They think 2008 will see prices of both houses and apartments continue to rise – but at a much less frenzied pace, than was the case in the third and fourth quarters of 2007.
The full effects of recent interest rate rises may cool the market, by removing owner occupiers from the pool of prospective buyers. However sharemarket volatility may bring back as many, if not more, investors to the market – in turn creating a wider gap between the property owner “haves” and “have nots”.
Sunday Domain ask five experts to gaze into the crystal ball, and reveal what they see for the year ahead in Melbourne’s real estate game.
1.MICHAEL MCNAMARA – General Manager, Australian Property Monitors.
Melbourne’s real estate market could encounter headwind next year.
Melbourne’s residential real estate market will decelerate from its recent boom-like course next year, but values certainly won’t be going backwards.
Australian Property Monitors general manager Michael McNamara says 2007 was a stellar year for Melbourne home owners, with average house values increasing 19.5 per cent in the year to September 2007, to $435,064. The average price for a unit over this period also increased, by 9.5 per cent to $316,509.
He expects 2008 to be big, but not bigger than 2007, in regard to average house value growth.
“We definitely see Melbourne’s real estate market as slowing down next year,” said Mr McNamara. “If average home values continue growing at current levels of around 20 per cent, they would soon overtake the flatter Sydney market, and we don’t see that happening.”
“The real estate market reaches strong headwind at a certain point because of borrowing capacity constraints,” says Mr McNamara. “When average values get to about the $500,000 mark, as is the case in Sydney and Perth at the moment, they tend to flatline”.
Mr McNamara says a “two tiered” market exists in Melbourne, whereby the inner and middle ring suburbs are recording strong value growth, while the outer suburbs – particularly in mortgage-belt areas – are recording weak, or negative value growth.
About the only sector Mr McNamara believes will continue to buck the trend and continue to surge strongly is the prestige residential market.
“There is still plenty of fuel left in the tank at the affluent end of the market,” said McNamara. “We expect the number of suburbs with an average house price of more than $1 million to increase next year.”
2. ANGIE ZIGOMANIS – BIS Shrapnel.
Sharemarket volatility will attract investors to property, despite interest rate rises.
Interest rate rises, and continued share market volatility, will take the heat out of Melbourne’s real estate market in 2008.
While these variables are not expected to result in a real estate bust (not one of the people we interviewed for this story anticipated a bust anytime soon), BIS Shrapnel analyst Angie Zigomanis expects they will contribute to a much needed “slowing down” of the market.
“We expect at least one interest rate rise early next year with potentially more to follow before the year is out,” Mr Zigomanis said. “This will impact on affordability, but it will take the heat out of the market after what has been a period of unsustainable growth”.
“The performance of the sharemarket next year, will also affect the market,” he said. “If volatility becomes more acute, we expect to start seeing some nerves particularly at the top end of the market.”
Whether or not this will affect the investor market, is another question, Mr Zigomanis says. “Typically in times of sharemarket volatility, investors take their money out of stocks, and invest into property.”
However the rental returns investors make, as a percentage of the price they pay for the property (known as a return on investment, or a yield) has diminished over the last twelve months, as rents have not increased at the same levels property values have.
According to agents in Melbourne’s inner-city, yields for inner city properties have fallen from around 5 per cent in 2005, to an average of between 3 and 4 per cent today.
3. SCOTT McELROY – Hocking Stuart, managing director and principal.
First home buyers, young professionals, families and empty nesters will continue to be out in force next year, according to new Hocking Stuart managing director and principal, Scott McElroy.
However they will face challenges, particularly from interstate investors, to which the Melbourne market looks relatively cheap.
“Melbourne has had strong and steady growth for the past 10 years. The value increases in 2007 have been driven through strong demand across all sectors,” Mr McElroy said. “The outlook for 2008 is a continuation of the strong conditions we experienced in 2007.”
“The first home buyers looking to enter the market and get out of the rental market have driven up values of apartments as many cannot afford the entry level for a home (but want to stay in the area),” said Mr McElroy.
“Families have been forced a little out of the inner city to find larger homes,” he said. “This has seen areas like Bentleigh, Balwyn, Northcote and Brunswick record strong growth.”
“The group which has been offering supply for the families, are the couples downsizing as their families move on, and their homes are too big,” said Mr McElroy. “These empty nesters have been strong in buying high quality townhouses and apartments in lifestyle oriented locations.”
Many new apartment projects have been developed, on the back of this relatively new demand, in Docklands, Southbank, St Kilda Road, Richmond and South Yarra.
Mr McElroy said young professionals with dual incomes and high borrowing capacity will continue to drive the inner city terrace home market, as well as the medium sized home market.
4. FRANK HANSON – Urbis
The great Australian Dream is no longer a house in the suburbs on a quarter acre block
Apartments, townhouses and units will continue to become more accepted as homes in 2008, particularly as they present an affordable, practical solution to living in the suburbs people want to live.
