Melbourne property market faces a long road to recovery

The Melbourne residential property market isn’t expected to turn around until 2028, say experts, but there are opportunities as well as potential pitfalls.

The national property downturn and negative gearing and capital tax changes and associated uncertainty are all weighing heavily on the southern capital.

“I don’t have any residential investors at the moment,” Robert Di Vita, Senior Property Consultant with National Property Buyers, told API Magazine.

“Normally I’d have predominately residential investors but the changes to capital gains tax and negative gearing have really shifted the market.”

Mr Di Vita said the state of flux in the Melbourne market presented opportunities as well as risks, with a flood of apartments available for buyers.

“A lot of investors have pulled the pin and sold up, so we are seeing a lot of apartments hitting the market; it’s absolutely flooded,” he said.

Of particular concern was a deluge of stock at Southbank and Docklands, adjacent to the CBD, areas which have long suffered from oversupply issues.

“We never buy in those areas, they just don’t perform,” Mr Di Vita said.

“People buy the property before it’s built and get stamp duty savings but when they go to sell they realise they’ve made a huge mistake and lose a lot of money, so we don’t touch them.”

Mr Di Vita said there were some buying opportunities in inner-city older style apartments in smaller blocks, noting inner-city South Yarra and Richmond.

“We don’t buy high-rise apartments, where there’s a gym, a pool, all those sorts of facilities that push up body corporate fees,” he said.

“We look to the older-style, low-to-medium rise, with no more than 20 on the block and low body corporate fees.”

Melbourne dwelling prices fell 3.4 per cent in the three months to August, according to analysts Cotality. Only Sydney performed worse, with the median dwelling price falling 4 per cent over the quarter.

Aife Raveche, Director and Buyer Advocate at Raveche Property, said she didn’t expect the Melbourne market to turn around until 2028.

But that didn’t mean there weren’t buying opportunities.

“I just spoke to two young guys wanting to buy a residential investment, who are looking for long-term capital growth and are OK with not negative gearing,” Ms Raveche said.

“They’re tradies and are willing to buy something that’s a little shoddier and do the work themselves.

“For those who do see opportunity in these types of things, it’s phenomenal buying at the moment,” she said.

Yet the negative sentiment meant many were avoiding the market.

“Sentiment is low and when sentiment is low, it’s difficult for people to make these types of decisions,” Ms Raveche told API Magazine.

“At the Sunday BBQ everyone its talking very negatively; there’s a fear that exists”.

While there were opportunities for astute counter-cyclical investors, there were also pitfalls.

Commercial resurgence

The Federal Government last month banned self-managed superannuation funds (SMSFs) from borrowing to buy residential property, as part of its moves to improve housing affordability.

The change has seen demand for commercial properties surge, according to agents.

Yet investing in commercial property was more complex, and typically carried significantly higher risks.

Agents warned would-be buyers risked getting burned if they didn’t do their homework.

“A lot of people are trying to get into commercial property, saying ‘OK, I’ll buy it in my super’, and then look to apply the same approach as residential,” Ms Raveche said.

“But commercial is complex, it’s scary. It depends on a lot of different factors”.

Mr Di Vita said he was actively sourcing commercial properties for investors but followed strict buying criteria.

Rental yields were higher for commercial properties — around 5.5 per cent to 6.5 per cent, versus 3.5 per cent to 4 per cent for residential — but factors such as vacancy risk were a serious consideration.

“If you buy an inferior property with an inferior tenant and they vacate, it could sit there for two or three years, with no income,” Mr Di Vita said.

“So you have to be very, very careful and purchase selectively.”

Mr Di Vita said he focused on commercial properties worth $1 million or more, that had high yields and were underpinned by quality tenants.

“We tend to focus on medical properties, dentists, radiologists, GPs, those sort of tenancies,” he said.

“They tend to be more stable, with longer-term leases and less turnover.”

Regarding residential property, Mr Di Vita said he expected Melbourne prices would continue to fall, with the outlook heavily dependent on interest rates.

“The Melbourne median price has dropped and it will probably continue,” he said.

“It really depends on the RBA, and whether they need to suppress the rate of inflation, and I don’t see that coming down any time soon.

“And what’s happening with good old Trump — that’s having a real impact,” he said.

Either way, he wasn’t expecting a sudden recovery.

“It won’t be until the end of 2027 or toward the middle of 2028 before we see any shift in the market in terms seeing any capital gains,” Mr Di Vita said.