VIC excerpt from the August 2010 market report

While soaring prices have favoured existing property owners, current buyers risk paying a premium in a market that is poised to slow.

Just when you think Melbourne can’t go any higher, the star performer stages another mind-blowing performance – this time, a massive 7.70% growth to $580,500 over the three months to April 2010. During the past 12 months, median house values in Melbourne jumped by 22.46% – almost double the rate of growth achieved in Darwin.

Units have also extended the strong rally with median values climbing by 5.60% during the April quarter. At their current level, Melbourne units are now inching closer to Sydney’s unit prices to become the most expensive in the whole of Australia.

“Melbourne units are going to be more expensive than Sydney units and that event is close at hand,” says John Edwards, CEO of Residex. “We suggested early this year this was going to happen but it’s going to happen earlier than we anticipated.

“The difference is now only $14,000. A mere increase of 5% in Melbourne units will take us there, assuming Sydney in the same period achieves a 2% increase,” Edwards continues. “Given this situation, it’s fair to say that before the financial year is over, Melbourne will have a median unit value that is higher than Sydney’s.”

New home sales surge

Sales of new homes in Victoria soared in April, largely defying the successive interest rate rises according to the latest data from the Housing Industry Association (HIA). Sales of detached new houses leapt by 27.6%, thanks to the state government’s first homebuyer top-up grant for new dwellings.

“Victoria has the stand-out new home building market due to more favourable affordability conditions for new dwellings,” says Harley Dale, HIA chief economist. “The strong response by first homebuyers to the new home grant underlines how effective the Victorian stimulus has been in lifting residential building activity. However, there are some warning signs, with buoyant demand eating into the availability of serviced land.”

Buoyant demand is also pushing affordability levels to a critical level with the latest HIA reading showing Victoria and regional WA experiencing the largest drops in affordability. Melbourne’s first homebuyer affordability dropped by 10% in the March quarter and 33.2% compared to 12 months ago. Affordability fell by 9.2% in regional Victoria as house prices rose over the quarter. So far, Melbourne has lost its affordability advantage over all capital cities but Sydney, according to the report.

Slowdown in sight?

Chris Smirnakos, practising valuer and managing state director (Victoria) with LandMark White, believes the market has already peaked as indicated by weaker auction results.

According to RP Data, Melbourne recorded its strongest auction clearance rate of the year at 85.3% several weeks ago. However, the week ending 23 May saw the clearance rate fall to 69.4% – it became the second worst clearance rate this year (behind the Australia Day long weekend).

“We probably hit the peak about a couple of months ago,” says Smirnakos. “There’s probably more volatility in front of us as interest rate hikes bite in the lower end and amid fears that we’re heading into a double-dip recession with some foreign sovereign issues.

“The heat has anecdotally come off the market right now where there aren’t many people competing at auctions.”

Greville Pabst, CEO of WBP Property Group, says while the market is supported by strong demand from a growing population for a limited number of properties, rising interest rates will apply pressure to homeowners, particularly those in mortgage-belt areas. “This is likely to have some effect on capital growth in the long term,” he says. “This may also lead to rising stock levels given the increased issue of unaffordability, which will see many homeowners and investors sell down their debt. The availability of credit and tightening lending conditions will also be an obstacle for property buyers.”

Another factor affecting Melbourne’s capital values is the revision of foreign investment regulations by the Foreign Investment Review Board. “The amendments to the regulations will see a reduction in the number of foreign investors in the market, who have reportedly played a significant part in the strong growth seen in some eastern suburbs,” says Pabst.

Where to find good value

Despite the strong surge in prices, Pabst believes there are still good value properties available for purchase in Melbourne. “Investors should consider properties located within 20km of the CBD and, where possible, those with a large land component. With land values on the rise, a property on a large block has greater potential for strong capital growth and may possibly have future development angles.”

Brendan Smith of WBP Property Group says Melbourne’s west remains relatively affordable despite strong demand during the first quarter of 2010. He says the outer western suburb of Melton – located within 45km of the CBD – while increasing 3% in the year to March, remains one of the top five most affordable suburbs in Melbourne, with a median value of $230,000.

Toolern, located to the south and southeast of Melton Township, is one of the largest growth precincts across metropolitan Melbourne, according to Smith. “Toolern is expected to transform Melton Township into a major urban centre with new regional infrastructure and services to support existing residents of Melton Township,” he says.

Major features of the urban development will include expansion of two shopping centres into major activity centres, rail station and a regional employment precinct, according to Smith. “A further driver for the outer western area is the recently completed Deer Park Bypass, which links the outer western suburbs of Caroline Springs to Melton, providing reduced travel times to the CBD. These improvements are expected to also benefit residents from Eynesbury and surrounding areas.”