Melbourne September 2018

The month in review: Melbourne

By Herron Todd White
September 2018

Melbourne With the cold snap behind us and a slow winter fading into the distance, we can look forward with renewed vigour. The summer months appear closer than ever, but first a taste of the sunny delight of spring time upon us.

Conventional wisdom would suggest that with the advent of warmer weather and longer days there would be an increase in market activity in this period, with few public holidays and distractions outside of the Melbourne Cup and AFL grand final to keep us from Australia’s first love – property.

Generally, the start of the spring season represents a change in attitude and positivity, which would bring welcome upward pressure to a market that has begun to decline somewhat in the major areas. According to CoreLogic’s Home Value Index, the year-on-year fall in values is still less than 1% in Melbourne for all dwellings, indicating a rather stable consolidation. In the peak of winter on the first Saturday in August the clearance rate was 55% as noted by Domain, well below 2017’s first week of spring results at 71.3% (CoreLogic). The question is, do we foresee a similar level of activity this year?

Total scheduled auctions for the beginning of August have almost halved, with 568 on the first Saturday of the month compared to 911 on the same weekend in the previous year (CoreLogic).

This decline followed two weeks of fluctuation, with 613 and 802 total auctions rounding out the month of July. These numbers were still well below the previous year’s result of 956, which had a strong clearance rate of 75.6%.

The slowing numbers of properties put on the market may be an indication of changing conditions rather than a different mindset due to the time of the year.

Houses remain the desired property type, with a 63% clearance rate for the second weekend in August across the Melbourne region, compared to 58.4% for units.

A number of specific areas including the Mornington Peninsula can see market activity increase significantly before the summer period given the established beach side properties become more desirable during that time.

The market may be turning towards buyers with greater time spent seeing multiple options – a far cry from the mad rush in the peak of the market a year ago with buyers competing at auctions every weekend. The market may kick off with the advent of Super Saturday with spring weather but can it push the needle enough?

Melbourne property

CBD and Inner Suburbs

The recent crackdown on lending to property investors has reduced demand but we have not seen significant falls in Melbourne apartment values, although some investors, especially in inner Melbourne, who bought at the peak of the market are being forced to consider selling at a considerable loss.

As the market turns increasingly towards the buyer’s advantage, vendors will need to accept the inevitable fall in the real value of their properties, however Melbourne’s nation-leading population growth should continue to underpin values preventing any collapse in prices. First home buyers have filled the hole in the market left by investors to a significant degree and are now taking up a substantial amount of stock, especially in the inner-city apartment market and in the outer suburbs where the price point is $650,000 or below.

FIRST HOME BUYERS

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Popular inner-city areas that offer a range of property types comprise a more resilient market segment with high-end apartments in prized locations still showing price growth. The clearance rate in St Kilda, for example, remains in the mid-60% range, and while that may indicate relative price stability and even growth, savvy buyers who do their homework are well-positioned to buy at fair value or at a cheaper price point.

Eastern Suburbs

Our valuers agree that the mad rush to buy property has dropped. As a rough guide, Melbourne-wide clearance rates as at 12 August 2018 were 64% with 557 auctions; this time last year it was 74% with 861 auctions (REIV), a gradual 35% fall.

As housing affordability has declined, property developers have led the charge to find cheaper and larger parcels of land and more profitable returns, gradually moving outwards from suburbs such as Ringwood to Croydon and then Lilydale in their search.

The median sales price for houses in Lilydale in 2016 was $632,000 (based on 254 sales) and in 2017 was $740,000 (based on 257 sales). Compared to the same period five years ago, the median house sales price for houses increased 64.4% which equates to a compound annual growth rate of 10.5% (realestate.com.au)

MEDIAN HOUSE PRICE IN LILYDALE

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As house prices increased the rental yield in Lilydale fell to 2.8% based on 172 property rentals and 231 property sales over the preceding 12 months.

RENTAL YIELD IN LILYDALE

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With the property market entering a new cycle, developers still overseeing construction may have to adjust their profit margins. Market values are unlikely to fall too far in the blue-chip suburbs where buyers generally have greater access to funds, but outer suburbs are more likely to see values fall, however, again, any falls will be tempered by population growth, as well as low interest rates and growing employment numbers.

“As housing affordability has declined, property developers have led the charge to find cheaper and larger parcels of land and more profitable returns.”

