say it is no longer at risk of the sharp downward correction threatening other capital cities in 2004. New auction rules and rising interest rates have hit Melbourne's housing market hard. Auction clearance rates reached a six-year low of just 50 per cent in early December 2003. House prices, too, have moderated with new statistics showing Melbourne's established house price rose just 1.9 per cent in the September 2003 quarter. Analysts say the slowdown is a welcome reprieve and should ensure a steady market throughout 2004.

THE STORY SO FAR

Three separate studies released late last year confirm what many Melburnians have long suspected; the housing market is slowing with affordability being the core problem. The latest Australian Bureau of Statistics house price index, regarded as the most accurate overall measure of market activity, shows that Melbourne's established house price increased 1.9 per cent over the September quarter of 2003. Prices were up 11.6 per cent over year ending September 2003, being the slowest growth rate in the country after Darwin.

The latest Real Estate Institute of Victoria figures tell a similar story. Melbourne's median house price rose 2.5 per cent to $368,000 in the September 2003 quarter. Prices were up 11 per cent for that twelve-month period. The median unit price rose 3.9 per cent to $290,000 in the same period. Significantly, the lower quartile median unit price fell by 0.4 per cent to $237,000, confirming recent reports of price falls in the cheaper end of the apartment market.

The Melbourne market was giving out conflicting signals. The median house price of $368,000 recorded in September still represents robust growth of 11 per cent, however auction clearance rates have been trending down. Vendor expectations are moderating with media coverage of concerns about the state of the market continuing.

Affordability continues to decline. Despite the slowing property market, Victoria remains one of Australia's most unaffordable states when it comes to buying a house. A recent report from the Real Estate Institute of Australia and AMP, found that housing affordability in Victoria was at a 12-year low. The Housing Industry Association's chief economist, Simon Tennent, said that with interest rates on the rise, affordability was likely to keep deteriorating well into 2004. "Affordability will continue to decline for the next couple of quarters so I would think that in the second half of 2004 we would start to see improvements”, he said.

Auction clearance rates slump. Auction clearance rates dipped sharply in the final weeks of 2003, down from an average of 75 per cent over the winter to a low of 52 per cent in early December. Agents blamed new auction rules outlawing dummy bidding for the collapse in clearance rates. While the new rules are no doubt making property harder to sell under the hammer, the real causes are likely to be rising interest rates, lacklustre residential vacancy rates and greater caution among investors.

Apartments most at risk. In a recent statement, the Federal Treasurer Peter Costello joined the Reserve Bank Governor in warning about the risks of a major correction in inner city apartment markets. "I have made the point over and over again to investors that the property market is not a one-way street," Mr Costello said. Mr McFarland told the Australian Financial Review newspaper that apartment prices in some inner city parts of Melbourne and Sydney had fallen by up to 40 per cent since the peak a year ago. Says Macquarie Bank's Rod Cornish; "Melbourne's weak spots include generic walk up apartments built in the 1960s, '70s and '80s without any differentiation and new apartments without community infrastructure in over supplied locations. Well-designed new apartments in inner city areas with well-established communities will fare better."

WHAT WILL HAPPEN NEXT?

The good news is that Melbourne appears likely to avoid the "hard landing" now threatening other capital city housing markets. A report by Commonwealth Securities warned that Canberra, along with Adelaide and Brisbane were showing classic signs of inflating a housing bubble, due to rapid house price growth. While Sydney and Melbourne appeared stable, prices had jumped 80 per cent in Canberra, 74 per cent in Adelaide and 70 per cent in Brisbane over the past three years. Housing bubbles are comparatively rare and occur when the price of a house and its ability to generate income breaks down. The last housing bubble occurred in 1988-1989 triggered by the stockmarket crash that year. Commsec spokesman Nikola Dvornak told the Sydney Morning Herald newspaper; "If prices continue to rise at the same rate as in 1988-1989 in Adelaide, Canberra and Brisbane, those markets could form a housing bubble."

AREAS ON THE MOVE

A survey of high and low growth suburbs for 2004 by The Age newspaper tipped the inner eastern blue-chip suburb of Surrey Hills as a likely standout. With a median house price of $635,000, prices are forecast to grow by five to 15 per cent over the year. Ringwood, in Melbourne's outer east, is another suburb to watch in 2004, with prices forecast to rise five to 10 per cent. Further to the south, Carnegie is tipped to enjoy eight to 12 per cent capital growth thanks to strong investor demand, particularly around the Dandenong Road area. Units and townhouses are particularly strong in this suburb.

Those looking for return rather than capital growth should consider Melton. With homes still available for less than $200,000, this outer western suburb is delivering investors strong yields. Given the combination of higher rates, new auction rules and early signs of a slowdown, Melbourne's market is likely to be driven by a return to yield, quality and location.

STEADY MARKET UNTIL 2005?

According to the latest ANZ Property Outlook Report, the good times are over for Melbourne home owners, "Our analysis suggests Melbourne house prices are around 15 per cent above “fair market value”, like Sydney, will very likely experience considerable weakness in the year ahead. While price falls will be recorded in some sub-markets, a broadly based decline in values over 2004 is unlikely. Rod Cornish says demand for homes in Melbourne will ease over the long term as population growth slows. Commenting in Money Magazine, he said demand "could even go negative with people moving to south-east Queensland."

