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Post-lockdown boost on the way for property investors

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The Melbourne property market is displaying clear signs of returning to health. No one made any big announcements at the time, but it’s now apparent that the Melbourne market bottomed in October. In fact, since November buyer enquiry levels, auction clearance rates, bank lending and transaction volumes have all started to spike up, forcing the major banks to revise their earlier forecasts of a sluggish market in 2021. Rents and demand from tenants also showed clear signs of improvement after October.

In another signal that the market is putting the disruptions caused by COVID-19 behind it, the Real Estate Institute of Victoria’s quarterly December report shows a robust bounce-back in sale prices. For the first time, metropolitan houses in Melbourne surpassed a median value of $900,000. According to the REIV, prices jumped by 9.5 per cent from the September quarter to land at $941,000.  

The big banks are now projecting Melbourne house price growth of between 2 per cent and 9 per cent, with some economists arguing that this range is conservative and will need to be revised.

Here’s our list of the predictions for the year, as they affect landlords and property investors:

Consistency to return – Since the 1980s, the Melbourne market has been one of the most resilient and consistent performers of all capital-city real estate markets. There are already firm signs that this consistency is returning. Remember that over the last 40 years the median house price in Melbourne has increased by 7.9 per cent per year. The median unit/apartment price in Melbourne has increased by 7.73 per cent per annum.

Growth outlook – The major banks agree there will be solid growth in the Melbourne market in 2021. Growth estimates for the year range from Westpac’s 2 per cent to the ANZ’s 8.7 per cent. The banks have revised their more negative forecasts, made at the start of 2020 when the COVID-19 pandemic kicked off, after “very strong” sales in Melbourne at the end of last year.

Big demand for professional service – More and more tenants prefer having a property manager than dealing directly with a landlord. A large proportion of tenants these days are professionals themselves. Many feel they’ll receive more professional service from a manager. Having a mediator between them and the landlord provides a level of comfort if disputes arise. In addition, the COVID-19 experience has raised the profile of property managers as problem-solvers among both landlords and tenants.

Lower credit costs – The cost of credit is at a historic low and Australian banks have strong liquidity to support borrowers. In December the Reserve Bank cut the official cash rate from 0.25 per cent to 0.10 per cent. The cut immediately pushed up the buying activity. The low-interest-rate environment has created optimum conditions for people to purchase an investment property, as well as for existing investors who wish to sell investment-grade houses and apartments.

Broader recovery – The Australian economy ended 2020 showing strong signs of recovery, with levels of retail sales at a record and a stronger-than-expected pick-up in growth in the third quarter. There was also a strengthening of key measures such as consumer confidence and business investment.

Long-term trends favour investors – In 1966, the median house price in Melbourne was $9,400. Values have doubled more than six times since the 1960s, with the median price breaking through the $100,000 barrier in 1988, and pushing through the half-million-dollar mark in 2010. Today, one-third of Melbourne’s suburbs have a median house price of $1 million or more. Some 90 per cent of suburbs within 10 kilometres of the CBD have a million-dollar median house price and almost 50 per cent of suburbs in the middle ring are also in the million-dollar club.

Post-lockdown surge – Melbourne was in lockdown for four months in 2020, but the reopening of the city is seeing activity come back strongly into the real estate markets. Both buyers and sellers are returning to normal activity levels and consumer confidence has improved markedly. Meanwhile, property transaction numbers have increased and house auction clearance rates have been at 75 per cent or higher and prices are rising.

Inner-city markets to require careful management – Vacancy rates pushed out in Melbourne’s inner-city areas during the pandemic far more than they did in the outer and middle-ring suburbs. As a result, professional property managers are focusing on carefully managing lease terms with tenants to maximise returns to landlords. In some cases, tenants are being offered a shorter lease at a discounted rate. This gets the property filled, keeps income coming in for the landlord and leaves room for rents to be lifted at a later date.

Apartments to beat market challenges – Compared to the housing market, Melbourne’s inner-city apartment market is feeling the pressure. Declines in immigration and the overseas student market, have affected apartment occupancy in places such as Docklands and Carlton. But these days one in 10 Australians choose to live in an apartment and this figure rises to one in five among millennials. For investors who own apartments, a major positive is a soaring rate of purchasing activity by first-home buyers since late-2020. In Sydney and Melbourne, the price gap between the median house value and the median unit value can be $200,000 or more. The price difference is a big deal, especially for first-home buyers.

Melbourne’s capital growth – Melbourne now has 119 suburbs with a median of $1 million or more – up from 98 a year ago, according to realestate.com.au data. The Melbourne real estate market has seen the biggest price rises in suburbs joining the million-dollar club in Australia over the last year. The REIV says the market remained remarkably resilient in 2020 despite dire market predictions at the onset of COVID-19. The institute says that once lockdown restrictions across the state eased, demand and buyer competition skyrocketed. Low-interest rates and government incentives including stamp duty concessions and first home buyers grants added to buyer appetite.

For further information on buying and selling properties or on property management services, please contact any Nelson Alexander office.

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