Article | Intelligent Investment

Optimistic outlook for Melbourne's residential property market

August 9, 2021

By Steph Harper David Minty

Optimistic outlook for Melbourne's residential property market
Six lockdowns, state and international border closures, spikes in vacancy rates, and increased property taxes have made for an eventful year for Melbourne’s residential property industry. 

However, off the back of a bleak 2020 and ongoing lockdowns, we have had an encouraging start to 2021 with strong transactions of townhouses and house and land products. Early predictions suggest that market sentiment will remain positive for the remainder of 2021, following an acceptance that COVID-19 is here for the foreseeable future.

Restored buyer confidence to make decisions and seek out housing investment options over a volatile share market is good news for Victoria, with median house prices ticking over the $1 million mark.

It’s expected that interest rates will remain low due to the current lockdowns and continue to drive record housing price growth.

In tandem, strong downsizer demand is driving sales of high-end, owner-occupier products to local buyers purchasing off-the-plan, who are prepared to wait for completion to secure higher sale prices from their family home sale. 

However, investors have left a big hole in the medium-to-high density apartment market, with sales numbers significantly lower than what we have seen in the past.

This has been exacerbated by border closures, which have prevented international students entering Australia and, while interest rates remain at an all-time low, lending criteria is tough. 

That said, the gap between apartment and house prices has become so wide that savvy local investors will be anticipating apartment price growth soon.

House and land sales are very strong thanks to occupiers and first home buyers, particularly for property within 20 kilometres of the Melbourne CBD, which is close to public transport. Developers have very specific mandates and need sites to be large enough, with favourable planning policies to achieve their required yields.

If we rewind to the end of 2020, deepened Government home buyer and builder grants as well as stamp duty exceptions encouraged young couples to enter the property market. The trend we are now seeing is first-time buyers driving demand for house and land packages, with a supply and demand imbalance and incentives to assist the purchasing decision, making these attractive projects for developers. 

The State Government subsequently announced increases to stamp duty and land tax in May, which led to an initial rush in transactional activity. However, since June 30, the stamp duty increase doesn’t appear to be much of a consideration in buyer decisions and developers have accepted that this is the new playing field and are moving forward.

On the apartment front, Melbourne’s middle ring suburbs remain attractive for apartment, but they are purely for a build-to-hold model as developers are confident in those rental markets. 

However, developers are also targeting locations where products are selling well.  Our data highlights that 80% of all residential housing site transactions settled across Victoria over the past 12 months have occurred within the outer metropolitan areas, such as Cranbourne or outer growth areas such as Officer and Truganina, but also in regional Victoria, mainly some of the peninsula locations.

While location is important, today’s buyers are keeping developers on their toes and placing more importance on the orientation of apartments – specifically the design of bedrooms, kitchens, and family rooms. The projects in good locations that consider this will find buyers. 

Notwithstanding these positive signs, market conditions in the apartment sector are still challenging for developers. 

Decisions on how to move an unprecedented overhang of unsold stock is forcing some developers to sell these apartments at a significant discount and while there is potential to pivot to a longer term, build-to-rent model this does have GST implications. Residual stock can be a significant pain-point, with nearly every Melbourne project that’s settled in the past two years having unsold or unsettled product.

Furthermore, material supply delays have increased the overall cost of construction. Buyers are the only winners with fixed-cost building prices keeping their budgets under control. 

There has also been a significant shift in capital lending over the past few years which is changing the way private developers fund their projects. This has been driven by a decrease in bank-lending which has led some developers to source finance from non-bank lenders.

But, despite capital constraints, development pitfalls, lack of high-density apartment investors and the current lockdowns, we are confident in the residential property market in Victoria. 

What 2022 has in store is still unclear, but our current view is that interest rates will remain low, which will help drive the housing market. 

We also remain optimistic that the vaccination will be effective, allowing our borders to reopen and the return of immigration and international students to reinvigorate the high-rise apartment market. However, it may not be until 2023 that developers reap the rewards.