Melbourne April 2018

The month in review: Melbourne

By Herron Todd White
April 2018

Melbourne is Australia’s fastest growing capital city and experts have predicted it is likely to surpass Sydney as the largest city of Australia by as early as 2031. While the national population grew by 1.6% in the year ended 30 June 2017, the highest growth was in Victoria, with a 2.3% increase in population. The majority of the Victorian population resides in Melbourne with approximately 75% of the total state population calling Melbourne, home. The growing population coupled with low-interest rates and low unemployment is continuing to keep the Melbourne property market relatively stable with modest to strong capital growth.

The current cash rate as at 7 March 2018 was 1.5% which has remained unchanged at a record low since August 2016. The Reserve Bank of Australia has left the cash rate low to encourage lower interest rates, stimulate the economy and consequently, increase inflation. Low-interest rates are a driver for demand and property market growth as more people are able to afford higher mortgage loans. In January 2018, the overall unemployment rate was 5.6% in Melbourne, a slight rise from 5.5% in September 2017 which was the lowest unemployment rate since March 2013. These figures are an indication of the strength of employment growth (source: Australian Bureau of Statistics).

However, while the low cash rate and interest rates coupled with low unemployment have been positive for purchasers, there are concerns over stagnating wage levels. While the cost of living continues to increase and a prediction for interest rate rises continues to loom, there are concerns of affordability given wage growth has remained sluggish. While many outer areas remain more affordable, there are concerns that if wage growth doesn’t come close to matching the increase in the cost of living there will be a softening of these residential markets. Those with more modest household incomes will feel the greatest impact of trying to cover the escalating cost of living.

Population growth is one of the major driving factors of the outer Melbourne suburban residential markets in the west, north and south-east as new residents are looking for affordable housing options and these areas are particularly popular with newly arrived overseas migrants. Additional factors driving these outer markets include the availability of residential land, infrastructure and amenities, size of allotments and the first home owners grant and stamp duty exemptions or concessions. Located within the growth corridor plans as designated by the Victorian Planning Authority, these areas have been identified to provide new housing for the expanding population. Local councils and the state government are investing in new infrastructure and amenities to provide for these fast-growing suburbs and their accelerated population growth. The development of new estates is ongoing, with regular releases of land coming onto the market and thousands of new homes being built each year. The availability of land in these areas, coupled with competitive building contracts and house and land packages provide affordable options for owner occupiers and investors alike. Although being located further from the city can result in a longer commute on oftentimes congested roads or crowded public transport, the ability for many to afford their own home is worth the trade-off, particularly for those looking for a detached dwelling rather than an apartment or unit.

The outer eastern Melbourne market is similarly driven by the aforementioned factors, with a strong influence from affordability as well as locality. Young families understand the significant trade-off between house prices and commute time when compared with inner eastern suburbs. The mentality of saving several hundred thousand dollars for an extra ten minutes of travel time is appealing to the younger generation as house prices steadily rise. Under the local municipalities planning schemes, there are design and development overlays in place where the current infrastructure can support the growth in the supply of housing without creating an immediate demand for an upgrade to the infrastructure. The focus points of supply are seen by proximity to public transport as well as access from major arterial roads such as the Maroondah Highway or Burwood Highway.

According to the ABS 2016 census, the occupation with the highest percentage of employed individuals was professional and the second highest was technicians and trade workers, at 22% and 15.5%, respectively. The highest percentage industry of employment was hospitals at 3.6% and the second highest was supermarket and grocery stores at 2.5%.

Strong migration, combined with low-interest rates, have been drivers in all markets, especially the apartment market as investors look to achieve strong yields from apartments and take advantage of reduced interest rates. Until interest rates tighten, the property market will continue to have a strong buy-in from the investment sector.

The apartment market is vulnerable to many external factors. The legislation is either a key driver or barrier in this market, with recent legislation exempting investors from stamp duty savings for off the plan apartments, which has put pressure on both investors and the down-sizer market. Also, the new “ghost tax” comes into effect from 1 January 2019, targeted at owners (primarily overseas) who leave investment properties vacant. These parties will be taxed at 1% of a property’s capital improved value. It will be interesting to see how significantly the apartment market is affected by this new legislation in 2018 and beyond. This could potentially put downward pressure on prices, as investors are less inclined to invest with the additional tax on their investment properties.

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