Exclusive: Does Melbourne have an oversupply problem?

Exclusive: Does Melbourne have an oversupply problem?
Jessie RichardsonDecember 7, 2020

With cranes dotting the horizon and a new apartment complex seemingly launched every week, many are wondering whether Melbourne will soon have more homes than it knows what to do with.

The Housing Institute of Australia forecasts a total of 51,007 dwelling starts for 2014. The figure puts Victoria's housing output above that of any other state, as it has been for every year since 2005. Dwelling starts in Victoria are predicted to reach 8.7% above those recorded last year.

According to Victorian government predictions, the number of households in Victoria is set to grow by an average of 1.9% between 2011 and 2021 to a total of 2,600,000 households.

The population projections have some arguing that Victoria is equipping itself for a migration boom. Others, however, believe we are building excess stock that will eventually result in a housing downturn. Meanwhile, the latest Speculative Vacancies Report from Prosper estimates a total of 64,386 properties are likely currently vacant in Melbourne.

64,386

Property Observer took the question to the experts: Is Melbourne facing an oversupply problem?

Catherine Cashmore: independent analyst and author of Prosper's 2014 Speculative Vacancies Report

If you're looking at it over the state as a whole, compared with the increase in population, it appears that there is ample property for the population.

If you narrow it down it down and look at it at a micro level, some areas definitely have an oversupply. Areas like Cardinia: there are about another 21,000 homes or that are to be built over the next five years or so. But almost 15% of the existing stock is sitting there vacant or unused.

When you say oversupply, in raw terms, sure. But the fact that it's not available to be accessed is important.

This is why it's really important for the government to understand how much latent supply is out there. If we do have a downturn in economic activity – which we will have, property cycles are quite predictable – investors try to offload their stock. That's what happened in 2008. A whole load of tiny apartments came onto the market because investors needed to access funds. Vacant properties go on the rental market. People sell off holiday homes.

In a downturn, people are hit in the pocket and the latent supply becomes active.

I wouldn't touch an inner city apartment. I'm talking about the Docklands, Carlton, West Footscray – all of these areas have seen an enormous uplift in apartment stock.

In Abbotsford, I'd advise any investor to keep glued to SQM's vacancy rates. In Abbotsford, SQM's vacancy rate came to 14% at one point. If you add that to our [Prosper's] speculative vacancy rate, of properties that have been vacant for 12 months or more – that figure rises considerably.

That is a red flag. The risks are just too great. The supply is not going to go away. You're not going to get capital gains from it, and you're not going to get a tenant.

The government can't keep talking about having a housing supply crisis. [Victorian Planning Minister] Matthew Guy says he doesn't want to see Melbourne suffering from a shortage of supply. They're fine concentrating on pushing the city's boundaries outwards and building more highrises, rather than concentrating on the supply that is vacant.

Robert Larocca: Victoria housing market specialist, RP Data

The question of supply levels is a vexed one, after all a high level of supply can be great for buyers as it can dampen price growth, but as most buyers are sellers too it is not that simple.

The question is also hard to comprehensively answer, as there are a wide range of data sets and stages in the development cycle to compare.

At a citywide level the volume of homes on the market at any given time is a good measure.  In the month ending on 9 November there were 4.5% more homes newly listed for sale and 6.6% fewer overall homes for sale in Melbourne. Given values have been rising that suggests that there is not oversupply of homes for sale, buyers are buying the new homes and the older stock is also reducing.

But what of the unit market? A casual glance at the Melbourne skyline shows a lot of new high rise residential towers being constructed. Our data shows that those units are finding buyers. The number of units listed for sale is marginally, 2.4% lower than a year ago, and the overall number of units on the market is 3.3% higher.

That suggests that the supply is exceeding demand to a greater extent than is the case in the houses market. That is not necessarily a bad thing. Over the past decade the state government’s policies to address housing affordability concerns have been centred on increased supply in the inner city unit market and outer suburbs. The data shows that it is working.

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Andrew Wilson: Chief economist, Domain Group's Australian Property Monitors

I think it's almost becoming common knowledge that in the CBD highrise market, it clearly looks like supply has moved ahead of underlying demand.

We have record levels of approvals for highrises over the last two years.

It's a market that's under development in the sense that demand isn't pushing supply, but supply is trying to lead demand. The difficulty is that a lot of the development is funded by overseas development. The question is whether that investment model reflects the investment model we have here. That is, ensuring there are a lot of pre-sales before construction commences to ensure demand meets supply.

The prospect of empty towers is raised, and it also presents a conundrum for those developers who are looking for a critical mass of pre-sales before construction commences. With the market seemingly flooded, it means there's a lot of competition for a small pool of buyers. I don't know if there's an underlying culture of CBD living in Melbourne, particularly a culture that would satisfy the number of apartments that would be built. I'm not sure if there's the infrastructure to support it. I'm not sure Melbourne has the natural attributes that would support inner city living like in Sydney and Brisbane.

We probably have a lack of high rise in some of the inner suburban areas. South Yarra has undertaken a change in its profile, as has Prahran. I think demand and supply are matching each other in Prahran and South Yarra.

