Is Melbourne’s Property Market heading for a USA-style crash?

Written by Frank Valentic in Investment on February 1, 2013

Over the last 12 months, we have witnessed a good measure of lacklustre sales in Victoria, particularly with many home buyers choosing a more risk averse and conservative approach to buying property. With housing values decreasing & buyer confidence diminishing, it would seem inevitable, that Australia could swiftly follow in the path of our sister country, the USA.

In 2012 we saw Melbourne’s property market remain relatively flat. The median house price increased only marginally by 1.5 per cent to $540,000. Auction clearance rates averaged around 61 per cent for the year. And, if we go even further, there was also a 30 per cent decrease in the volume of auctions, resulting in 20% less property transactions compared to previous years. Buyer confidence has clearly not been a strong feature this year.


But it’s not all bad news.

Melbourne’s rental market increased its vacancy rate to around 2%, up from the low vacancy rate of 1.5 per cent. If we compare this to previous years, there were significantly more available rental properties for prospective tenants, adding greater buoyancy, flexibility and choice in this area. This was also positive news for investors.


Is it all doom and gloom in 2013?

When predicting the performance of Melbourne’s property market for 2013, some opinion suggests that we have escaped the major effects of the Global Financial Crisis (GFC).  Others say that a US-style property crash is still within the realm of possibility and could potentially happen.

In our opinion, US Doomsday reporters have no real or tangible knowledge of the Australian property market, to keep suggesting that we are heading for a bust. Yes, we are going through a lull in the market at this present time but just like everything, it will pick itself up again. It always does.  Rather than focusing on the negatives, let’s take a look at the bigger picture and determine how Melbourne is positioned going forward.

The 5 Key Fundamentals Affecting the Market in 2013:

1. Interest rates

A good rule of thumb to remember is: When interest rates are rising, both businesses and consumers will cut back on spending. This tends to mean tighter budgets and less flexibility with higher-end purchases. On the other hand, when interest rates have fallen significantly, consumers and businesses will generally increase spending. This means more economic stimulation and revived buyer confidence.

In the last 12 months, we have seen interest rates decrease by 1.25% below ‘normal levels’. This dominant factor really helped to ease the financial pressure on buyers, making it much easier to borrow and meet existing mortgage repayments. Further decreases are being predicted for 2013, with potentially two or three further rate drops coming in the next 12 months.  As a result, this should mean a more revived and buoyant market, compared with early 2012.


2. First home buyer activity

It’s an exciting time for first home buyers right now.  Since the 1st of January this year, the government has put in place massive stamp duty savings. This will help to help ease the financial burden of those entering the market for the first time. These savings will start with a 10 per cent reduction, on top of the current stamp duty costs.

Based on the current median house price of $540,000, you can expect to save approximately 30%, or the equivalent of $6,000-$8,000. If that’s not enticing enough, the government has also decided to add a further 20 per cent reduction over the next two years. This is a great help for first home buyers, making it a great time to purchase and get your foot in the property market.  As good as all of this sounds, it does come with some rules.

To be eligible for these savings, the property value must not exceed $600,000; it must be your first home and your primary place of residence. Depending on the value of the property purchased, you can expect to save anywhere within the vicinity of $3,000-$8,000k. If you require more information, contact the State Revenue Office of Victoria to see how this can benefit you.


3. Population growth

Melbourne’s population has increased by 80,000 over the last 12 months. This figure is close to double the average growth of around 50,000 a year, from the previous ten years. As Melbourne grows, so will the demand for housing. With a larger supply of new dwellings predicted in the future, we can expect to see more competitive property prices and a healthier, stronger economy.

Consequently, this pressure will force governments to invest in good infrastructure to support and service these new growth areas. Melbourne’s 2030 Population Growth Plan anticipates a population increase; up to 5 million by 2020. This is 10 years earlier than predicted. If you think about it logically, property prices, like other commodities, are determined by the demand versus supply equation. With demand continuing to rise rapidly, together with increased population growth – pressure will continued to be applied to Melbourne’s property prices.

4. Supply of properties

The number of properties sold in 2012 was at least 20% lower than the boom year of 2010. Construction of new buildings will continue to be well below the number required to house 80,000 new people each year.

It was estimated that Victoria would have a short fall of approximately 15,000 dwellings this year. The reason for this is; building approvals are tough to get. Building starts and approvals continue to be a major problem. So, unless the State Government changes its current planning controls and Rescode Building Regulations, we will see continued upward pressure on prices because supply levels will fail to adequately meet rising demand.


5. Economic conditions

Far from being dismal, Australia’s economic conditions have remained solid over the last 12 months, with Melbourne’s CPI rising around 2.5 per cent for the year. This has been kept below the Reserve Bank Australia’s preferred band.

Another positive is that future increases in prices are predicted to be relatively stable. This equates to less pressure on further interest rises for 2013. Employment growth has continued to increase and unemployment figures have increased slightly to around 5.4% – we can expect to see some improvement in this area. In addition to that, growth in wages has also increased, which is also a good sign.

The exchange rate is also expected to stay at high levels, with the US dollar reflecting the current level of unemployment. This was much better than the unemployment rate that was initially predicted.


So bust or not?

If you listen to certain US Doomsday forecasters, then you might be mistaken in thinking we were headed for a US Style Crash. Without having a crystal ball, if the above-mentioned points are considered, Melbourne’s property market should have a reasonable year ahead.

It’s never an easy thing predicting where the market will go. As is often the case, there are many unforeseeable things that can happen, that can take even the best economic/property forecaster by surprise. With the property market being stagnant for some time now, we can expect to see continued decreases in housing affordability. As a result, this could put some pressure on property prices in late 2013.

Based on our knowledge of the local marketplace, the lower to middle end of the market should see 5% plus growth while the upper end of the market should also start to regain some momentum. Although we won’t see the 27 per cent median price growth of 2010 (an approximate $113,000 increase on a median priced house), we certainly won’t see US crisis conditions or the market going backwards.