Apartments set to rebound as Melbourne affordability bites

Melbourne’s property market does not have pandemic immunity, but forecasts of 20 per cent growth over the next 18 months now appear fanciful.

With Melbourne again enduring lockdown and the Victorian capital’s median house price rising to a record $1,022,927 over the June quarter, affordability issues are now pulling the reins on what is still a strong market overall.

Much of the growth in 2021 has been driven in the upper part of the market and by houses in attractive lifestyle locations, reflecting the focus on work from home arrangements and a shift in lifestyle preferences driven by the pandemic. 

Melbourne’s apartment market has seriously lagged its housing counterpart but may shape as the big winner in the coming months and year ahead. 

The apartment market lagged in the recovery as it was affected by the collapse in immigrant and student demand, along with a lifestyle rotation away from units to houses. Although not growing at the same speed as houses, units have still managed to hit a record price, rising to a median of $572,793. 

Speaking to Australian Property Investor Magazine, AMP Capital chief economist Shane Oliver said a shift towards units may be imminent.

“Deteriorating affordability in relation to houses, and falling vacancy rates with stabilising rents, is driving some demand back into units from owner occupiers, particularly first home buyers, and investors,” Dr Oliver said. 

Office, residential and retail vacancies rose rapidly during the lockdown and as a result the City of Melbourne estimated that economic productivity for the area dropped 22 per cent. The absence of workers is only exacerbating the lack of demand for inner city housing.

“We could see an oversupply of houses in the market in the future as the federal government’s Home Builder incentive had resulted in a record number of homes being built,” Dr Oliver said. 

“I also think we could see a reversal of what the market was doing a few years ago — that will be an undersupply of units and an oversupply of housing pushed along by the demand from Home Builder.

“Approvals for units [being built] have fallen right away at the same time.”  

All but two of the Melbourne regions registered unit price increases over the past year, according to the Domain House Price Report, particularly in the north-east (up 8.5 per cent) and the outer-east (up 8.3 per cent). 

National Property Buyers director Antony Bucello said it was clear a two-speed apartment market had emerged in Melbourne.

 “One market is the high-density inner-city area where there are lots of high rise apartment buildings, such as the CBD itself, and neighbouring suburbs such as Southbank,” Mr Bucello said.

“This type of property relied heavily on overseas students buying and renting these properties, but the pandemic and the closure of our borders brought this to a sudden halt and they are struggling.

 “The other market is the one for apartments that are typically low-rise and boutique, with no more than around 20 apartments on the block.  

“These apartments are doing better and still attracting reasonable demand, in particular from first home buyers and we expect this apartment market to rebound reasonably well.”

Bank forecasts questioned 

Just before the latest lockdown, National Australia Bank forecasts had tipped Melbourne property prices to rise more than 20 per cent by the end of next year but just how sustainable that prediction is in this market, given the impact of lockdowns and flow-on effects on incomes and employment, is debatable. 

In 2020, Melbourne recorded the biggest movement of people to regional Victoria ever recorded and the biggest movement to Queensland since the early 1990s recession. This boosted housing markets in places like Sunshine Coast, Brisbane, Gold Coast and in many regional Victorian towns. 

While returning expatriates are making up for some of this population shortfall, the prestige property market that has powered growth rates in Sydney has been more subdued in Melbourne. 

Ray White chief economist Nerida Conisbee said in this regard, Melbourne was now playing catch up. 

“Many of Melbourne’s most expensive suburbs such as Hawthorn, Canterbury and Armadale, are still recording house price declines,” Ms Conisbee said. 

“All over Australia, we saw changes to the way people work, demand for second homes and a need for space drive purchases of big homes on big blocks in places not particularly close to CBDs, with the strongest performer in Melbourne over the past 12 months being the Mornington Peninsula.” 

Units on the Mornington Peninsula skyrocketed by 18.7 per cent over the year to June. 

“The biggest certainty we have around the lockdowns is that properties for sale will decline and that at the end, we will see a jump in listings post lockdown,” she said. 

“Depending on how long this goes for, we could be in for the strongest Spring on record when measured by properties available for sale.” 

AMP’s Dr Oliver said the lockdowns may cause some disruption but so far it’s been minor compared to last year. 

“Supply has fallen and the market has learnt from last year that mortgage holidays and government income support will help head off forced sales.  

“The most likely impact is a slowing in price growth in the near term but once the lockdowns end property price growth in Melbourne is likely to remain strong, having lagged Sydney and the national average over the last year — interest rates set to remain low, incentives are still in place and a resumption of the economic recovery is likely to support demand. 

“However, the pace of price increases is likely to slow through 2022 as affordability deteriorates and long term bond yields bottom out again and start to rise resulting in rising fixed mortgage rates,” he said. 

Property buyer Mr Bucello told API Magazine that given the significant price growth we have experienced in the last 12 months he was not sure house prices would increase by 20 per cent by the end of 2022. 

“If we do achieve that sort of level of growth, don’t be surprised if we see a small correction follow, which can occur after significant price growth in a relatively short amount of time,” Mr Bucello said. 

“There is no doubt we will level out at some stage, and that will probably be in 2022, as the remainder of 2021 is expected to be strong based on current and expected demand levels, which are outstripping supply by a long way.   

“Unfortunately, I can see some buyers, in particular first home buyers, simply being priced out of their preferred locations as they compete against more and more cashed-up investors and second home buyers eager to take advantage of low-interest rates.”