Melbourne’s Property Market Unsustainable? It’s All Hype

The growth of Melbourne’s property market is quickly catching up to Sydney. So much so that observers are questioning whether its growth is sustainable. But you should always view Melbourne’s rate of growth in the context of Sydney’s market.

Sydney remains the gold standard of ‘unsustainable’ price growth, where home values are nudging $1 million. Yet Melbourne’s property market has a long way to go before it hits Sydney’s level.

Let’s now look at how both markets fared last month.

CoreLogic figures for September show property values in Melbourne rose 2.4%. That’s in sharp contrast to the 0.1% growth in Sydney property prices.

But this wasn’t just a one off month though. Melbourne’s overtaking Sydney on longer term trends too.

For the September quarter, Melbourne property prices  rose 7.4%. Sydney’s market, on the other hand,  grew at a much slower, though by no means slack, 4.6%.

On annual trends, Sydney still tops Melbourne, but the margin is narrowing.

In the year to September, Sydney’s market was up 16.7%. That includes the value of both house and unit prices. But Melbourne’s not far behind. Prices in Melbourne have grown at an annual rate of 14.2% to September.

This represents a rapid turnabout in fortunes over last month.

In August, Melbourne’s property market went unchanged, with static price growth. Meanwhile, Sydney dwelling prices rose by 1.1% for the month. At the time, it was taken as a sign that the Aussie property market was finally cooling. And that it would bring some sense of normality back to the house prices.

But just when you thought Sydney’s slowdown would set the tone for the nation, along came Melbourne and upended everything.

The difference between the two markets is now narrowing quickly. In the year to June, the difference in price growth between the two cities was 7%. That’s now narrowed to just 2.5% for the September quarter.

In fact, you can say that Melbourne is now supporting the growth of the entire Aussie housing market! That distinction once belonged with Sydney, but no longer does.

Should you worry about the sustainability of this trend then? I don’t believe so. The clearest sign of this is the shifting landscape in home loan lending.

Investor lending has slowed to 10.8% on a national scale. At the same time, lending to owner occupiers ticked up 0.6% in August. Why is this difference important?

Because if people are buying houses to live in them, it poses less of a risk to the stability of the market.

As it stands, median house prices in Melbourne are $285,000 lower than in Sydney. For units, this difference is $180,000.

In other words, there’s still only one city with seemingly unsustainable prices. And it’s not Melbourne.

The other side of the property market

Across the combined capitals, property price growth in September nudged 0.9%. On annual terms, the Australian property market is up by 11%.

But this growth isn’t spread across the nation. Outside of Brisbane, which is up 4.9% in the year to September, the national market is in a depression.

Property values in Adelaide fell 1.2% in September. Hobart and Darwin both saw home values decline. Where growth did take place, it was meagre at best. Perth property values rose 0.5% in September. Yet its market is down 0.9% over the past year.

As far as future demand goes, things are no better on that front.

Property prices are influenced heavily by changes in population patterns. As populations rise, demand for property follows suit. Which, of course, lends itself to higher price growth across the property market.

On a national scale, the pattern of migration is skewed towards the eastern states. Across WA, Queensland and the Norther Territory, population growth is slack. That’s all down to the ongoing mining slowdown. As these states suffer under the pressure of the commodity rout, fewer people are moving to them.

Victoria and New South Wales don’t have this problem. Their property markets aren’t affected by a slowdown in overall migration to Australia.

People that are moving to Australia come to where the jobs are. These are increasingly in Sydney and Melbourne, and it partly explains why demand remains robust.

Are rental yields a sign of future unsustainability?

As mentioned, Melbourne’s swift growth raises concerns about its long term sustainability. But is it reasonable to worry? CoreLogic’s Tim Lawless thinks so.

He says the rise in property values doesn’t match up with falling rental yields. He notes:

We wouldn’t expect values to be rising that fast for extended periods at a time when rents are hardly moving — Melbourne rents are only up by less than 1% the past 12 months — and, of course, household incomes are hardly moving as well’.

Mr Lawless adds that housing rental yields in Melbourne have fallen below 3%. It’s the first time that’s happened since 1996.

That might be true, but you’re also seeing much lower auction clearance rates.

In fact auction clearance rates are more or less the same across both Sydney and Melbourne. Both markets are clearing 70% of listed properties in recent weeks. That’s in sharp contrast to earlier this year. Sydney recorded clearance rates of over 90% at its peak. Melbourne reached its ceiling in the low 80%.

And there’s another point here about falling rental yields… it’s nothing new. We already know that Melbourne has an issue with unit oversupply. But in the long run, the clampdown on investor lending will ease worries over this. That’s because investors gravitate towards units when investing. Especially younger investors breaking into the market.

We could be seeing the effects of this rebalancing playing out in Melbourne then. Price growth is sharp, but only at the expensive end of the market. We know this because, as you’ve seen, clearance rates are trending down.

And with investor lending slowing — as owner occupier lending rises — it suggests a more sustainable path of home value growth. At least one which doesn’t leave the market exposed to a slew of bad investor loans.

All of which is to say that fears over Melbourne’s growth are unfounded for now. It’ll take several months of 2%+ growth for its sustainability before the alarm bells start ringing.

Property market performance by city

Below is a list of property market performance by city (monthly, yearly, median dwelling price).

Sydney: +0.1%, +16.7%, $785,00

Melbourne: +2.4%, +14.2%, $580,000

Brisbane: 0.8%, +4.9%, $464,000

Perth: +0.5%, -0.9%, $492,000

Adelaide: -1.2, -0.3%, 405,000

Hobart: -1.9%, -0.2%, $305,500

Darwin: -0.3%, -3.9%, $542,500

Canberra: +1%, +0.6%, $551,000

Non capitals: +0.6%, +2.8%, $360,000

Mat Spasic,

Contributor, Markets and Money

PS: The Aussie property market is still growing. It may be a two-speed market, but both Sydney and Melbourne have grown by over 14% this past year. Markets and Money’s property expert, Phillip J. Anderson, is bullish on the market’s future potential.

Phil says that the national housing market is only set to continue growing. He says that Aussie real estate is set to boom over the next decade.

Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He correctly predicted the 2008 housing market crash. He also went against the trend in 2009, saying that house prices would go on to boom this decade.

He was right on both accounts.

In his latest free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money