Melbourne's potential oversupply: The experts have their say

We've heard it discussed regularly, and it has been a point of contention for many: Melbourne's potential oversupply.

As usual, we went to our readers first and asked them their thoughts. As the poll doesn't give space for further comment, we were specific about focusing on apartments.

As it turns out, 44.8% believe there is an oversupply "but only in the inner city", while a further 37.3% voted that there is an oversupply generally.

We took the question to experts that have a vocal opinion about this topic, as well as some of those who have access to interesting data.

We asked the following:

Do you think there is an oversupply issue in Melbourne? Why/Why not?

Here is what they said: 

Robert Larocca - Victorian housing market specialist, RP Data. 

DEMAND IS WHAT WE SHOULD FOCUS ON

The Victoria property market has a high number of homes on sale right now, but that’s due to higher levels of supply and lower demand.

It’s often said that real estate is all about supply and demand, and to a large extent that’s true, which is why it’s very difficult to say the market is oversupplied.

You have to consider the demand side. It’s not a fixed amount and is affected by a range of factors including the state of the economy and population growth.

Over the past few years in Victoria there have been historically low levels of demand. Consumers have lacked confidence and stayed away from the market.

At the same time, there has been strong growth in supply. Between 2010 and 2012 there were 167,214 dwellings approved, in the three years before that it was 130,989 and in three years before that only 120,850.

In many ways builders have been increasing supply to counter the demand and this creates a surplus (and improved affordability).

Finally, active listings of homes for sale is running at 60,000 now, down from 64,000 seen last year but still higher than the 30,000 in 2007 which was the all-time high for transactions in Victoria.  

Johnny Barnard - Population forecaster, .id (informed decisions)

YES, IN THE INNER SUBURBS

It certainly appears that there is in the inner suburbs.

Our organisation, (.id) has recently completed population and housing forecasts for the Local Government Areas (LGAs) of Melbourne, Yarra, Port Phillip and Stonnington.  This involved assessing what has happened since the 2011 Census and what is likely to occur out to 2036. Aerial photography was analysed and all major housing projects assessed as to when they are likely to be constructed.

Based on our review of these sites, we estimate that there are somewhere between 9,000 and 10,000 apartments currently under construction in the four LGAs, the majority of which we estimate to be completed by the 2014-15 financial year. To provide some context, these four LGAs added 19,600 dwellings in the five year period between 2006 and 2011.

Certainly in the period we have been doing this work (15 years) we have not seen anything like the number of apartments now under construction in these four LGAs. Maribyrnong (Footscray area) and Moreland (Brunswick area) are also experiencing a significant number of apartment projects currently under construction, so these numbers actually understate the level of inner city apartment development occurring.

The major driver of population growth in Melbourne in recent years has been net overseas migration. Between 2006 and 2011, Victoria averaged around 63,000 persons per year. In the last two years, the number is likely to average around 56,000. So not much has changed in the last couple of years in terms of changed underlying demand. The fringe has dropped off in the same period but I can’t see a direct transfer of demand, the markets are too different.

It is probably too early to tell exactly what the impact will be of the peak in apartment construction. There are a number of things that could happen. Firstly, many apartments may not be able to be tenanted. Secondly, owners may decide to use their apartments as serviced or short stay apartments for a certain period of time until there is enough demand to absorb the new supply. Time will tell.  

Monique Sasson Wakelin - Director, Wakelin Property Advisory

MODERATE FOR HIGHRISE INNER CITY

The answer, in part, depends on how you define oversupply. Is it empty states and streets full of unsold, uninhabitable, decaying properties? Or a situation where there are large numbers of properties in a very tight geographical precinct that take longer to sell, often require price discounts to close the deal and deliver little if any capital growth over a several-year holding?

There are no empty estates in Melbourne. But using the latter criteria, there is a moderate oversupply of high rise property in the inner city locations such as Docklands, Southbank and St Kilda Road. Carlton is over-supplied with student accommodation and there are too many McMansion-type housing developments on the fringes of suburban Melbourne.