In Boroondora and Bayside and Stonnington, there are constraints from the local community to high rise development but there is the demand there. It's not all about high rise - it's a question of median density as well. The key question is whether there will be a medium density homes available for downsizers. If we do have these restrictions, there is a shortage.

We seem to be moving away from balance. We're building more high rises in the inner city and fewer medium density suburbs.

Developers such as Little Projects seem to be meeting the market, as are many other developers. In the city of Yarra, there seems to be a reasonable balance there.

Terry Ryder: Founder, hotspotting.com.au

I'm surprised this is even up for debate. The oversupply in Melbourne's inner city apartment is starkly obvious. Also readily apparent is that it will get worse. A lot worse. It has the potential to cause a market crash.

Current vacancy rates include 5% in Docklands, 6% in the CBD and 7% in Southbank. That's about 1,200 apartments sitting vacant and seeking tenants, without considering the thousands of apartments under construction or being marketed off the plan prior to construction.

The true level of vacancies may be higher, given a recent report which found that 17% of Docklands apartments consumed no water last year, which presumably means they were permanently vacant.

New highrise projects are being approved by Planning Minister Matthew Guy at a frantic rate. Since coming to office four years ago, Guy has approved close to 100 buildings in Melbourne's inner city areas.

A recent study by RMIT, looking at additions to the supply of inner-city units from 2011 to 2021, found 85,000 apartments either built, under construction or in the pipeline.

Guy has shown that he will approve anything and everything that comes across his desk. A report six weeks ago suggested there were applications for 42 more apartment buildings on his desk – and the record suggests they will all be approved. You have to wonder about his motivations.

It's overbuilding on a grand and reckless scale. And it's all being done, not to provide homes for Melbourne buyers, but for sale to Asian investors.

There is clearly no local demand to support the scale of new supply that's being created. We will soon have vacancies above 10% throughout the inner city suburbs, with rents falling and property values being dragged down with it.

Inner city Melbourne has experienced oversupply in the past. It helps to explain why the market performance of inner city units has been so poor in Melbourne.

There has been no growth in the median unit price for the CBD over the past three years, while the median prices for Southbank and Docklands have fallen in that time.

Over the past five years, the median price for Docklands has averaged growth of just 1.7% per year, while Southbank and the CBD has managed little better, at around 3% per year.

Given the poor historic performance of inner city apartments, the current high vacancies and the impending glut of new properties, I would strongly urge investors – and home buyers – to steer well clear of this market.

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Miriam Sandkuhler: Founder, Property Mavens

Having lived in and around the inner Bayside suburbs over the last 20 plus years, the ongoing addition of highrise development, especially in and around Port Melbourne, has had an enormous impact on the area.

While Port Melbourne has an attractive location on the bay with some great amenity, I would say that oversupply of apartments is an issue, not just for investors but for local residents alike.

When attempting to shop at Coles or anywhere in Bay Street, it is often a struggle to find a car park. In securing one, the one hour time limit frequently isn't adequate and the grey ghosts are hot to trot in this densely populated part of the suburb. Bay Street also carries a high volume of traffic during peak hour into and from the CBD and surrounding suburbs.

The local primary school is full to overflowing and the new Albert Park high school is also at capacity (it services Albert Park residents ahead of Port Melbourne residents). There is strong demand for a high school and child care to be built in Port Melbourne.

As we know, high demand and low supply drives capital growth. As demand in Port Melbourne is average, I wouldn't recommend investing in Port Melbourne. Investors can do better in other inner city suburbs with less high and midrise development, lower supply and greater demand.

This is evidenced by there being over 1,000 apartments available for rent and over 1,150 apartments for sale as at today, not including houses for rent or sale. Demand for housing to buy is average, based on data from listings over the last 12 months on realestate.com.au.

If owner occupiers particularly wanted to reside in Port Melbourne, I would recommend that they only buy a period style house to maximise capital growth and keep to the older and more established parts of Port Melbourne - on the north side of Graham Street and towards the city.

In other words, steer clear of all of the apartments.

Todd Hunter: Director and location researcher, wHere Group

Note: Last year, when asked the same question, Todd Hunter said Melbourne was "absolutely" facing oversupply.

So I went back and had a re-look at the available properties for sale and for lease, and I'm sorry, but the numbers tell a similar story:

Docklands and surrounding suburbs: 1,904 units for lease, 2,205 for sale, 4.5% yield

Melton: 840 houses for sale, 170 for lease, 4.7% yield

Whittlesea: 1,912 for sale, 414 for lease, 4.7% yield

Pakenham: 765 for sale, 414 for lease, 4.9% yield

Point Cook: 1,685 for sale, 518 for lease, 4.3% yield

Roxburgh Park: 902 for sale, 178 for lease, 5.1% yield

Werribee: 1,680 for sale, 504 for lease, 4.6% yield

In the above numbers, I have not used any price point and ticked the surrounding areas on realestate.com.au and the suburbs next door also add relevance to the huge over supply in these locations. All locations except for Docklands are houses.

It is also relevant to note that the above numbers account for each advert on the website. Now on many of the adverts where new House and Land is being offered or Blocks of Land, there are many properties on the one advert, so the numbers are even more scary than above – and the yields are very reflective of an over supplied market place.

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