Interpac Business and Migration Solutions Melbourne Australia

(October 20, 2011)

The recent Sydney Housing Valuation Report argued that Sydney's housing market, despite being Australia's most expensive when measured against household incomes, is built upon relatively sound fundamentals and offers a safer-than-average (Australian) proposition from an investment housing viewpoint.

Now this column wants to focus on the Melbourne housing market, which is built upon far shakier foundations and is arguably Australia's major market most at risk of a significant price correction.

Melbourne housing market fundamentals are weak based upon the following facts, each of which are explained in detail below:

• Melbourne's house price growth has exceeded the national capital city average;
• Melbourne's homes are relatively expensive on a price-to-incomes basis;
• Melbourne's median rents have displayed sluggish growth and Melbourne's rental yields are by far the lowest in the nation;
• The number of homes for sale in Melbourne has skyrocketed - just as Victoria (mostly Melbourne) is undergoing a nation-leading dwelling construction boom, which is expected to continue well into the future
• Victoria's (Melbourne's) population growth is falling.

Melbourne housing is expensive

The chart below shows Melbourne's real (inflation-adjusted) house price performance relative to the national capital city average since 1987.

As you can see, Melbourne's housing market has out-performed the national capital city average, due primarily to the sharp rise in house prices after 2005.

And, from my Australian Housing Valuation Report, Melbourne is ranked as the second most expensive capital city housing market in Australia based on the Median Multiple measure (median dwelling prices divided by median household disposable income):

Melbourne's rental returns

While Melbourne's house prices have out-performed the capital city average, rental returns have significantly underperformed.

As shown below, Melbourne's housing market has experienced significantly lower rental growth than the national capital city average. Whereas average capital city rents have increased by 17% in real (inflation-adjusted) terms since 1987, Melbourne's real rents have risen by only 5%:

Melbourne's supply and demand balance

One of the reasons for Melbourne's recent sluggish rental growth is the surge of home construction, which has eclipsed that of the other markets. Whereas the other states combined have experienced falling rates of new home construction, Victoria (mostly Melbourne) has experienced an unprecedented construction boom:

Second, Victoria's population growth is slowing (albeit remains at a relatively high level):

These two factors combined suggest that the glut of unsold homes in Melbourne is likely to get worse, placing continued downward pressure on both home prices and rents.

With home prices already elevated and illustrating an elevated valuation gap, the lowest rental yields in the nation, and an ongoing boom in supply likely to make the existing glut of unsold homes worse, Melbourne's housing market arguably offers the worst investment fundamentals out of Australia's capital cities.

Source from Theage.com.au