Is Melbourne the top Aussie market?

As you will hear today, there is no one property market in Australia and that is being highlighted as we continue to look at the various markets that make up the country.  That in fact is the first point Michael Yardney makes when we ask him about Victoria.  Interesting to note that while we all talk about the big gains out of Sydney, you might be surprised to hear what Michael says about the performance of the Melbourne market.
Kevin:  First up on the show, let’s have a look at one of the bigger markets around Australia. Sydney and Melbourne, of course, have been recognized as the two big winners going forward, and we’ll have a look at the Victorian market now. Joining me to have an overview of that, Michael Yardney from Metropole Property Strategists.
Michael, I know you work all over Australia, but for the sake of this chat, can we talk purely about the Victorian market?
Michael:  Of course, we can, Kevin.
Kevin:  What is your overview of Victoria, and how the property market is faring there?
Michael:  Let’s be clear. There is not one Victorian property market. When people talk about Victoria, they generally mean Melbourne. Even within the Melbourne property market, it’s very fragmented. But Melbourne has won the two-horse race between Sydney and Melbourne over the last couple of years with now last year, the last 12 months, having a 9.8% overall capital growth, which means certain areas have done particularly nicely and others haven’t as strong.
Looking even over the last ten years, the average dwelling price has changed 6.9% in Melbourne, which is the highest growth over the last decade compared to Sydney, which only grew at 5.9%, Darwin 5.6%, and the overall state capitals at 5.4%, so Melbourne has been the clear winner.
Kevin:  What’s impacting the market there right now, both positively and negatively?
Michael:  The big thing that has impacted the Melbourne property market that has kept it growing is our economy and jobs creation. Kevin, we didn’t have the ups and downs of the other states, so we didn’t get the mining boom and mining bust mentality. What we did do was slowly but surely, change from a manufacturing state to a services industry state with finance, health, and IT jobs, which were good-paying jobs.
People came for the jobs. Wages growth in the service industries allowed people to be able to spend more, they had high disposable income, and they wanted to live in the city, and more of them are coming here, so strong population growth and strong jobs growth pushing up values. Then it led investors to hop onto the bandwagon of capital growth, as well, so it was a multitude of factors.
Kevin:  How would you describe investor sentiment in that area now, Michael?
Michael:  Interestingly, at our offices at Metropole, we’re seeing more investors wanting to invest in Melbourne than we have for a long, long time. At the end of last year, they were a little bit cautious, a bit nervous with the scares about APRA. Earlier this year, there were some concerns about negative gearing. I think they’re recognizing that we are not going to grow as well in the next couple of years as we did the last couple of years, but still, there is good certain long-term growth if you buy the right property – strong investor sentiment, Kevin.
Kevin:  What are the areas that you’d avoid, and why?
Michael:  The big areas to avoid are the inner city and off-the-plan property markets. We’re building too many. Over the last few years, we’ve built three times the average number of properties we’ve built in the past, and it’s been fueled by investors speculating – not really investing – hoping that property values would go up, and therefore, buying off-the-plan and overseas investors.
But now there is about 14% of all of the properties of the CBD sitting vacant, a very significant proportion of all of the properties being underpinned by investors, not owner-occupiers, and they’re sometimes a bit fickle. Values are dropping. Rents are not going up. There will be maybe a decade when there will be no capital growth or rental growth. I’d be avoiding those areas.
The other areas I’d avoid are the newer states. We’re building a few too many houses for first-home buyers, and some investors are being lured to buy in these outer suburbs. They won’t get capital growth there, either.
Kevin:  Going back on something you just said, that figure you said about the number of apartments that are sitting vacant, what was that number again?
Michael:  According to BIS Shrapnel, 14% of properties in Melbourne’s CBD are sitting vacant, and most of those are not on the rental pool. In other words, the rental vacancy rate is only 3.5%. It’s just overseas investors have locked them up, not turned on the lights or electricity, and are leaving it there – land-banking, so to speak.
Kevin:  Wow. That’s a major concern.
Michael:  It could be, but remember, their motives are different to yours and mine as investors. What they’re doing is just putting their money somewhere secure. I believe their mentality is “This is a new apartment.” They like the concept of new. Keeping it new and pristine, in their mind, adds value, keeps its value. I’m not sure that’s true, though.
Kevin:  Yes, it’s going to skew the vacancy figures, because we’re looking at a balanced market being around 6%, but if you put that pool in there, you’d go well above 6%, wouldn’t you?
Michael:  Sure, but they’re actually not in the letting pool. They’re just lock and leave. People are leaving them alone.
Having said that, the vacancy rate in the CBD and inner-city areas is high. In general, in Melbourne, the vacancy rate has been comfortable. What we’re noticing is there are lots more people turning up to open for inspections.
Rent growth has been very poor, but with the current vacancy rate according to SQM Research at around 2%, it’s actually suggesting that we’re going to lead into a period of higher rental growth as there are more people starting to look for properties and not as many around. But that’s overall in Melbourne; there are some pockets, as I’ve already said, that I’d definitely be steering clear of because the vacancy rates are much too high.
Kevin:  Looking ahead – and I want a very quick answer, if I may – without notice, rate out of ten, ten being the highest, one being the lowest, how would you rate Melbourne’s future growth potential?
Michael:  In 2016, it’s going to be number one in that it will be the fastest growing capital city market with an overall capital growth probably in the order of 5%, maybe even 6%. It’s not staggering, but it’s definitely going to end the year better than it started.
Kevin:  Always good talking to you, Michael Yardney from Metropole Property Strategists. There’s your outlook for the Victorian market.
Thanks, Michael.
Michael:  My pleasure, Kevin.

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