OPINION: THE Melbourne Apartment market has reflected the decline in the overall residential market which peaked in November, 2010 and has been subdued for the last two years.
Only recently, in the Spring of 2012, has the market seen improved conditions, predominantly in inner suburban markets via 60% plus clearance rates, with middle and outer suburban markets yet to respond to the RBA stimulus of substantially reducing interest rates. A consistent clearance rate in the low 60% would suggest the market has stabilised but would have to push higher to result in any discernible growth in values.
Having regard to the weakening economy, Australia is in the enviable position of having a strong mining sector and some of the highest interest rates in the western world, despite recent cuts. The RBA’s latest 25 basis point cut in December 2012, in addition to previous cuts in May, June and October 2012 had been reflected in the longer term 5 year fixed rate for some time. Recent reductions in the five year fixed rate suggest a weakening economy will require further stimulus over the short to medium term.
The demand for apartments “off the plan” had been flat over 2011 and 2012, substantially below 2009 and early to mid-2010, which provided the strongest rates of sale seen in eight years. The erratic equities market, first home buyers encouraged by government grants, relaxation of FIRB (foreign buyers) laws, collapse of agribusiness style investments and baby boomers downsizing, have continued to provide a market for apartments but not at the same levels experienced in the peak of 2010.
Those projects which have been well received in the “off the plan” market have typically been well located, well priced and dominated by both local and overseas Asian buyers.
With regard to investment apartments, developers continue to be innovative in their presentation of stock ensuring price points remain affordable via more efficient designs. However, there is obviously a finite point as to how small apartments can become, and remain liveable, and we may be approaching that peak in design. There has been limited speculation of large scale, owner occupier focused apartments of recent times.
Residential vacancy rates at around 3% provides some equilibrium in the rental market and a rate in excess of this suggests over supply and the potential for a reduction in rentals which is likely to peak at the end of 2013. The REIV is reporting low to mid 2% vacancy rates currently and property managers are reporting reasonable take up of completed stock. This will continue to be tested over 2013 when supply peaks.
The unknown element in the market is the capacity for stock to be taken up where the key drivers of immigration and average household size appear to be changing month to month. We note the residential commentator Residex suggests Victoria has an oversupply in mid-2012 of 16,000 to 20,000 dwellings. This is reflected in the recent stock market statements of some of the larger listed developers, the majority of which are reporting subdued conditions for the foreseeable future.
By David Way, Knight Frank Victoria joint managing director valuations and Australian Property Institute’s apartments expert.*
Property Review
