Melbourne Property Outlook for 2011
“If Melbourne were a share on the Stock Exchange, everyone would want to invest in Melbourne!”
Melbourne is becoming an international city, with a burgeoning apartment market beginning to make it’s impact on a steady path towards maturity. For those unwilling to commute from affordable outer lying suburbs (and house & land packages) an apartment in inner Melbourne makes sense.
Charter Keck Cramer’s message for over the past 5 years, which is the same message today, says that Investing in Apartments is a strengthening trend. As house and townhouse prices rise to levels outside of affordability … lifestyle choices are made and Apartments slot in neatly to fill the void through owner occupied or renting.
With only 4% of residential properties in Australia being apartments, there is incredible opportunity to fill the demand for housing through Apartments. How can Melbourne become saturated with apartments at a mere 4% and with only 58,000 apartments completed since 1990?
Apartments are becoming a conduit stimulating demand as houses and townhouses become more unaffordable.
Did you know that 70 to 80% of people occupying apartments are renters? Because they cannot afford to buy where they wish to live … so they choose to rent there rather.
The Australian Bureau of Statistics December quarter dwelling commencement figures confirm that supply shortage has been the prime factor driving price growth and represents the biggest threat to affordability over the next 5 years!
Supply and Demand
Goldman Sachs report states “The very broad conclusions of the report indicate that Australia already faces a chronic housing shortage which is set to worsen over the next 2 years as demographic demand outstrips supply.” By 2015 the projected number of households will rise to 9.2million and onto 9.9million by 2020! The current housing shortage is acute and set to worsen with a base forecast in 2010 of 190,000 set to rise to 196,000 in 2015 with only 145,000 houses completed in 2009. The rebuilding Queensland will have an impact the situation.
Under the ABS’s high population growth scenario, in 2010 there is currently a demand for housing requirement of 204,000 nationally and set to rise to 217,000 in 2015. You will note that this exceeds the Goldman Sachs base rate scenario; having said that … the fact is that there is a national shortage of housing which is set to worsen. Goldman Sachs using their base case scenario predicts by the end of 2012 that there will be a national housing shortage of 250,000 … which is 9 times the size of the next largest shortage of December 1997!
Population Growth – Melbourne 2030
“Over the last 5 years Melbourne’s rate of population growth has increased by 84% and the ABS confirm that the number of dwelling commencements in Victoria has increased by only 22.4% … leaving no doubt that the mismatch between supply and demand, underpinned by increasing population, is driving prices in Melbourne.” Only a marked increase in supply (unlikely during the next decade) will see an improvement in affordability for owner occupiers and renters alike.
The children of the Baby Boomers are now entering the market for their first home; lack of affordability will force them into the rental market. Affordability will determine the shape of the housing construction cycle; availability of homes; underpin demand for other style of accomodation and thus pricing and rental yields for these types of properties.
Government policy has also boosted the birth rate creating a new demand for affordable accommodation and for future generations a place to raise their own families in.
Investors have continued to dominate the property market, having clearly identified the opportunity being presented above. Understanding that this is a medium to long term opportunity, Investors have now returned to the market that was previously dominated by first home buyers with strongest levels of growth in the inner suburbs and ‘blue ribbon’ locations where units and apartments have dominated off the plan sales and performed best in capital appreciation and rental yields. Vacancy rates for inner suburbs remain below 2%.
For an investor with an income sufficient to put them on the top marginal tax rate, the combination of negative gearing and depreciation deductions mean that a property investor could currently incur tax losses in excess of $22,000 per year on a $500,000 investment. This dramatically reduced the out-of-pocket expense of holding the investment property from around $548 per week to around $126 per week – according to the Goldman Sachs report Sept 2010. *We estimate at 7% interest rate this is closer to $170 per week
Property is an asset class that is determined to be a ‘low risk profile over a medium to long term’. Low risk investments usually provide low returns, yet property over the last 20 years has flown in the face of this principle by providing investors with high returns. Property is predicted to return to normality of 8% annualised returns through 2011 and rental yields set to increase.
As Melbourne continues its dramatic increase in population growth and with the gap between supply & demand widening, many fundamentals are in place to ensure that property prices remain stable in most suburbs and across most property brackets that investors would look at. The national average for population growth is around 2% with Melbourne exceeding other capital cities at around 2.8% meaning the growth in Victoria outstrips other states, placing a higher demand on finding somewhere to live.
