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What does 2021 have in store for the Melbourne property market?

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What's in store for the market in 2021?

Investors and owner-occupiers should expect stepped-up transaction activity and raised competition for residential real estate, especially for the most-coveted, A-grade homes.

Official interest rates and the cost of mortgage finance are at all-time lows. Interest rates are the primary driver of real estate activity in Australia. With the Reserve Bank forecasting no change to the ultra-low official cash rate (0.10 per cent) for at least three years, this should prove a significant confidence-booster for consumers.

The banks are operating in an environment of easing government credit regulations. They are more prepared to lend to aspirational home buyers than they have been in five or six years.

If you are looking to buy or sell (or both) this year, you need to be aware that significant impediments for an improving residential property market have been removed. Borrowings cost are low, money is easier to access, the economy is recovering, and there is a pick-up in demand for real estate.

Here's our list of the predictions that are likely to come true:

Green shoots and growth: The significant banks agree there will be substantial 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.

More buyers: According to research by CoreLogic, Melbourne property prices slipped by 1.3 per cent in 2020, falling 5.6 per cent from a March high to an October low. Prices then rapidly recovered lost ground in November and December. What does the overall price decline bring? It delivers more prospective buyers to the purchasing table. In particular, first-home buyers have been energised by a market that appeared to tread water or go backwards last year. Second- and third-time buyers looking for a larger home are also searching for new properties in more significant numbers, as are those looking for high-end, trophy homes.

Easier access to loans: Almost all purchases of real estate rely on the buyer first obtaining finance. From 2015 to 2019, a consistent tightening of credit policy by the Australian Prudential Regulation Authority meant fewer well-qualified borrowers could access credit. That's now changing fast as the banks, backed by easier credit access arrangements introduced by the Federal Government, seek to lend more and increase their home loan business share.

Credit costs: The credit cost 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. Expect this to continue through 2021.

Broader recovery: The Australian economy ended 2020 showing strong signs of recovery, retail sales levels at a record and a stronger-than-expected pick-up in growth in the third quarter. There was also a strengthening of critical measures such as consumer confidence and business investment. This will only help underpin confidence in residential property.

Holiday real estate markets point to a resurgence: Historically, the holiday real estate markets on Victoria's Mornington and Bellarine Peninsulas have been reliable indicators of how the mainstream market will perform. The holiday home market is usually the first to struggle when a downturn hits but the reverse happened last year as buyers bid up the price of holiday real estate in response to the COVID lockdowns and the lack of international travel access. Some solid sales have been seen in the past two months on the Mornington and Bellarine Peninsulas. Buyers should note that what happens in Sorrento or Lorne influences prices in Fitzroy North and Kew.

Buyer enquiry: Throughout the second half of 2020 buyer enquiry volumes on property search website realestate.com.au grew to all-time highs. Many agents have commented that when new property lists, it is overwhelmed with enquiry and inspection requests in the first week.

Little left-over stock: Melbourne's real estate market usually kicks off the year with a large amount of "carry over" stock from the previous year. But in this December/January period, carry overstock has been purchased by buyers more quickly than usual. The trend indicates there could be slim pickings for buyers in the months ahead. You should also expect more competition for auction properties, especially for A-grade houses and apartments.

Space at a premium: The Melbourne lockdowns made city-dwellers acutely aware of some of their existing homes' limitations. Potential buyers are now paying meticulous attention to backyard space issues and whether or not a property has a separate dining room and the right floor plan. Breakaway rooms and studies are required for a family to function nowadays. Having two or more living areas and space for several home offices are also crucial for many buyers. Expect the desire for space to push up prices in key areas.

Houses to be the star performers: Free-standing houses and large terraces will be hot property in 2021. Auctions clearance rates for homes in November and December in Melbourne were more than 75 per cent. This was a strong result given the excess supply of houses that usually comes on in Spring but last year mainly went to market in November and December. House owners looking to make their move shouldn't procrastinate. A 75 per cent clearance rate typically translates into a 10 per cent-plus capital growth rate.

Spacious apartments to perform well: Many commentators and agents expect sales of houses to outperform apartments this year. ANZ, for example, forecasts that apartments will weigh down the overall Melbourne market. While this may prove to be accurate, be aware that there will be a plentiful buyer pool at lower price points. Buyers are also likely to continue to swoop on apartments with unique features such as a large courtyard or balcony. Many coveted apartment categories, such as Art Deco flats from the 1920s to the 1940s, and 100 sqm-plus 1960s apartments will have no shortage of suitors.

The first half may be the best: The removal of buyer impediments in the market needs to be balanced with concerns about new coronavirus outbreaks, rising unemployment, falling immigration and government assistance schemes, such as JobKeeper, being scaled back. The performance of the housing market this year will also reflect a power struggle between very low-interest rates – which are generating extra savings for homeowners – and Australians' sense of confidence about their financial wellbeing in an economy that will come under pressure as the federal government winds back stimulus measures.

If you are looking to buy and/or sell in an upbeat market in 2021, it may be a smart move to transact in the first half of the year rather than wait.

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