Integrity InSite Market Review 2016
February 21, 2016
(According to REIV & Australian Property Institute State of the Market Seminar 2016)
Melbourne Real Estate has seen a complete resurgence in the marketplace over the last 5 years, and what an incredible industry to be a part of. With a banner year in 2015, the state saw over 500,000 transactions cleared, totalling $283 billion in annual sales. This was assisted by a strong retail sector, historical low interest rates, and steady employment statistics. Unemployment in 2015 was only at 5.9%, showing population growth of 1.4% and a credit growth downturn in investment lending. These key factors played in favour for sellers across the state, similar to Sydney, seeing a huge hike in auction clearance rates and median averages.
The year of 2015 showed its hand when it came to property prices, exceeding performance averages higher than the record 2010 market. Although, there were some downsides to this growth. Banks capped investment lending at 10%, and stock levels toward the end of the year increased, with a downturn in building approvals for units in the Melbourne metropolitan district. But the oversupply was not balanced across all types of investment. With the strong population growth and spend average, pressure was put on the housing and development market.
Greville Pabst, CEO of WBP Property Group said it best: “We can’t build it quick enough. We aren’t seeing enough housing developments being established versus demand. Land in Melbourne is cheaper than Sydney and Brisbane but there isn’t enough of it to cope.” The current upswing in property has been going since December 2012, and is currently in its 13th quarter, totalling 34% in capital appreciation. That is 5% more than the 2008-2010 period. This significant shift shows an upward trend that pins Melbourne alongside Sydney as being the nation’s property capital. However, this is not sustainable. The Melbourne market has had 3 downturns in the last 20 years; 2005, 2009, 2012. In 2016 this trend lends itself to a more balanced market.
This year, the wave has passed, the ships have sailed, and the storm is quiet, but that doesn’t mean it is dead. The bubble prices of 2015 will see price correction over the next 8 months, but on clearance rates versus growth the market is estimated to do close to 65%, only 10% less than last year. Predictions can only go so far, and with such a buoyant market one small change, an interest hike, or any economic shift can severely impact the averages in the next 5 years. The bottom line is: clearance rates depend on stock and quantity, supply and demand. The auction season will kick off on the 13th of February, the scuttlebutt between agencies being that stock levels are low, and with a short February and Easter, demand will still stay strong through Autumn. Demand equation is dynamic. Suburban areas have people cuing at open homes. Despite property purchases over Christmas, median house prices went up by 2.5% in January, and days on market averaged 35 days for Melbourne and 66 days for regional areas including the Yarra Valley. The disparity between averages and real time results is that market sentiment is up, but property and consumer market sentiment is going down, so what determines an accurate prediction for 2016? The key is statistics.
Let’s looks at the chart. There is a balanced market in vacancy rates, 3% Melbourne and 2.5% regional. In terms of sales volume (auctions versus private sales; 123,000 transactions in 2015), and coming to the end of summer, volume will be a lot less, due to a weak tension in the selling market. Last year saw the highest number of transactions and clearance rates in 4 years. More and more people are going to auction now, last year over 40% across the state, and even higher in the inner city at 50%. The property market now in Australia has really become ‘a tale of 2 cities’, i.e. Melbourne and Sydney, putting them on a global scale. But our population is not big enough we are told, even though Melbourne overtook Sydney in median house prices, sitting at 11-14%. Melbourne is now a 24/7 city. But how does this affect regional? How will this impact the area from Easter through 2016? With any inflation in the Melbourne market, there will always be a long term impact on outer suburbs. Higher prices make liveability for families in the inner suburbs more difficult, creating an elitist marketplace. With 87 million dollar suburbs now, finding affordable homes for under $1.2 million is becoming increasingly difficult. This forces first home buyers and investors into the unit market. Inner city unit growth is strong, but will change with oversupply. On average, the median house price is $735,000, whereas median unit price is $530,000. But a long term investment for a family in this environment is not sustainable, pushing the urban fringe even further, and creating more opportunity and growth in regional areas.
People want land, they want their plot. Petrol prices, rates, infrastructure and commute distance for regional suburbs under 1 hour to the CBD, play a key factor in choosing the right suburb for your family. The pros far outweigh the cons now to regional living, with huge savings compared to elevated prices paid for urban convenience.
This is why development is getting tighter. A change of attitude toward land size requirements are backed by changes to regulations of apartment and land development sizes. Developers won’t be able to put as many units on their sites anymore, which will assist in steady price growth for the next 3-5 years. New subdivisions going up to a minimum allotment size of approximately 800m2 will be even more stringent in fringe suburbs. This will be crucial in long term regional performance. As it stands, regional median house prices have gone down from $347k to $344k, with only a 4-5% growth. Regional will always be steady, backed by strong rental yield at approximately 5%, where Melbourne is only 3%.
So what will the forecast be for the remainder of 2016? House price growth in 2016 will be 5-8% (primarily for inner city housing); apartments are at a downturn for new at -4%-0% and established at 1%-5%. Prestige properties in excess of $3mil will be steady at 1-7%, and holiday makers investing in seasonal areas and holiday homes will see a decrease between -4%-0%. The competitive Melbourne market will sustain steady average between the $700k-$1.5mil bracket, and demand will underpin growth and stability. By the same token the Chinese market will be affected by structural changes and regulations for infrastructure and development. This may ease the strain on some families and investors competing at auctions in 2016.
To summarise property fundamentals and capital growth, things will continue to change in the Melbourne and regional property market year over year. A key element in investing has always been, if a property hasn’t tripled in value in 18 years, it won’t perform in the future. But the 8 year rule has changed, no longer will properties continue to double during this period. If the performance of the dollar and income remain, properties should take 12 years to double depending on suburb popularity and infrastructure growth. For the keen property monitor, look at historical performance, there is enough public data available to analysis trends, so check the history. Calculate annual capital growth in arrears, and remember to take into account the simple aspects commonly missed; car spaces, main roads, floor-plan, position and orientation. Land will always appreciate and buildings always depreciate, so be careful of putting good money after bad. Be careful of future speculation as well: that bypass or that shopping centre may not go in for another 20 years, so track current council applications. The next 10 years won’t be the same as the last, so stick with what you know, be confident in your investment, and have a productive 2016.