Time to sell Melbourne housing?

by Chris Lang on April 18, 2011

Melbourne Views The following article first appeared on the MacroBusiness website. Republished with permission.

Melbourne has long been considered one of Australia’s best property bets – it lured my wife and I, among many other buyers – but the city’s increasingly costly housing market is now showing signs of weakness that are hard to ignore.

In mid-2006, my wife and I bought our first home in Melbourne – a brick house in the city’s inner east. At the time, we considered the Melbourne housing market to be expensive, but not excessively so. We’d been married for a year and planned to start a family, and therefore wanted to lay down some roots in an area near where we had both grown up.

We purchased the house via private sale at just below the suburb’s median house price. Below is the five year REIV price chart pertaining to the suburb. Note that I have blocked out the suburb’s name for privacy reasons.

Melbourne House prices

As you can see, we were fortuitous in our timing – our suburb’s median house price has nearly doubled in the five years since we bought. And despite earning significantly more income than in 2006, valuations have become so stretched that we would now struggle to purchase the same home.

Now I realise that my experience in one suburb is not indicative of the overall Melbourne housing market. However, the macro data also suggests that Melbourne property valuations have become stretched, and that the market is now in a precarious position.

Consider the following indicators.

1. Melbourne’s house price performance has exceeded other capital cities:

As shown by the below RBA chart, Melbourne’s home prices have risen higher than the other capitals since 2005.

Melbourne House prices

2. Melbourne’s Median Multiple is the third highest in the nation:

According to the latest Demographia Housing Affordability Survey, Melbourne’s Median Multiple (median house price divided by median household income) is the third highest in the nation, just behind Sydney and Coffs Harbour (see below chart).

Melbourne House prices

3. Victorian land values are the highest in the nation:

The ratio of Victoria’s residential land values to Gross State Product (GSP) is the highest in the nation (2.6 times), indicating severe overvaluation (see below chart).

Melbourne House prices

4. Melbourne’s rental yields are the lowest in the nation:

Melbourne’s gross rental yields, as measured by both RP Data and Australian Property Monitors (APM), are by far the lowest in the nation. This is true for both houses and units.

First, consider RP Data’s latest release:

Melbourne House prices

And APM’s latest release:

Melbourne House prices

5. Melbourne has recorded the largest increase in stock on market:

According to SQM Research’s latest newsletter, Melbourne has recorded the equal largest increase in stock coming onto market, registering a whopping 60.9% increase from this time last year. Melbourne’s increase in stock is well above the national average increase of 47.6%.

Melbourne House prices

6. There is a dwelling construction boom underway that is adding more supply.

It is fair to say that Victoria, read Melbourne, built its way through the GFC. Some of that was school halls. But most of it was dwellings, adding to supply:

Melbourne House prices

Melbourne’s housing market certainly appears to be in a precarious position, due to a combination of stretched valuations, very low rental returns, and increasing numbers of homes for sale.

There is the mitigating factor of strong population growth over the last decade:

Melbourne House prices

But we know immigration is slowing significantly nationally and supply is already overwhelming it in Melbourne anyway.

While this certainly does not mean that a housing crash is on the way, there is little potential for solid house price growth going forward.

Accordingly, prospective first-time buyers should think twice before gearing-up to buy into the Melbourne housing market, particularly given the relatively cheap rents on offer. Likewise, investors might wish to consider taking profits, since superior investment opportunities are available elsewhere.

Cheers Leith

Disclosures:

1. I own my own Melbourne home, have a small mortgage (LVR~25%), and am not planning to sell.

2. The above article is not financial advice. Please undertake your own research and/or obtain independent expert advice before making an investment decision, including buying/selling property.

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