What’s In Store for Melbourne as We Approach the Federal Election?

As we tick over into August and await another interest rate drop, new housing data for the preceding month is once again filtering through.

Source: RP Data

Firstly, RP Data and Rismark have released their July Hedonic Home Value Index Results, which showed a 1.6 per cent rise in capital city dwelling values for the compounding four week period. This further strengthens the 1.9 per cent gain in June, taking RP Data’s figures to a 6.5 per cent cumulative recovery since the trough of May 2012. 

For Melbourne, the change is 2.3 per cent for July, 2.4 per cent for the quarter and 4.3 per cent year-on-year.

I pointed out last week that results can be as misleading as they are informative. Although it’s anecdotally evident that prices have significantly improved since the end of 2012, estimating exact percentages is by no means an accurate science and certainly no guide to an individual property price.

However, probably due to the fact that it’s the last to be released and therefore has the opportunity to gain benefit from the largest collection of lagging data, the ABS June quarterly house prices are due out tomorrow and will no doubt reflect a similar upward trend in market movements – along with a few revisions to the previous month’s numbers.

With this in mind, a few things are happening to our housing market which are worthy of mention.  The marginal upward trend in building approvals, evident since the low of 2011, has been moderated. The latest ABS figures show new houses and apartments fell -6.9 per cent over June (seasonally adjusted); their third largest fall in the past four months.

Even when you allow for the usual volatility of short-term data, this is low by historical standards and falls short of RBA forecasts, prompting an almost foregone conclusion that the RBA will cut the interest rate by another 0.25 basis points tomorrow.  

In contrast, the established market is undergoing an investor-led rally as funds are increasingly shifted from cash into residential real estate, with 36 per cent of loans going to this sector alone. 

Source: eGuide Travel via Flickr

In May of this year, $18.4 billion worth of housing finance for investment purposes was committed to – the highest level since January 2008.  Prices in Sydney, Perth and Canberra are now reportedly back to their previous peaks, and with the cash rate set for a further fall, it could be argued that we haven’t even started to touch the surface.  As reported a couple of weeks ago from the new SMSF Professional’s Association of Australia and Macquarie Bank, SMSF property assets grew in value by 230 per cent between 2006 and 2013 (according to the ATO) – ‘a higher growth rate than any other asset class.’

Ahead of the hugely popular auction episode of The Block, the REIV commented that the result could not be taken as a reflection of the current market.  However, I attended the auctions on the day, and the buoyant competition that was clearly evident from those bidding was not at all at odds with what we’re currently seeing on the ground in inner and middle ring Melbourne localities.

If you have a sensible head on your shoulders, you might think it bizarre that a buyer would pay $1.5 million for a three bedroom apartment with four bathrooms, five toilets, some hefty owners’ corporation fees and fixtures and fittings that are arguably dramatically overcapitalized for the property type – especially when that same figure could purchase a renovated period terrace in Albert Park, Middle Park or South Melbourne. This is only a small sense of some of the crazy activity I’ve witnessed of late.

Whilst a drop in rates may assist lowering the Aussie dollar, which will have a positive impact in the longer term, GDP growth is slowing. As we’ve seen over the past 12 months, interest rates are limited in their effectiveness to stimulate those sectors of the economy most in need, and without the opportunity to leverage a higher rate of interest on cash savings, yield seekers are sourcing other ways to gain on their dollar – a larger proportion of which is being channelled into property.

Rental rates have inflated strongly since 2007. RP Data estimate a cumulative rise of 32.1 per cent. However, having had the greatest impetus of supply side growth over the previous 5 years or so, Melbourne’s vacancy rate sits at around 3 per cent, which has made the atmosphere competitive for rentals.  The yield for an apartment is currently around 4 per cent, and for houses it is around 3.8 per cent.

Whilst the number of properties on the market nationally has fallen 2.1 per cent in July and 2.5 per cent over the year, the number of listings in Melbourne is elevated.  However, there is a sharp difference across the suburbs. A larger surplus of properties can be found in the outer regions and good quality listings have been reduced in the inner and middle ring suburbs. This divergence is helping fuel some of the pent up demand we’ve seen of late, which has fed directly into boosting established prices.

Melbourne – and the macro environment as a whole – will present some challenging headwinds as we navigate past the federal election in September.  I would therefore caution all buyers to avoid the temptation to rush in under the impression that we’re into another boom phase of the cycle. Instead, it’s important to keep a wider long-term perspective prior to embarking on negotiation.