Rental Shortage Helping Fuel Melbourne Property Market

Melbourne and Sydney are often seen as sharing (a usually) friendly rivalry in everything from the weather to the arts and, of course, sport.

With property markets across Australia now a patchwork of soaring prices in the east and depressed markets in the north and west, it is the two most populous cities that are locked in a battle for market performance supremacy.

Sydney shone brightest in November with a median price increase of 2.7% but Melbourne was close behind at an impressive (unless you’re a first-home buyer) 2.2%.

But over the last three months, it is Melbourne that has been the strongest performing property market in the country, with values surging 6.4%.

While Melbourne and Sydney engage in a battle for dominance in yet another arena, the drivers behind their respective price rises differ.

Vacancy rates in Sydney are serving to keep the market on a long leash. Rental vacancy rates are sitting at 3.7%, with a vacancy rate of 2% considered a normal rental market there.

In Melbourne, it’s a different story.

The monthly rental data from the REIV shows median rental house prices have shot up across Melbourne by $10, with units also climbing by $10 since October 2018, following a vacancy rate of 2.2% for Melbourne last month.

REIV President Leah Calnan said a lack of housing has led to renters paying a premium.

“There is an urgent need for more rental accommodation across Victoria.” Ms. Calnan said.

Healthy vacancy rates should be  around the 3% mark, "but most of the state is sitting at 1 or 2%, with increasing demand leading to rental prices climbing.”

James Nihill, Managing Director of Patrick Leo, said the situation was even tighter in the inner city.

“It’s definitely a landlord’s market in Melbourne,” Mr. Nihill said.

“Vacancy rates in inner-city Melbourne suburbs such as Fitzroy North and Southbank are even lower, sitting at 1.8 per cent, proving that now is an excellent time to rent out your investment.”

Taking stock

The strong demand for property in Melbourne has seen prices recover to within 3.7% of their 2017 highs, with the deficit likely to be erased early in the new year.

Auction results have been very strong over the past three months, coming in around the high 70 percent range most weeks. A shortage of quality stock on the market has been one of the key drivers. 

Aussieproperty.com.au Licensed Real Estate Agent, Steve Janes, said buyer demand continues its upward trend across Melbourne, generating unexpectedly high results from a multi-buyer auction environment.

“A key driver magnifying such results is low inventory levels, where sale volumes in many locations have, during the past 12 months leading to August 2019, declined by as much as 25 to 30% below the previous decade’s median average,” Mr. Janes said.

“Rather than accept lower prices, many vendors simply held off selling and it is yet to be seen whether or not such sellers will take action now to capitalise on the recent price surge.

December is always a period of wait and see in the property sector, with buyers, sellers and agents all looking to take time off over summer for Christmas and New Year and often towards Australia Day in late January.

Mr. Janes said the picture would be clearer in the coming months.

“Melbourne’s market strength would be fully tested if we were to experience a significant uplift in new listings.

“Traditionally, this occurs after the festive break and given the increasing feed of positivity surrounding market sentiment, I am increasingly confident buyers will continue to quickly absorb fresh supply.

“As always, anytime is the right time to purchase a good performing investment property, however, investors can act with confidence now and enjoy a positive capital growth outlook in Melbourne,” he said.

Under the hammer

President of the Real Estate Buyers Agents Association of Australia (REBAA), Cate Bakos, said the holiday season was also affecting the auction market.

“The sporadic nature of property sales prior to auction does tend to kick in at this time of year as more properties hit the market and threaten competing vendor’s campaigns,” Ms. Bakos said.

“Agents and vendors alike opt for a ‘bid in the hand,’ with heightened auction numbers posing competition for vendors, so we’re seeing a lot of negotiation and boardroom auction activity prior to scheduled auctions. 

“With only three weekends remaining until Christmas, it’s also no surprise that some agents are hosting midweek twilight auctions.

“It has been a busy run to the finish line (end of year) and we’re certain more erratic campaign surprises are in store for buyers,” she said.

2020 vision

The more expensive areas have been recording far bigger price increases than lower-priced suburbs. The strongest sub-regions for capital city price gains over the past year were in Melbourne's inner-east and inner-Melbourne.

According to the REBAA president, the driving force behind the Melbourne market is multi-pronged: first home buyers, investors and downsizers alike.

“Many first-home buyers are turning to the bank of Mum and Dad, but for the rest of us the record low-interest rates combined with lender appetites for more lending are enabling buyers to stretch to new bidding levels and the median growth data will no doubt be reflected in the price movement in coming months, as settlements flow through,” she explained.

There are economic headwinds that may yet curtail the upward trajectory.

Wages and household income growth remain low, economic conditions are losing momentum and housing affordability is once again worsening (from an already high base in the largest cities).

According to Mr. Nihill, Melbourne’s fast-growing population provided a hint of where things may be heading for the property market.

“For investors, Melbourne’s population story is particularly compelling,” he said.

“It remains one of the world’s fastest growing cities as more than 100,000 people move here each year, it is a popular location for overseas migrants and is predicted to surpass Sydney as Australia’s largest city by 2031 with a population of 7.7 million by 2050,” he said

As always with property investment, it was still crucial to do the homework before handing in the bid.

“While there’s no denying Melbourne is a top performer in terms of home values and growth, it’s important not to make the mistake of thinking just any property in Melbourne is a good investment.

“As always, investors need to do their homework and seek professional advice before leaping into any investment opportunity,” Mr. Nihill said.