In contrast, demand exceeds supply for older style properties and for some boutique-sized new developments in the inner ring suburbs (around two-to-12 kilometres from the CBD). The market is balanced in the middle ring.

We’ve noticed that the oversupply of new apartments in places like Port Melbourne and Richmond has moderately dampened the established market in these localities – more in terms of capping rents rather than suppressing capital growth. That is an exception to the usual rule that established property and new developments are distinct markets. It may be that in certain localities, investors need to be more cautious.

By and large, much of the moderate oversupply is cyclical. Most of it will be absorbed by growing demand should the market recovery be sustained into 2014.  However, there are more structural challenges for the inner city and outer fringe market. Although Melbourne’s projected population growth should soak up current over-supply in a few years, it is inevitable that developers will continue to over-build, so expect the issue to persist.    

Todd Hunter - Director and location researcher, wHeregroup

ABSOLUTELY, NUMBERS DON'T LIE

Absolutely… sure in some niche property types there may be a small shortage but the city tells a different story  

But don't let me try and convince you, there is a simply way to find out for yourself, simply google realestate.com and search the following locations. Leave the surrounding suburbs button ticked and don't put a price point in on houses, (by not putting a price point you are covering multiple price points of buyers, not just first home owners):

·     Werribee, Tarneit, Wyndham – 3,150 for sale

·     Pakenham – 2,000 for sale

·     Melton – 1,600 sor sale

·     Whittlesea, Mernda, Doreen, Sth Morang – 3,600 for sale

·     Point Cook – 2,300 for sale

·     Roxburgh Park, Craigieburn – 1,550 for sale

Then do the same for units and search Docklands - 1,800 for sale  

As you can see there are literally thousands of properties for sale.  

Now do the same exercise and search the same suburbs for properties for lease and see that there are literally thousands of properties for lease. This is why Melbourne currently has a very low yield on investment properties, there is simply too much choice. There are 2,300 units for lease in and around Docklands!  

Now to make that even scarier, many of the adverts advertise multiple properties in one add making those numbers even higher and with 15,000 more units due for construction in the inner city area, along with more land releases in the next two years, this problem is not going away any time soon.  

Andrew Wilson – Senior economist, Australian Property Monitors

SUPPLY MAKING PRICES MORE AFFORDABLE 

Melbourne remains Australia’s engine room of housing construction. Over the past year Melbourne has approved 38,394 dwellings for building or 32.4% of all capital city home approvals according to ABS data. This compares to Australia’s largest capital Sydney that accounted for just 26% of all dwelling approvals over the same period.

Melbourne’s supply-side advantage over the other state capitals through its outstanding construction performance has translated into relatively cheaper accommodation for its residents. Melbourne’s median house price is $150,000 lower than Sydney’s and also is lower than a number of the smaller capitals – Perth, Canberra and Darwin.

Melbourne’s tenant-friendly rental market is also a product of consistently solid levels of new supply. The latest median rent for Melbourne houses is $370 a week well below Sydney’s $500 and lower than all capitals with the exception of Adelaide and Hobart.

Melbourne has experienced an unprecedented surge in new apartment construction over the past two years particularly in the inner city and CBD precincts. High levels of apartment construction have been an important ingredient in keeping the local economy healthy.

Burgeoning numbers of new inner city and CBD  apartments may be moving ahead of demand with the prospect of an emerging oversupply similar to what that market experienced in the late 1990’s and early 2000’s.

Low interest rates have activated the Melbourne housing market this year with house prices now at or close to their previous peaks recorded three years ago. Unit prices however remain 5% below those recorded in 2010.

Latest data reveals that Melbourne CBD unit prices fell by 10% over the six months ending September this year with Docklands down by 6.4% and Southbank unit prices also down, falling by 1.2% over the same period.

Enzo Raimondo - Chief executive officer, Real Estate Institute of Victoria (REIV)

SHORT PERIODS OF OVERSUPPLY ARE NORMAL

The property market moves in cycles and from time to time, there can be short periods where supply can outstrip demand and vice versa. At the moment, the market as a whole is relatively balanced having readjusted from a broad oversupply in 2011 and 2012. There are still a few pockets, particularly in the inner suburbs that are still readjusting. Having said that, this balance could potentially change with the recent increase in demand and the continued slowdown in building activity.

