Will the Melbourne property market run out of steam? Richard Wakelin

GUEST OBSERVATION

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Video transcript:

We’re now in the third year of the residential property market recovery in Melbourne. It’s one that began in 2013 after the market started a decline in mid-2010 and remained in the doldrums through to the end of 2012.

Not unreasonably, many are asking whether this recovery will run out of steam. Are we due a period of plateauing and then falling prices?

Naturally there will come a time when the market will turn south. Up and down periods are the nature of markets and property is no exception.

Let’s take a look at previous property cycles in Melbourne.

The current upswing started in the September 2012 quarter so has been underway for nine quarters or two and a quarter years. In that time we’ve seen around 16% capital growth in Melbourne. 

In the last 20 years there has been three other periods of upswings: December '08 to June '10; September '05 to March '08; and September '96 to December '03.

The length of upswing has varied from six quarters to 29 quarters.

And the total capital growth ranged from 29% to 142%.

So our 16% growth and nine quarters of growth to date is by no means destined to end any time soon.

So will the current cycle be more like the '08-'10 cycle or the '96 to '03 cycle?

I doubt that this market will run for 29 quarters of growth, but I wouldn’t be surprised if we saw another four quarters or more.

Underpinning that view is the level and direction of interest rates.  Following the February 2015 cut of the cash rate by the Reserve Bank to 2.25%, the typical new mortgage rate stands at around 4.75%, a generational low.

Of course, with houses prices growing over time, the average mortgage is much larger today than it was 10 or even five years ago. So although interest rates are lower, interest payments are greater than in yesteryear.

But on the flip side, rents have also increased, which is clearly an important factor for investors and the market more generally.

They have not risen as quickly as property prices which is leading to what’s known as falling rental yields.

But interest rates have fallen even more than rental yields, such that the funding gap – the cash flow cost of holding a property – is actually falling as a proportion of values.

It is these fundamentals that will support and drive the property market forward in 2015.

Moreover, it is clear from the Reserve Bank’s rhetoric that these very low levels are likely to continue for the foreseeable future, which will give comfort to many prospective investors to enter the market.

But what about the inevitable downturn? OK, Let’s take a look at previous property cycles in Melbourne again, and this time focus on the downswing part of the cycle.

Melbourne has experienced three downswing periods in the last 20 years. The most recent episode was between June 2010 and September 2012.  The other times ran between March '08 to December '09 and from December '03 to September '05.

As we can see, down turns in the Melbourne property cycle tend to be relatively short – between 3 and 9 quarters - and deliver comparatively modest price falls.

The result is that over the long-term, property prices in Melbourne trend up – notwithstanding the occasional retreat.

And that’s because Melbourne is a city with strong population where demand for property outstrips supply over the long term.

Richard Wakelin is the director and founder of Wakelin Property Advisory.