Urbis principal urban designer Frank Hanson expects next year will be a “tipping point” for prospective apartment buyers, saying their attitude to apartments is changing from apartments being “a nice idea” to “something they really embrace”.
Urbis consults on projects associated with urban transformation. Its staff includes urban planners, social researchers, urban designers, geographers and investment analysts.
Mr Hanson said demand for units and apartments is predominantly coming from first home buyers and empty nesters, but that in years to come, like in many European and Asian cities, Melbourne families will consider apartments an alternative to the traditional “home on a quarter acre block”.
The changing buyer sentiment may result in an increase in the number of high rise units and apartment buildings in middle-ring suburbs like Northcote, to outer ring suburbs like Ringwood and Frankston.
High-rise development in established suburbs, and around established transport nodes, is one of the cornerstones of the State Government’s controversial Melbourne 2030 policy, first introduced as a blueprint in 1999.
The policy identifies inner, middle and outer ring suburbs which will become activity hubs – each which will receive various levels of funding from the government. Examples include Footscray in Melbourne’s inner west and Box Hill in Melbourne’s east.
The success of Melbourne 2030 however largely depends on the amount of private sector investment the government can get to fund these high density projects.
Mr Hanson expects the current inner-city housing affordability crisis to encourage more builders to build higher density housing in 2008.
Whether or not these apartments will be sold to owner occupiers, or investors, remains to be seen.
5. FRANK VALENTIC – managing director, Advantage Property Consulting.
Melbourne is Growing. Don’t Wait. Buy Now.
“It never seems cheap to get into the real estate market,” says buyers advocate Frank Valentic. “If a buyer’s budget and financial situation permits, our advice is to buy and now.”
“It is a rising market and if you don’t get in, the market will keep moving forward away from you” said Mr Valentic, managing director of Advantage Property Consulting.
“The fundamentals of Melbourne’s landscape are strong,” Mr Valentic said. “We’re recording strong interstate and international population growth. We have a strong economy. And our properties, particularly in the inner city, are still relatively cheap compared to other capital cities, in particular Sydney and Perth.”
“We expect the inner city, and suburbs within a 15 kilometre of the CBD to record the strongest growth next year,” Mr Valentic said. “People buy a lifestyle, and most of these suburbs have the fundamentals of easy city access, schools, cafes, restaurants and amenities.”
“Buyers who can’t afford to buy a home in the area they want are either choosing to buy a unit or apartment in the same suburb, or are moving to neighbouring, less expensive areas.”
Mr Valentic doesn’t expect values in “first home buyer” areas, such as Werribee and St Albans in Melbourne’s west, where owners are more vulnerable to interest rate movement, to perform as well as the central suburbs.
“Unfortunately the gap between the performance of the inner and outer suburbs will continue next year,” said Mr Valentic. “The first home buyer suburbs are now dangerously exposed to interest rate movement.”
One group which isn’t phased by interest rates, and this is changing the landscape of property ownership in this city, is the investor.
“The number of investors on our books has doubled compared to last year,” said Mr Valentic. “Many investors have been spooked by recent volatility in the stockmarket, and are deciding to invest in property instead.”
“In particular we’ve noticed a sharp increase in the number of Perth-based investors buying property in Melbourne,” he said. “The recent Perth property boom has meant many investors have huge equity in their homes and they are re-investing that in Melbourne.”
6.TERRY WHEELER, Investor
Property investor Terry Wheeler believes there’s never a bad time to buy property.
He also believes there’s no better investment than property – so has kept his finger on the property pulse throughout a few turbulent cycles.
Terry bought his first property at the “late” age of 30, using the equity from it to continue buying others. He targets unrenovated properties, where he does them up, adds value (and equity) – then lease them out at a premium.
He said he has considered buying shares, but always opted against, preferring the security of bricks and mortar investment.
His portfolio includes one and two bedroom apartments, and houses, focussed in Melbourne’s inner south-eastern suburbs, where demand for quality homes is strong.
The recent surge in demand for rental properties, which resulted in vacancy rates falling sharply in May, has given him the confidence to buy again in 2008.
Terry has chosen the south-eastern suburbs to invest in, because it’s the market he is most familiar with. He looks for homes and apartments with character and charm.
“I don’t believe Melbourne’s property prices in the inner-city are going to get any cheaper,” Terry said. “You can wait to watch the market pass you by, or get in and have a go.”
“For anybody thinking of investing though, I’d say it’s important to get good advice and research your market.”
He says to investors who will become landlords, it’s important to also recognise and reward good tenants.
“Good tenants are more important to me than the extra $500 or $1000 extra a year I could get, if they were charged maximum possible rent.”
“I insist my property managers make sure my tenants are happy at all times, and try to make tenants feel like they’re a part of the investment.”
“In some cases I’ve given several weeks free rent because something in the house needed to be fixed,” he said. “Good tenants aren’t always easy to find.”