Melbourne investors are being urged to look at returning to CBD apartments with the Victorian capital recently acquiring the unique status of having outer suburban units outpricing their inner city counterparts.
Melbourne’s property market recorded exceptional growth between 2017-2021, particularly in the outer ring, of 11.5 per cent for houses and 15.7 per cent for units, according to the latest PRD Melbourne Market Update 2021.
As the city faced COVID-19 lockdowns and restrictions, the outer ring market continued to surge due to working from home options becoming more commonplace and government stimulus to increase home-ownership.
The middle and outer ring unit prices continue to outpace those of the inner ring, with the outer ring units now — unusually for a major city — the most expensive.
Despite COVID-19 lockdowns, units in the inner ring continue to record growth, a testament to that market’s resilience and prompting some to reconsider city apartments as an investment opportunity.
Jarrod McCabe, director of Wakelin Property Advisory, said the surplus of apartments in the inner city had suppressed prices while developers had more recently been addressing a shortage of higher density properties in the outer suburbs.
“As more developers cater to the demand and supply increases, the outer ring market performance will begin to level out,” he said.
“Meanwhile, when the Australian border eventually opens up, there will be greater demand for inner city apartments from international students and corporate travellers, which will provide a boost to the rental market, and push up property values.”
Mr McCabe said he expected the housing market, as opposed to units, to remain the strongest performer in the coming year or more for investors, but an opening up of the economy could transform inner city and unit prospects relatively quickly.
“Housing market growth will lean towards properties in middle ring suburbs, as opposed to outer suburbs,” he said.
“In the more medium term, I think the established, older style, boutique apartment blocks will start to show some reasonable levels of growth.
“This will particularly be the case when those international travellers and students come back and start to occupy more of the apartment market from a rental perspective.
“That will increase demand from an investment point of view, for that type of property.”
Also performing well were inner city house rentals.
Houses within 5 kilometres of the CBD with four bedrooms or more fetched the biggest rental returns this year, outpacing any other property type as lockdown spurred demand for extra space.
This configuration returned a median weekly rent of $1,000 in the inner ring, compared to $795/week in the city’s middle suburbs and just $450/week in the outer ring, the PRD report revealed.
Median house sale prices
Inner: $1,560,000 (price growth between 2017 and 2021 of 9.9 per cent)
Middle: $1,350,000 (price growth between 2017 and 2021 of 5.9 per cent)
Outer: $920,000 (price growth between 2017 and 2021 of 11.5 per cent)
Unit sales
Inner: $585,000 (price growth between 2017 and 2021 of 3 per cent)
Middle: $660,000 (price growth between 2017 and 2021 of 11.9 per cent)
Outer: $665,000 (price growth between 2017 and 2021 of 15.7 per cent)
Houses: Average days to sell (Q2, 2021)
Inner: 37 days
Middle: 38 days
Outer: 37 days
Units: Average days to sell (Q2, 2021)
Inner: 55 days
Middle: 52 days
Outer: 48 days
Nowhere to hide
Melbourne suburbs 10-20km from the CBD have outperformed those closer in for house price growth in the past five years, as affordability concerns continue to force buyers to look further afield.
Houses in suburbs within that 10km range jumped 11.5 per cent to a median sale price of $920,000 and units shot up 15.7 per cent to $665,000 from 2017 to 2021.
But while the markets further out were on the rise, they still offered the most affordable housing opportunities.
Houses below $1 million in the inner city were akin to unicorns, with 92.2 per cent priced at more than that, while 73.1 per cent of houses in the middle ring (5-10km from the city) fell into the same price bracket, based on sales for the first half of 2021.
Underscoring the difficulties facing first homebuyers and low-income earners, even the outer ring, still the most affordable option, is inching closer to breaking the $1 million mark.
This section of the Melbourne market recorded the highest median house price growth in the past five years to now sit at $920,000.
Credit or crunch?
In the last 12 months, the average days to sell a house declined across all regions.
Average days to sell in the middle and outer rings for Q2 2021 are the lowest in the past 18 months.
The average days taken to sell houses is now back to pre-COVID-19 levels, which according to Mr McCabe is driven predominantly by first homebuyers and upgraders.
“Melburnians have been spending a lot more time at home through protracted lockdowns and have been reassessing the function and liveability of dwellings,” he said.
“Many have more savings at their disposal because they are not spending money on travel and nights out and these extra funds are being directed towards property upgrades and investments, resulting in surging demand for what has been a somewhat limited supply.”
Vaccinations will presumably allow the economy to open up eventually and help lift incomes and increase the volume of workers returning to workplaces where they support small businesses. But potential headwinds still exist for investors.
While credit standards are still perceived as prudent, higher household debt levels or a further rise in high-debt-to-income ratio lending could be a trigger for tighter credit conditions down the track.
With the second highest median property price in Australia behind Sydney, Melbourne property buyers and owners with significant debt could be susceptible to any tightening of credit conditions.
“The availability of credit is a major factor underpinning market demand for property, and in turn prices,” Mr McCabe said.
“I don't necessarily think Melbourne is any more susceptible than other markets but I do think it’s something to watch, particularly when high debt to income ratios are quite significant.
“It should always be a consideration when people borrow money, that they factor in future potential interest rate increases and tightening credit conditions.”
