Magnetic Melbourne

Victoria’s capital city is looking more and more appealing for property investors. We discover this market’s history, and discuss why it is now so popular.
When he turned 26 in 2012, Timothy Tan made the biggest purchase of his life: a 59 sqm one bedroom apartment located in Southbank, just one kilometre from Melbourne’s CBD, that cost him upwards of AUD 450,000. For a home owner – even a first-time one, Timothy Tan was relatively young. But his fortunate circumstances illustrates the healthy state of the property market in Victoria’s capital city.  
Melbourne is attractive to property investors, even when put up against Australia’s current leading city, Sydney. Over the past decade, Melbourne has seen an upward trend in property prices, reaching a record-breaking median price of AUD 706,000 this June. This figure, however, remains reasonable when compared to Sydney’s AUD 1,000,616, a price that indicates affordability is fast becoming an issue there. 
“The Sydney market has heated up significantly after Tony Abbott took over as Prime Minister and promised huge investments into Sydney’s infrastructure and transportation networks,” explains Nicholas Tan, Founder and CEO of Building Wealth Group. “There is also a severe underlying shortage of housing in New South Wales where surging population growth and household formation has outpaced new housing construction.” Due to these factors, the price increase in Sydney is quickly outpacing Melbourne’s – 25 leading economic forecasters have predicted in a Fairfax Media survey that, on average, prices will rise 10.4% in Sydney but a more reasonable 6.4% in Melbourne this year.
Melbourne’s property market is a robust one. In the last 20 years, it has seen four upswings – it is currently still caught in one that had started in the last quarter of 2012, while the most drawn out was the 29 quarters from September 1996 to December 2013. The other periods of upswings were from the last quarter of 2005 to the first quarter of 2008, and the beginning of 2009 to the end of the second quarter of 2010. 
Property investors in Melbourne are generally a lucky lot: downswings there tend to be rather short. Corresponding to the periods of upswings mentioned above, the downswings were between December 2013 to the last quarter of 2005, at the end of the first quarter of 2008 to December 2008 when the US subprime crisis brought down global economy, and from the third quarter of 2010 to September 2012. They lasted only seven, three and nine quarters respectively. 
Short downswings are a privilege enjoyed by those living in vibrant cities that consistently see demand for properties outstripping supply – such as Melbourne. However, the question prevails: how long would the current upswing last?
The current upswing is already going into its 11th quarter – a period longer than the six-quarter one observed between 2009 to mid 2010 and matching the length of the one from end of 2005 to the start of 2008. While unlikely to surpass the record 29-quarter upswing from end of 1996 to 2013, it is likely to continue for at least a year, or another four quarters. 
No doubt, the phenomenon is aided by the two cuts in interest rates introduced by the Reserve Bank of Australia (RBA) this year. The first cut in February lowered interest rates from 2.5% to 2.25%; the second, announced in May, further pushed it to a historic low of 2.0%. With Australia’s treasurer Joe Hockey urging Australians to take advantage of low interest rates to borrow and invest, the popular opinion is that the property market in Australia’s two most important cities, Sydney and Melbourne, may enter a bubble if growth is not controlled.
Nicholas Tan observes: “The demand for Australian property has risen dramatically, boosted by the lowering of cash rate. Home ownership and investing in property are now more affordable. First time home owners are finding it easier to buy their first property due to the Australian Government’s generous grant for first time home owners and lower mortgage payments. Existing property owners are seizing the opportunity to re-finance their mortgages at lower interest rates, taking out equity to invest in their second property. Foreign investors are also capitalising on lower interest rates and the weakening Australian dollar to snap up properties.” 
In fact, some believe that the market, especially in Sydney, is already in a bubble, but that authorities are reluctant to admit the fact due to vested interests. Rental rates, income, and inflation have remained disproportionately depressed compared to the unsustainable inflation in housing prices, prompting doomsayers to predict a catastrophic drop in prices as the property market adjusts to give an accurate reflection of the economy.  
Some numbers, however, are portraying a contrary scenario. Melbourne’s property price growth in 2014 was a sluggish 4.1%, down from 2013’s 10%. The RBA’s adjustment of interest rates was meant to revive a weak economy and, as a fringe effect, inject energy into a property market that is growing, but could afford a better showing in 2015. 
Response in Melbourne has been mixed so far. The inner suburbs (areas within 10km of the CBD), which usually remain relatively uninfluenced by changes in the local economy, continue to show growth potential, propelled also by the continuous shortage of supply. The lowering of the interest rate is likely to be just sufficient to keep the market healthy in these areas. Inner Eastern suburbs are expected to perform better than their Western counterparts, particularly those in the school belt and with large family-sized estates, with prices growing at around 5% while the latter is seeing about 2%. 
Asian investors will always play an important part in driving up demand, Australia universities being a popular choice for Asian students from the Southeast Asian region. It is for this reason that suburbs like Kew, located just seven kilometres east of Melbourne’s CBD and home to Melbourne University and La Trobe University, constantly remain promising areas for property buyers. 
For Timothy Tan, the decision to live in Southbank was a no-brainer: “It’s walking distance to the CBD, is a good neighbourhood, and has a high percentage of younger working professionals. It is undergoing development so property value is unlikely to drop even if it does not increase. It has good transportation infrastructure and should not be difficult to rent out if I decide to do so in the future. I didn’t buy to speculate and I am not hoping to make a big profit from this property in the future. I am more concerned about the location retaining its value, which I am confident will happen.”
Outside of the inner suburbs and going into the middle or outer ring, however, growth remains negligible except in some middle ring suburbs that are still seeing a healthy demand. Again, Chinese interest comes into play. The middle ring suburbs of Glen Waverley and Mount Waverley has made headlines for their appeal to Chinese buyers and the reason is believed to be the presence of two of Victoria’s most prestigious state schools, Glen Waverley Secondary College, and Mount Waverley Secondary College, in these suburbs. Wealthy immigrant Chinese families are attracted to Wesley College Caulfield Grammar, widely considered to be two of Melbourne’s best private institutions. The two suburbs also boast ideal locations: they are midway between the CBD and the country, and offer an attractive lifestyle with an abundance of restaurants and entertainment options.
Robert Murphy, Development Manager of SMA Projects, has this advice for those interested in property investment in Melbourne: “Demand for inner city developments is a solid investment and a timeless performer. My advice would be to avoid the risk of trying to analyse the next “it” suburbs and concentrate on areas that have performed above average over time and invest in those. Next, look at areas with lower supply, then at those with high rental demand. If I must pick a single suburb, I would suggest Fitzroy. It is a timeless suburb currently with limited supply.”
One of Melbourne’s most appealing points is its strong population growth of 2%, above the national average of 1.8% and currently the largest of all capital cities. The Australian Bureau of Statistics has identified Melbourne as on track to become Australia’s biggest city. Its population of about 4.4 million puts it only slightly behind Sydney’s 4.8 million, and the city is likely to overtake Sydney as Australia’s most populous by 2056. Its popularity is unlikely to die down – the Economist Intelligence Unit has named Melbourne the world’s most liveable city out of 140 contenders for four years in a row. A constant influx of new residents will keep the pressure on property prices, ensuring good returns for investors. All in all, despite naysayers, the property market in Melbourne is likely to continue delivering strong returns for investors in 2015.