Melbourne downturn imminent

Simon Pressley from Propertyology believes that Melbourne is on the cusp of a market downturn and he tells us why.
Kevin:  Property price falls are forecast in Melbourne from 2017, due to massive car manufacturing job losses and rampant overbuilding of houses and apartments, according to some new research released by Propertyology. Joining us from Propertyology once again is Simon Pressley.
Simon, thanks for your time.
Simon:  It’s nice to talk to you again, Kevin.
Kevin:  With the extent of this fall, are you able to forecast by how far it will fall?
Simon:  No, I’m not. We’re always reluctant to put percentages on things because with every market, whether it’s Melbourne or anywhere else, it’s obviously going to be influenced by international events and federal events, as well. But whatever broader Australian property markets in 2017 and 2018, we feel there’s every reason to expect Melbourne to be quite a bit below that.
Kevin:  We hear about closures in car manufacturing impacting the Adelaide or South Australian market. Why are you saying it’s going to extend through to Melbourne?
Simon:  A couple of years ago, Kevin, when the three big car manufacturing plants announced publicly to all of us that they were closing, we automatically go to things like that to work out what potentially impacts on which market.
Not long after the announcements, there was a report released by the University of Adelaide. We have no reason to take that on anything other than face value. Because they’re academics, they don’t have a vested interest. They estimate that nationally, there will be 200,000 jobs lost. Not all of those will be working directly in a plant. Some will be in the supply chain of that. But 98,000 will be in greater Melbourne. A lot more are in Melbourne than Adelaide, Kevin.
Kevin:  Has this or anything like this occurred anywhere else in Australia and this is what you’re making comparisons on, Simon?
Simon:  In our history, has there been something like this?
Kevin:  Yes. Are you comparing this with impacts anywhere else in Australia?
Simon:  The closest recent comparison we can make is with Perth. To us, the fundamentals of the Melbourne property market now resemble what we saw unfolding in Perth two years ago. At that point in time, Perth’s property values were still rising. However, commodity prices, especially iron ore, were starting to decline, and we anticipated that that would lead to job losses in Perth.
At the same time, we could see lots of development or building approvals, which eventually equates to more supply. We put a report out forecasting Perth’s values would decline, and history stands that we were accurate in that.
We think there’s a similar dynamic unfolding with Melbourne. Right here and now, today, Melbourne’s property market is one of the strongest in the country – no denying that – but those jobs will be lost. Those factory announcements have been made. And the supply of new housing in Melbourne is not contained to just the inner city Melbourne stuff that’s been well reported for a while now.
Kevin:  Yes. In your report, you mentioned two factors. We’ve pretty well covered one, which is the downturn of the car industry. You also mentioned there about an overbuilding of houses and apartments. Are they equally contributing to this, or is one worse than the other?
Simon:  It’s not just unique to Melbourne, Kevin. There’s been a big increase in the number of apartments relative to all dwelling styles built over the last three years. For a long period of time, apartments represented about a third of all new dwellings approved in a typical calendar year. Now, it represents 50% to 55% of all dwellings built in this country each year.
That’s not unique to Melbourne, but we all probably have known for a while that there have been too many inner-city apartments built in Melbourne. This is official data. Our research shows that there is going to be an oversupply across greater Melbourne. In fact, 16 out of 31 local government authorities that make up Melbourne have approved in excess of 50% more dwellings each calendar year than what they normally build. That correlates to the demand side of things. The rate of population growth of Melbourne has been the same last year as it was the year before, the year before that, and the year before that. Demand is the same, but supply is a heck of a lot more.
Kevin:  You’re saying 2017. When in 2017 do you think we’re going to start seeing the impact of this?
Simon:  Look, it would be great to have that crystal ball, but we know that the first of the car manufacturing plants will be closing in October 2016, about six months from now. That’s not that far away. It’s highly likely leading up to that that there’s going to be lots and lots of stories reported in the broader media about households affected by this. The next two closures will occur – I don’t know the exact dates – over the following 12-month period.
The downturn will be directly related to when the factories close, to the sentiment related to the stories about it closing, as well as the unfolding of the extra supply. It’s likely to be a few years of being quite grim, according to our research.
Kevin:  Simon, I understand you have some graphics on your website that demonstrate this point.
Simon:  Yes, we do, Kevin. We’ve produced a heatmap that shows the specific local government authorities from an oversupply of housing point of view and also the councils that will likely be affected the most by these car manufacturing closures. They’re available on the Propertyology website.
Kevin:  Okay, go to the website – I’ll give it to you in just a moment – or you can use the link here. We take all of our interviews word to text, so we’ll put that link across the text in there. You can read that, and it will link you straight to it.
Simon, it was great talking to you. Thanks very much for your time. Simon Pressley there from Thanks for your time, Simon.
Simon:  No worries, Kevin.

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