He says community living will be the key buzzword in the coming years. "Whether it's an urbane near-coastal or country town, a new lifestyle development near the big smoke, or an established city 'village', purchasers will increasingly choose to live in places that offer a sense of community," he told Money Magazine. Quarterly figures from the Real Estate Institute of Victoria show vacancy rates in many new inner-city apartment blocks in areas such as Southbank, St Kilda Road and Docklands rose sharply to 10 per cent by December 2003, up from 8.3 per cent the previous December, while the leasing of previously tenanted stock rose only slightly to 4.5 per cent, below the 5.1 per cent at December 2002. Many agents blame the rental crisis in new inner-city blocks on the explosion of building activity in Docklands, which has seen the construction of thousands of units in a two-year period, creating a glut. Until this stock is absorbed, the rental difficulties are predicted to continue.

Tim Storey, general manager of PRD Nationwide, says the city market is broken into five general areas: CBD proper; Southbank; Docklands; Port Melbourne; and St Kilda Road, which can absorb roughly 2,500 new apartments a year combined. "If that was the case the market would be at a pretty good equilibrium but the problem with the Docklands project was that it was meant to be 10,000 units over a 10-year period, equating to 1,000 apartments a year. So 1,000 in Docklands and 2,000 everywhere else would be all right. "The State Government however has allowed all the developers to increase the density on their blocks of land and build straight away, so it's had a downward pressure on the rest of the market, Docklands has taken up two years of supply over the whole inner-city market, and they're not even on the rental market yet. Just wait until they are. There will be a huge pressure there. In some segments the rental vacancy rate will probably get higher than 10 per cent," he says.

The flurry of development at Docklands has meant less construction in Port Melbourne, Southbank, the CBD and Carlton, where Mr Storey believes excess stock problems will be absorbed in about two years, while the Docklands glut will take about five years to even out. He says on a positive note the situation meant renters could secure a new two-bedroom waterfront apartment in Docklands for only $50 more than an older apartment in the northern fringe of the city, for example. "You could probably pick up a great resale property in Docklands in the next couple of years as short-term investors realise their plans might take longer than promised".

Anton Wongtrakun, sales director at Dingle Partners, says in the past three to four months Dingle Partners has been renting 50-60 apartments a month. He says, the fact they are new and offer many superior facilities such as gyms, pools and entertaining decks make them popular with renters. "We have not had any trouble with any new building in the last few months finalising leases," Mr Wongtrakun says. He admits that when a few of the major buildings came on to the market at the same time, rents were discounted a bit to get the numbers up quickly but says the market has since stabilised.

Melbourne’s residential vacancy rate rose 0.2 per cent to 3.9 per cent for the December quarter 2003. The rate was 4.1 per cent for the December quarter 2002. The residential vacancy rate for regional Victoria fell 0.1 per cent to 2.1 per cent for the September quarter, equal to the rate for the same period in 2002. The newly completed and previously untenanted inner-city apartment market in the CBD, Docklands, St Kilda Road and Southbank vacancy rate rose sharply to 10.0 per cent, up from 7.2 per cent in the September quarter and above 8.3 per cent at the same time last year.

Enzo Raimondo, CEO, REIV said, “With the exception of new inner-city apartments, the vacancy rate for Melbourne is still well within an acceptable range”. Mr Raimondo said, “The sharp rise in vacancies in new inner-city apartments is due to a large supply coming onto the market, which is likely to continue for sometime.
In fact, nearly 2,000 new apartments entered the market in 2003, and a large number of these were in the CBD, St Kilda Road, Southbank and Docklands areas. In 2004, an expected 3,500 new apartments will further add to supply”.

The residential vacancy rate for apartments not newly completed and previously tenanted in inner Melbourne, 0-4km from the CBD, rose 0.4 percent to 4.5 per cent, below the 5.1 per cent rate in December 2002. Inner Melbourne, 4-10km from the CBD recorded a vacancy rate of 3.8 per cent, equal to the September quarter and well below the 4.5 per cent rate in December 2002. Middle Melbourne, 10-20km from the CBD rose 0.4 per cent to 4.2 per cent, well above the 3.4 per cent rate in December 2002. Outer Melbourne, 20km plus from the CBD rose 0.2 per cent to 3.3 percent, below the 3.6 per cent rate in December 2002.

Geelong’s vacancy rate rose 0.3 per cent to 3.0 per cent; Bendigo’s fell 0.4 per cent to a low 1.6 per cent, while Ballarat’s rose 0.7 per cent to 2.2 per cent, during the December quarter.

Vacancy rates for other Victorian regions remain very low for the December quarter, with Mildura and Wodonga recording the lowest rates in the state both at 1.3 per cent. Wimmera, Shepparton and Goulburn, East Gippsland and Wellington Shire, Warrnambool and Western District, Latrobe Valley and South and West Gippsland recorded vacancy rates of 1.9 per cent, 2.4 per cent, 2.6 per cent, 1.5 per cent and 3.1 per cent respectively.

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