While low wage growth has been another constraining factor, the Westpac Melbourne Institute Consumer Sentiment Index for Australia jumped 3.9% month-on-month to 106.1 in July following a 0.3% rise in the previous month – the highest reading since November 2013 – indicating growing optimism about the economy.

Melbourne property 6

Inner and Outer North

Market activity in the northern suburbs has shown that the transition from winter to spring usually sees an increase in median house prices and a decrease in vacancy rates, however this is not the case for the entirety of the northern suburbs. Since 2015, the median house price has slightly increased $20,000 to $30,000 from the June quarter entering the September quarter for suburbs such as Craigieburn, Wollert and Roxburgh Park. Median house prices rose by roughly $30,000 to $40,000 for Coburg and has held this trend to the present.

Melbourne property 7

Even though some areas generally increase in median house price, there is no definitive trend of it bringing a more influential property market, as the vacancy rates tend to reflect little change from January 2018 to July 2018.

Vacancy rates in areas such as Mernda, Brunswick and Roxburgh Park tend to prove that the warmer weather, along with school holidays, does influence the market as the number of vacant properties in January was significantly lower. This was not the case for Northcote and Fitzroy North where vacancy numbers decreased by 7 and 14 respectively. This can also be attributed to the softening of the market as a whole since the start of the year.

The Inner and Outer West

Activity in Melbourne’s west generally reflects the softening market we have seen across the Melbourne metropolitan area as a whole with a clearance rate just below the established inner suburban markets at 58.3%.

With less activity in the market, established suburbs such as Newport and Altona saw a reduction in median values in the March and June quarters of 6.9% and 2.4% respectively, according to REIV. Both inner-west suburbs’ median values remained above the $1 million mark which indicates that prices remain relatively strong despite the decline.

Further out in Derrimut and Sunshine West the trend remained the same with 3.6% and 6.4% falls in median house prices respectively. Newer, less established suburbs including Truganina and Rockbank saw small increases in median values of between 1.9% and 2%.

Heading into spring it is not expected that the market in the western region will see a significant change in activity. The general trend has been one of consolidation and lowering of prices after the highs of previous quarters. As a measure of activity, the seasons do not usually tend to impact this sector of the market as it is more responsive to general economic conditions and larger drivers of activity.

Inner and Outer South East

The outer south-east doesn’t usually see a substantial increase in prices during spring, due to the fact that most of this area consists of house and land packages with set prices. The market is generally more affordable than the Peninsula and inner south-east, so tends to rise in steady increments in line with general economic conditions such as inflation, rather than fluctuating in seasonal bursts.

The Mornington Peninsula generally sees an increase in prices during spring as purchasers look to secure holiday homes in time for the summer. Suburbs such as Capel Sound and Dromana which were once made up predominantly of holiday homes have now seen an increase in permanent residents due to their affordability and proximity to pristine beaches, cafes and shopping centres. Interest from investors looking to cash in on the short stay rental trend should keep this market strong.

The table below displays median sale prices in Dromana. It shows that by the last month of spring (November) there has been a substantial increase in prices since the end of winter (August).

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The inner south-east generally sees a steady increase in prices during spring, however this area is always a desirable market due to its relatively close proximity to the city. Much like the outer south-east, sales activity is more reflective of general market conditions.

The graph below displays median sale prices in Bentleigh showing an increase between July and November with a flattening around the Christmas/ New Year period with the exception being the 2015/16 period.

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Summary

Overall, the Melbourne market continues to experience a slowing in activity which is reflected in a stabilisation of median prices. Lower auction numbers and clearance rates indicate that an upward trend is unlikely in the short term given the current state of the market.

Seasonal locations including the Mornington Peninsula are influenced somewhat by an uptick in activity closer to the beginning of summer with an increase in demand for beachside dwellings. Along with the blue-chip suburbs these areas are expected to remain relatively stable with a pull back in the peripheral suburbs that experienced growth in the last year.

Spring may bring with it more palatable weather but is unlikely to generate the same market interest as the previous year in terms of auction numbers and auction sales.

The established inner suburban areas do not typically see a definitive influential upward trend in the spring period with the current market consolidation expected to be maintained which indicates that vendor expectations may need to be curtailed slightly.

With a possible increase in the number of properties put to market as nervous investors seek to avoid dramatic price falls, buyers might just find a market more to their liking.

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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.