Melbourne’s property market: A tale of two cities

“It was the best of times, it was the worst of times…” These words seem as relevant describing the Melbourne property market today as they were when written by Charles Dickens over 150 years ago in A Tale of Two Cities.

The latest RP Data stats show that overall Melbourne dwelling prices increased by 2.5% over the last quarter and have risen 4.9% since the market turned in May last year.

Not a bad result! But when you dig deeper you find there is a shortage of well-located, desirable, established apartments and houses in Melbourne’s middle ring suburbs, causing prices to rise and auction clearance rates to remain high.

But on the other hand, there is a glut of new apartments coming onto the market and a dearth of new house and land packages standing vacant not able to find buyers.

Add to this the record number of new apartments coming onto the market in some of Melbourne’s inner suburbs over the next few years, which will put further pressure on the city’s supply and demand ratio.

According to a recent report by valuers Charter Keck Kramer, about 25,500 new apartments will be completed in metropolitan Melbourne by the end of next year, four times what was built in 2005, when the market for apartments last peaked.

And there are even more in the pipeline. Across the Melbourne metropolitan area there were about 10,250 apartment completions last year, 19,250 under construction and 16,300 being marketed but not under construction.

Many off-the-plan purchasers will be disappointed

The problem is that many Melbourne purchasers bought their off-the-plan apartments a few years ago during more buoyant times, and according to Charter Keck Kramer, eight out of ten off-the-plan apartment sales coming up for completion over the next two-and-a-half years could be facing negative equity.

Apartment prices across Melbourne have fallen between 7% and 11% in the past 12 months and even more than that in some areas of oversupply.

The potential problem for off-the-plan buyers is that, on completion, valuations will fall far short of their contract purchase price and the banks will only lend against the lower valuation. This means many buyers will have to bridge the gap, coming up with the shortfall as well as the stamp duty and acquisition costs.

If history repeats itself, some buyers will try and walk away from their contracts, accepting the loss of their deposits. But they could be in for a rude surprise if the developer on-sells the apartment at a lower price and sues the original purchaser for any loss.

Melbourne house and land sales are also in big trouble

One more thing: the new house and land market in Melbourne also has a huge oversupply.

According to real estate group Oliver Hume, there has been a 29% increase in the number of residential projects being marketed on Melbourne fringes since 2006, at a time when there is a 5% decline in the number of land settlements.

Land prices have now fallen by a cumulative 16% over eight consecutive quarters, forcing developers and marketing companies to entice first home buyers and property investors by offering substantial incentives.

At the same time as experiencing an oversupply of land, these areas lack infrastructure and facilities, meaning there will be no swift recovery in the outer-Melbourne residential new housing markets.

If you want to get an idea of the huge oversupply just hop on to RealEstate.com.au and type in Point Cook or Truganini and you’ll be shocked by how many properties are for sale.

I’ll save you the trouble: Point Cook and surroundings – 3482; Truganina – 4020.

And it’s much the same for many of the northern and western outer suburbs in Melbourne.

So why are the stats showing the Melbourne property market is rising?

Considering the outer suburbs are performing so poorly, the overall figures just show the strength of the established home and apartment market in Melbourne’s inner and middle ring suburbs where there is a shortage of good properties.

Now is a time to be very selective in what you buy in Melbourne. While there are some good buying opportunities, there are also a lot of secondary properties on the market right now.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. A best-selling author and one of Australia’s leading experts in wealth creation through property, he also writes the Property Update blog.