The population growth being experienced in Victoria, is a result of both migration from other states and also immigration from abroad. Neatly fitting in with the governments 2030 plan, to absorb One Million new residents in Victoria. Where they will put them only time will tell … interesting youtube discussion and their view of how Melbourne will absorb another 1,000,000 residents.
Did you know: people would rather rent in a suburb they want to live in (if they cannot afford to buy in this suburb) to meet their choice of lifestyle and for other reasons. What this means to a property investor is that the demand for inner suburbs will strengthen as the majority of people seek to live within 8 – 10km of Melbourne CBD. The rise in interest rates has kept a lot of first home buyers out of the market remaining as tenants paying off your Investment property. The high demand, from the large numbers in the rental market, keep rentals from falling. This high demand for rental properties generates a higher rental yield for the landlord, making for very happy investors.
The REIV consider a vacancy rate around the 3% mark to represent a healthy balance between supply and demand. Vacancy rates remain below 2% and have not moved above 3% since January 2005 (and unlikely to rise) with increases in rentals jumping from about 3% to almost 10% per anum!
Factors that have kept vacancy rates below 3% include : Melbourne’s population boom; lack of affordability to buy; a diminished supply of rental accommodation and the fact that new home building activity has been fairly subdued and unable to keep up with demand. A new determining factor is emerging from the banks who will not be funding a certain amount of developments due to come to market. The very reasons why one should be investing into the property market!
Affordability to purchase continues to weaken as median house prices in Melbourne Local Government Area increase. In the 12 months to March quarter 2010 the median increase was up 27.9% from $790,500 to $1,011,000 and the media unit / apartment price increased 19.5% from $405,500 to $484,500.
Median House Prices
A rise in median house prices stimulates a rise in rental yield as does a rise in interest rates. Rental yields on new apartments / units are achieving 5% yields with overall increases for as long as demand outstrips supply. Capital appreciation over the next two to three years is estimated to be in the single figures going back to normal growth patterns where the value of property doubles over a 10 year period.
Did you know: Victoria remains one of the most affordable States in the country in which to rent, at 22.5% of household income.
House and Land packages are experiencing a boom for those who do not mind the long commute into their place of work as they prefer the lifestyle that the new outer suburbs provide for them. History for the investor will show that these outer lying suburbs do not experience the same level of capital growth as inner suburbs do, nor do they attract the same level of rental income as the inner suburbs do. The demand for this type of product will continue through 2011.
Invest and Hold
RP Data figures indicate the unarguable virtues of a buy & hold investment strategy – designed for long term success, “with property values, rents & subsequently rental yields having historically proven to increase over time.” Prediction – ongoing housing shortage & worsening affordability issues due to inflationary pressures will see rents continue to rise into the future, while the next twelve months will see fairly flat growth for property prices. However the report adds, “With an insufficient supply of homes, upward pressure will remain on housing prices over the long term.”
High demand and a low supply provide reason to invest in property to achieve the new market driven rental yields and the medium to long term capital appreciation. Forget the doomsayers! There is no bubble to burst. Australia’s longer term economic prosperity and strong population growth will underpin a softer landing for the domestic housing market. While it is evident that unsustainable median price growth will abate this year (and has already begun to), it is more likely to be short lived, with the growing housing industry shortage applying long term pressure to housing values once inflation is under control and interest rates stabilise.
What is the Rationale for Investing in Property:
- Wealth Accumulation – using negative gearing (upfront might seem implausible), once a property is positively geared a rise of 20% in housing prices equates to $100,000 capital gain on an investment of $500,000 that is being negatively geared to less than $10,000 per anum
- Diversification of investment – spreading the risk of your investments into different class categories and risk profiles looking for the highest returns with the lowest volatility. In the case of property utilising leveraging, tax planning (up to $22k per anum) and a tenant (paying around 5% pa rental yield) to help accelerate your wealth planning adds value to your Investment.
- Utilising leveraging can increase annual returns of your investment strategy
- Rising rental yields, a rise in property prices and tax concessions have popularised the opportunity of owning investment property
- A designed population growth has a very long term impact in the ongoing demand for property and on the economy as a whole. Property with values below $1 million will be in high demand and under supply
- Baby boomers will be wanting to downsize creating a demand for property below $1 million
- Baby boomer children will be wanting their first homes creating demand for property below $1 million because of affordability issues
- New migrants will either become tenants to investors or create a demand for property below $1 million
Sources : REIV, RP Data, Westpac, BIS Shrapnel, Australian Bureau of Statistics; CBRE, Charter Keck Cramer, Goldman Sachs
Comments or questions are welcome.