The Smartline Report – March Edition

The month in review: Melbourne

By Herron Todd White
March 2015

The RBA has recently cut interest rates 25 basis points from 2.5% to 2.25% after 16 months of stability to a low not reached since 1959. This will affect the Melbourne property market in a variety of ways. Currently the property market is performing well with steady growth across the board in Melbourne. RP Data shows that Melbourne property prices have increased 8.1% over the past 12 months. By lowering the cash rate this month, the RBA has the ability to influence housing market prices and household property investment. This can encourage greater consumer confidence and willingness of lower to middle range income earners to take out
mortgage security loans. This appears to be working as research by the Housing Industry Association indicates that 2015 will see substantial growth in new home construction, especially in the early months.

An interest rate fall allows borrowers to feel more confident when borrowing money as their monthly bank repayments would be lower or the amount they borrow could be increased. First home buyers would also be encouraged to enter the lower end of the property market and therefore create more demand, which in turn can drive property prices up. The lending market would also become more competitive, offering better loan packages as lenders try to attract their share of any increase in borrowing. This results in the cost of money becoming cheaper and property values rising.

The greatest benefit of interest rate cuts will be seen in the lower end of the property market. As interest rates are gradually lowered, the Melbourne property market will initially see an increased investment in outer suburban areas of Melbourne such as Craigieburn, Mickleham, Mernda and Doreen. These suburbs are at the medium to lower price point value, with a current median sale price of houses in these suburbs of $350,000. People living here usually have mid to lower income levels, for example, 19.9% of Craigieburn households earn between $52,000 and $78,000, and would therefore receive more relief or encouragement to borrow when there is an interest rate cut. Outer suburbs such as these consist of modern conventional homes that are master planned and mass-produced by large building companies. The more people who decide to buy or build a property due to the interest rate cut, the larger the growth of property prices in these suburbs.

Inner city properties containing higher value properties will be significantly less affected by interest rate cuts. The inner north such as Parkville, Northcote and Brunswick will not show as much change in consumer confidence or property investment as those in the outer suburbs from the interest rate cut. The inner suburbs are at the medium to higher price point value with a current median sale price of $1,077,500. Generally, those
who live closer to the CBD and own their residential dwelling have a higher income, for example, 20.5% of Northcote’s households earn between $78,000 and $130,000 per year. With these higher income levels, Parkville and Northcote residents generally own higher value assets such as period or modern dwellings with higher land values. As a result, the downward movement of interest rates isn’t going to have as large an effect on these households. Cuts to the interest rate would only ensure that consumer confidence remains solid and that properties continue to have steady to moderate growth.

Many types of investors exist within Melbourne’s property market including property syndicate funds, foreign investment and owners looking to negatively gear. All investors receive encouragement from lower interest rates although different categories of investors will be affected to different degrees.

The RBA lowering the interest rate will boost the already strong number of overseas investors in the Melbourne property market. The RBA’s announcement also results in a downward moving Australian dollar, falling more than 1.5% to below US$0.77 making foreign investment more attractive in our country. We will see greater property investment from owners looking to generate income from negative gearing benefits.

Property syndicate funds are less affected by the rate cuts as investor numbers and the amount they invest aren’t affected as greatly by the RBA’s decision.

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 – 2015. Australian Credit Licence Number 385325


Share on:

DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.