Melbourne’s strong run of property price rises may be ending

A number of indicators suggest that Melbourne’s strong run of price rises may be nearing an end.

There’s no doubt the Melbourne market overall is strong and currently one of the most buoyant in the nation. Some research sources have Melbourne house price growth ahead of Sydney now, although others in the land of dodgy data still have Sydney leading. 

An analysis by Performance Property Advisory finds that the key indicators, while slightly mixed, suggest that Melbourne is now coming to the end of its growth cycle.

Indicators which point to a moderation in price growth include the firm’s affordability index, the level of rental yields, the high price growth in the past three years relative to longer-term trends and a decline in the influence of foreign investors.

Director David McMillan says: “From an investment point of view, Melbourne is showing all the signs of a market running out of steam.”

He says the firm’s Affordability Index (AI) is currently sitting at 43 percent and historically the Melbourne market has struggled to grow past this point.

“Properties become unaffordable in Melbourne when the market’s AI rises to around 45 percent,” he says. “Melbourne’s AI is hovering around the 43 percent mark, indicating that properties are approaching a natural ceiling. The most likely outcome is a low-growth environment over the next 2-3 years.” 

McMillan says that from 2009 to 2016, incomes rose approximately 15 percent while house prices rose 79 percent.

“The out-performance of house prices against incomes is, in our view, unsustainable and this is a negative for future price growth in Melbourne,” he says.

“It is clear that the three-year price movement is well above trend at 12.96 percent per annum. On that basis it could be said that the Melbourne market is likely to slow down in the short term.” 

McMillan also notes that Melbourne has the second lowest yields among the major cities, with only Sydney lower. “Due to an out-performing median house price, we have seen yields progressively deteriorating, which is a negative for both investors and first-home buyers,” he says. 

The report says total foreign investment in Victoria has quadrupled in the last three years, from around $6.6 billion to $26.6 billion, but is expected to decline in the coming year.

“While we encourage foreign investment, the phenomenal rise has led to over-speculation and over-building in some pockets of Melbourne – the consequences of which are yet to be fully understood by the market.

“Given that the banks have now ceased lending to foreigners, we expect that this number will reduce as much as $10 billion in the 2017 financial year. The large swings in foreign investment have distorted normal market cycles and are expected to lead to increased supply.”

But price decline is not expected, as there are counter-balancing positives for the Melbourne market. They include a high level of proposed infrastructure spending by the federal and state governments, the low rate of unemployment, relatively low levels of stock for sale, a low “Days On Market” indicator, and strong levels of population growth (both existing and projected future rises). 

“Victoria has gone from being a loser from Net Interstate Migration in the 1990s, to a fairly neutral position during the 2000s, to being a winner since 2010, which has been a key factor of the price growth we have seen since 2009.”

Performance Property does note, however, that there has been a level of oversupply in B and C grade housing and apartment stock.

It recommends that investors avoid the off-the-plan apartment market and I wholeheartedly endorse that. “This market is showing no value and price falls in the short term are possible,” McMillan says. “There are no fundamentals that support price growth in the short term. 

But he does see some value opportunities in the Lifestyle and Middle Ring housing markets. 

“This is really a tale of two markets, with house-and-land packages on the metro fringe and inner-city off-the-plan property over-supplied, while the established school belt areas of Melbourne are in short supply,” he says.

Terry Ryder is the founder of hotspotting.com.au. You can email him or follow him on Twitter.