In today’s show, together with Michael Yardney from Metropole Property Strategists, we look at the property markets in Victoria and Tasmania. We talk about what is driving the growth in Melbourne.
Kevin: So far in the show, we had a look at the South Australian market. Let’s take you to one of the major markets in Australia now – Victoria.
Michael Yardney joins us. Michael, we should really look at the Melbourne market specifically.
Michael: Victoria is a very large state and the markets are very fragmented. Regional Australia hasn’t performed particularly well with real estate, but boy, has the Melbourne market performed strongly. Last year, dwelling values grew about 7.4%, but interestingly, Kevin, most of the growth was in the last quarter when it grew 4.5%.
Kevin: We know that we have a tendency to want to live in our major capital cities, but what is driving the growth in Melbourne?
Michael: It is a combination of population growth and the wealth of our economy that is doing particularly well. The markets have been driven by owner-occupiers, by investors, by self-managed super funds, and also by overseas investors.
Absent over the last 12 months or so were the first homebuyers, but interestingly, rather than buying their first home, many younger people ended up buying an investment first. This created a very fragmented market. There are pockets of over-supply – unfortunately, there is more stock looming in some of those areas – and there are pockets where everyone wants to live. That is what is pushing up prices in certain locations.
Kevin: That over-supply situation you just mentioned, I’m hearing a lot about that particularly around the Melbourne market. Is that something fairly acute, do you think?
Michael: It’s something that is going to continue on for a number of years, because the development cycle for these very big projects goes over a number of years. The under-supply of properties a couple of years ago created a demand. All these developers got in, and now all are coming on stream at much the same time.
Unfortunately, this is going to cap rental growth, especially in the inner city and the inner suburbs. It is also going to cap capital growth in those locations, and therefore, they are the sort of locations one should avoid.
I think the other thing is, in general, the market is not going to do the heavy lifting this year. This year for investors, correct property selection and the ability to add some value – in other words, manufacture some capital growth at a time when the market is not going to do the heavy lifting – would be a good strategy.
Kevin: With those two things in mind, if you had $500,000, where would you be looking at spending it?
Michael: I would be spending it in those areas where the demographics are going to push property values up, areas where people’s disposable incomes are higher. This is the middle ring suburbs and a couple of the inner ring suburbs – not the inner CBD – where young professionals have higher disposable income and want to live there.
It would be an established two-bedroom apartment in one of the more Money Belt, affluent, southeastern suburbs where you could buy an apartment that you could add some value to. If you can’t afford to do the renovation now, you can just keep something up your sleeve to do it down the track later.
Kevin: I’m talking to Michael Yardney from Metropole Property Strategists specifically about the Victorian – or more specifically, the Melbourne – market as we do our rip around Australia. We’re going to go over the ditch in just a minute and have a look at Tasmania.
Before we leave Melbourne, are there any areas that you think we should avoid if we’re looking at investing in that market?
Michael: Clearly, the off-the-plan market is the area I’d be avoiding. Also, the new house and land packages in the outer suburbs, because that is an area where first-time buyers are staying clear of. But there is still quite a lot of development happening, so there is minimal scarcity, there is the wrong demographics, there are not a lot of buyers.
The other thing is avoiding secondary properties. Over the last couple of years when the Melbourne market was really strong, almost anything sold. Now, as the market is going to be flatter, prime properties, good properties, good floor plans, good layouts, and good locations are going to trump, while secondary locations are going to not sell well or not rent well.
Kevin: It places an even bigger emphasis on doing your homework, doesn’t it? There’s a great need to do it now.
Michael: Very much so, Kevin.
Kevin: We’re going to take you to Western Australia in just a moment with Damian Collins, but before we do and before I leave you, Michael, I wonder if we could jump across to Tasmania. Give me your view on that market.
Michael: Hobart has had very little value growth over the last 12 months. Median house prices there are about $360,000 and the unit prices are $259,000. But they only grew about 0.6% last year. Over the last ten years, Hobart property values increased on average about 1.7% or 1.8% per annum.
The trouble is the Tasmanian market lacks the drivers of capital growth. It has not got strong population growth and its economy is not doing well, so the people there can’t afford to pay more. While properties are affordable and it is a lovely place to live, it’s not an area where I would be investing. I can’t see any change in that in the near future.
Kevin: Wonderful stuff. Michael Yardney has been my guest as we looked at the Victorian and Tasmanian markets. We’ll have a look at the other major market in Australia – New South Wales – a little bit later with George Raptis.
Michael, I just want to say thank you so much for joining us and for your input.
Michael: My pleasure, Kevin.