We all know Melbourne’s residential property (housing) market is falling — it’s a story we’ve been covering extensively here at Markets & Money.
Today’s article will focus specifically on the Melbourne residential property market.
To understand what is at play here, a few things are useful as background information.
Previously, we’ve covered factors specific to the property market and macroeconomic trends.
In terms of factors specific to the property market, we have explained how Chinese investment in apartments has fallen off dramatically in the last two years, auction clearance rates falling and building approvals dropping, as well.
With this in mind, let’s examine Melbourne’s property market as it stands today.
Strong Victorian economy/weak housing market
On first glance, it may seem like a mystery — Victoria continues to lead the country in economic growth.
Commercial property construction and infrastructure development remains strong, as well.
Victoria’s labour market is healthy with unemployment falling 1.5% over the last year to 4.5%.
But the residential property market in Melbourne has been left behind recently — with house prices in particular falling by over $1,000 a week.
There are both supply and demand issues that explain these falls. Much of the movement can be pinned to what’s happening with apartments.
Demand and supply issues for Melbourne residential property market
On the demand side, sales volumes of apartments have declined 12% over the last year in Inner Melbourne:
Source: JLL Research
Driving this fall in sales is the removal of stamp duty concessions for investors in July 2017, which has had flow on effects for off-the-plan property purchases.
This has further reduced pre-sales of new apartment projects.
There is however a difference between investor demand and owner-occupier demand, as well as Inner versus Greater Melbourne.
Loans to first home buyers grew 30% year-on-year. Some banks offer lower interest rates for first time customers.
Stamp duty payments are also relevant as well as they have been removed for property purchases under $600,000 and discounted up to $750,000, which aids Greater Melbourne apartments which have an average price of $535,000.
Below is a useful heat map for Melbourne property prices:
Source: Colliers Research
On the supply side, the apartment pipeline has dried up with a 41% fall compared to last year.
Some projects have even been converted into more desirable office towers or student accommodation.
This contraction will hopefully lead to a turnaround in the next 2–4 years due to population growth — assuming we don’t see a credit collapse.
Going forward, demand could shape as the primary market mover. Particularly if Federal Reserve interest rates continue to tighten.
After all, Australia has the second highest household debt to GDP ratio in the world, behind only Switzerland. This amount of leverage looms as a major risk as Big Four banks deal with increased funding costs and interest rate differentials.
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