The Smartline Report – February Edition

The month in review: Melbourne

By Herron Todd White
February 2016

Our research has led us to believe that there a few key suburbs which may experience higher than average growth in 2016. In the inner west, Footscray, approximately 6.5 kilometres from the CBD already experienced a rapid growth rate during 2015 with a median house price of $780,000 recorded in September 2015, up by 13.5% from the June 2015 quarter median of $687,000. December 2015 saw a new sales record set for the suburb with $2.11 million achieved for a 6-bedroom Edwardian home. The vendors profited over $700,000 since their original purchase in March 2014. Given the suburb’s proximity to the CBD, improved infrastructure and rich multicultural environment, this suburb has all the characteristics to be a distinguished performer in 2016.

Other suburbs set for growth in the west include Sunshine, Braybrook and Laverton. With a number of small subdivisions and infill redevelopment, it is the mid-tier dwellings that are likely to perform best, in particular townhouses and units.

In the south eastern suburbs, proximity to local amenities, public transport, schools and beachside areas continue to remain the key factors influencing demand. Bayside suburbs such as Hampton and Beaumaris are likely to continue to see strong growth in 2016 possibly easing in comparison to 2015. Frankston has long been set as the next suburb to experience rapid growth and although there was improvement in 2015, it wasn’t to the same percentage of nearby bayside suburbs. This year could be Frankston’s time to shine.

Similarly, property prices in the outer eastern suburbs have also been positively impacted by proximity to local services. The 12 months to December 2015 saw unprecedented levels of growth in a number of outer eastern suburbs, led most notably by Ringwood and Ringwood East. This demand was partly driven by the redevelopment of Eastland Shopping Centre but also the lack of affordability of the inner eastern suburbs, which continues to push purchasers further along the Lilydale train line. The scarcity of developable land has resulted in increased competition and higher prices. Land banking also became more prominent over 2015 to the west of Eastland Shopping Centre. Foreign investors who saw the capital appreciation over the past two years in suburbs such as Glen Waverley are no doubt hoping that Ringwood is next in line for such growth. We expect investors to continue holding these sites in 2016 and only consider development once demand reaches its peak.

There is however, good news on the horizon for buyers. The south-east market appears to be shifting in their favour for 2016. The latter part of 2015 saw a noticeable decrease in the number of auction attendees and corresponding clearance rates, with a number of properties passing in before eventually selling. The indication is that the market may be nearing the top of the housing cycle with prices flattening and values anticipated to remain relatively stable.

Many outer south-east suburbs are still considered good value for money, making them popular for first home buyers, families and investors.

In suburbs such as Cranbourne, Clyde and Officer the average price for a newly-built conventional 4-bedroom, 2-bathroom house on approximately 450 square meters of land is circa $400,000. However, investors are advised to approach with caution due to the risk of oversupply and given that growth was stronger than expected throughout 2015.

This sentiment is being echoed within some inner eastern suburbs but most prominently within recently overheated sub-markets such as Balwyn, Balwyn North, Mount Waverley and Glen Waverley, suburbs particularly popular with Australian Chinese purchasers and overseas investors. These suburbs experienced a noticeable dip in property prices over the last two months of 2015 and a reduction in clearance rates by approximately 10%. The recent legislation introduced by Chinese banks to limit overseas transfers by individuals to US$50,000 per annum had significant impact on Melbourne’s property market in late 2015. While purchase prices within these markets are expected to dip again throughout 2016, the appeal of the highly sought after school zones could limit substantial reductions in prices.

The expected dip in property prices within these sub-markets combined with record low interest rates will provide more opportunities for local buyers wanting to upgrade existing homes to ones within the prestigious inner eastern suburbs, a feat which may have seemed financially out of reach for some in previous years.

The apartment market is certainly one that should be approached with caution in 2016. Our recent monitoring of the difference between off-the-plan sales and the price on resale of recent developments (since 2012) of inner Melbourne suburbs is on average a loss of 10%. Suburbs such as Southbank, Docklands, St Kilda, South Yarra, West Melbourne, South Melbourne and North Melbourne are all impacted, with the biggest losses being 30% off the original off-the-plan purchase price.

Research has revealed that approximately 20% of all apartment sales in Melbourne CBD were sold at a loss. Research from the REIV has shown that the median price for 1-bedroom apartments in Melbourne for the year to September 2015 fell by $5,000 to $355,000, a decrease of 1.4%, whereas the median price for 1-bedroom apartments in the middle suburbs of Victoria fell by 2.5% to $305,000. Median prices for 2- and 3-bedroom apartments rose by 3.8% and 8.7% respectively. In November 2015, we saw a rise in the vacancy rate for apartments from 3.3% to 3.8%, which is now nearly 1% higher than the vacancy rate in September 2015. Approximately 20% of vacant apartments were located within the city of Melbourne, which experienced a rise in vacancy rates from 3.3% to 3.9%.

A key piece of legislature primed to come into effect later this year will be the restriction on height and size of buildings in the Melbourne CBD. This restriction will limit the plot ratio of a site to 24 to 1 compared to the current average plot ratio of 37 to 1. Essentially, this means developers wanting a taller building will need to ensure they have the required open space beneath it. This will almost certainly result in a substantial decrease in the number of high-rise towers being built, which appear to be a prominent feature of the Melbourne CBD skyline.

With 2,524 apartments expected to be delivered in Melbourne and Southbank this year alone and the recent apartment boom seen in Carlton, Collingwood and Fitzroy, there is a substantiated fear of oversupply in the apartment market, even taking into consideration the growing population. Government legislation will go some way to reducing the glut but the second half of 2016 will be an intriguing one for the Melbourne apartment market.

A similar trend can be seen in the apartment market throughout the south-east, which has softened and is likely to continue to do so due to the increased volume of new construction. Second-hand apartments have generally taken longer to sell and in some cases vendors are taking a loss on what was originally paid off-the-plan.

The oversupply in the apartment market is also a concern in the inner north western suburbs. Suburbs such as North and West Melbourne, Moonee Ponds, Ascot Vale and Essendon will see a large number of apartments completed this year. With no sign of construction slowing down, additional concerns are coming to light surrounding the impact of the designs on the local community as well as the sizes of the complexes and individual apartments and how these impact the long-term resale value.

In conclusion, we believe that 2016 will be one of average growth throughout Melbourne, with the levels of capital appreciation being significantly lower in comparison to 2015. With instability in China and

the weak Australian dollar we expect interest rates to remain relatively low, helping to maintain a healthy level of demand throughout the market. However, all indicators point towards an oversupply of apartments, particularly within inner Melbourne. The interaction between the developer’s willingness to supply and buyer’s willingness to continue to absorb the excess stock will determine how the apartment market will fare in 2016.

Please note that information in this publication is subject to change without notice. Smartline assumes no responsibility for any errors, omissions or mistakes in this document. © Smartline Home Loans P/L 1999 – 2016. Australian Credit Licence Number 385325

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