The past two years of low transactions and moderate price growth is evident of a market that was readjusting from a general oversupply. Obviously there are many other factors at play such as consumer confidence, interest rates, unemployment, and broader economic developments but the supply and demand equation remains fundamental.

Victoria experienced a building boom in 2009-11, in part driven by government stimulus. We went from having around 40,000 building approvals per year in 2009 up to around 60,000 building approvals in 2011. This has now come down to around 50,000 approvals per year and continues to fall. Considering that the average household size in Victoria is around 2.6 people, we were building for around 156,000 new people at its peak.

On the demand side of the equation, population growth slowed down considerably during the building boom period. We went from having 120,000 new people in Victoria in 2009 down to around 80,000 people by 2011. The most recent population statistics show that growth has since increased and we have added around 100,000 people over the past year, the highest of any state. Victoria continues to be an attractive place to live and population growth is once again on the way up.

So is Victoria in an oversupply now? No, but it did just come through a period of oversupply and readjusted accordingly. The higher number of sales, price growth, and increase in clearance rates are all signs that demand is coming back into the market fairly strongly. Building activity is yet to pick up and if this continues to be the case, in time this balance could change.    

Jeremy Sheppard - Head of research, Redwerks (Hotspotcentral)

MARKET STILL IN BALANCE AS A WHOLE 

I use the demand to supply ratio algorithm (DSR) to gauge whether a residential property market in Australia has an oversupply or under-supply situation. This compares 15,000 suburbs against eight leading indicators of supply and demand  - property statistics like auction clearance rate -  gleaned from a variety public sources online.  

Just looking at the Melbourne city centre (comprising 16 suburbs) and not the entire Melbourne metropolitan area, the average DSR score for houses was around 22 and for units around 20 for September 2013.  

These figures are both considered to be within the "balanced" range. The ideal balance between demand and supply has a DSR score of 24 out of a maximum of 48. So the Melbourne city market is slightly below average but still in balance.  

The average DSR score Australia-wide for September 2013 was 22.4 so you can see that both the unit and house markets of Melbourne city can't really be considered oversupplied.  

However, looking at individual markets rather than the city as a whole shows a completely different picture. Dockland units have a DSR score of seven for September 2013. This is considered "very poor". In fact, this placed the Docklands unit market in the lowest percentile for the country by DSR score. The housing market for Docklands was a little better getting a DSR score of 11 which is still considered "poor".  

On the positive side both Carlton North houses and Kensington houses scored 29 in September by DSR. This places them in the 14th percentile country-wide which is comfortably above average.

So one could argue that 'Melbourne' is a balanced market but, like all markets, there are markets within a market that are both over-supplied and under-supplied to various degrees.

Michael Buxton - Professor environment and planning, RMIT University 

NO OVERSUPPLY OF LAND AND NO HOUSING SHORTAGE 

The 2010 expansion of the urban growth boundary by 43,000 hectares doubled the outer urban land supply to 30 years at world’s lowest densities. However, even in 2003, doubling the then density of 11 lots per hectare would have increased outer urban land supply by 62% and the amount of greenfield land by 46%.  

A more important figure for greenfield land supply is the amount of land released and zoned for housing. This is largely controlled by a few development companies, who prevent an oversupply of land released. In 2008, the supply of urban zoned land in development corridors ranged from four to seven years. This was a sufficient supply in international terms, but the government took further measures to fast track further urban zonings far in excess of demand.  

The growth boundary expansion coincided with a fall in demand for outer urban housing from almost 26,000 dwelling approvals in 2009-10 to 19,000 in 2011-22. Yet multi-unit dwelling approvals rose from 14,221 to 17,412 over this period. There is an enormous amount of land available for redevelopment in Melbourne in both brownfield and redevelopment sites. When a city wide approach is taken, and higher density is factored in, dwelling land supply in Melbourne is almost unlimited. There is no state or national housing shortage. Claims to the contrary are based on a methodology which counted large numbers of people who did not possess the financial means, or intend to enter the property market.