Melbourne Market Consistent, but Enters Second Quarter with Slower Growth

Another strong clearance rate of 71 per cent was recorded this weekend, once again giving foundation to the improved trend we’ve encountered since the beginning of the year. Unless Melbourne experiences a dramatic drop in stock over the winter months, it’s likely we’ll remain on the current path for the inner and middle ring suburbs. Good properties will sell with competition, while those that have been poorly marketed will need modest price drops to achieve results.

Improvements in the market are evident, from both an anecdotal perspective and in the raw data. Year to date total transactions show a marginal improvement (up approximately 183 from this time last year) and the clearance rate – the best barometer of heat in the inner and middle ring suburban market – sits at 69 per cent (year to date), compared to 61 per cent for the same time last year.

The 70 per cent + clearance rates that are recorded on a Sunday are typically correcting to the high 60s by the time they are revised mid-week, and we seem to have settled into a pattern of relative consistency.

However, after a robust recording of first quarterly growth in the property market, the latest RP Data April Home Value Index has splashed some cool water on the outlook for those who like to extrapolate short term data to evaluate a long-term outlook.  The results show capital city medians have fallen back nominally, with only Darwin and Adelaide recording a rise.

The change in Melbourne is down by half a percent (month to month). Whilst only a modest drop, this is indicative of a trend that is more sustainable long term, especially considering our economic prospectus as we move into the traditionally quieter winter months.

Year to year, we’re still in positive territory. The RP Data index showed an overall 1.6 per cent rise from April 2012 to April 2013.

Last week, the ATO released its taxation statistics for the 2010/11 financial year, which showed one in seven own an investment property, whilst one in ten of Australia’s taxpayers are negatively geared. In raw numbers there are 1,811,174 property investors in Australia – an increase from the 1,751,679 recorded in 2009/2010 financial year.

The collective loss of negatively geared property investors totals $13.2 billion. However, it should be noted that the higher interest rates recorded over the same period would have inflated this figure and when the data is released for the 2011/2012 financial year it’s likely to drop – albeit, per capita, the average loss works out at $83.50 per week.

Considering the overwhelming number of investors who now employ negative gearing as part of their wealth strategy, it’s unlikely government policy will attempt any change to the status quo in the near term.  However, as we move into our new post-GFC environment, one which produces lower overall capital returns, it is important to understand the length of time necessary to profit from a low yield investment.

In this respect, the latest report from RP Data is worth a read.  Although home values are producing positive nominal returns when assessed against yearly median data, real price growth (once adjusted for inflation) is a tad more sobering.

When looking across all capital markets, once adjusted for inflation, RP Data assess real values to be at a similar level to that recorded in September 2007.

Melbourne’s market peaked in September/October 2010 yet even with the recent upturn, the inflation adjusted data shows a drop from ‘peak to current’ of -11.2 per cent.

Once again, it emphasizes the need for investors to adopt a low growth mindset as we move into an atmosphere that the RBA have termed in their Housing and Mortgage market outlook, to be the ‘new normal’ – principally, lower capital returns that typically track the rate of inflation.

The last bit of data worthy of note is ‘private sector housing credit’ which has increased only 0.4 per cent over the March quarter. The figure is somewhat compromised due to the fact that many home owners are taking advantage of our low rate environment to pay down outstanding mortgages; however, the levels are historically low.

Annually, they have increased by 4.4 per cent, the greater proportion coming from the investment sector, which has grown 5.4 per cent year to date, compared to the owner-occupier share, which increased a lesser 3.9 per cent for the same period (a record low.) Investors make up roughly 41 per cent of Victoria’s buying market.

The short term outlook shows a reduction in ‘stock on market,’ which dropped 1.1 per cent from March to April. As we move into winter, the trend will likely continue. Good stock will be soaked up first, and we’ll no doubt experience a great challenge sourcing the better investment properties.

Next week the REIV expects around 730 auctions.