Melbourne Property Market Update | Quarter 2, 2016
The election results are in
With the coalition win at the polls, there will be no changes to existing negative gearing or stamp duty legislation. We saw a lot of the market holding it’s breath during this period with the Labor Party promising to make extensive changes if they were elected. The Government has openly said that there will be no change to its policy on negative gearing in the short term. However the government has acknowledged that it needs to be addressed in some form in the future.
Did rate cut stimulate demand?
In early May, the Reserve Bank brought down the cash rate by a further 25 basis points. Now standing at just 1.75%, it means interest rates in Australia are now at record low levels – some 3.17% below the historical average of the past 26 years.
It is widely regarded that with every reduction in interest rates, the property market is further stimulated because the cost of borrowing goes down, thereby driving demand up. But the latest figures demonstrate that, in the latest period, that has not been the case for Melbourne.
In mid May, the auction clearance rate was actually over 2% down compared to a year ago, indicating that on this occasion the drop in interest rates did not stimulate the residential property market at all.
No property market boom
Reserve Bank Governor Glenn Stevens confirmed those figures and said the latest interest rate cut will not lead to a property market boom. With the latest cut, he said “the board took careful note of developments in the housing market, where indications are that the effects of supervisory measures are strengthening lending standards and that price pressures have tended to abate”.
The Chief Executive of National Australia Bank, Andrew Thorburn agreed, telling the Sydney Morning Herald that once the cash rate has dropped below 2%, a further drop of 25 basis points is not going to convince a buyer to “go and buy another house based on that”.
While that may be the case for the overall residential market, one analysis is that interest rate cuts really do positively affect demand towards the lower end of the market. A report by Domain said growing families and Gen-Y buyers are now more prepared to take on investors in the sub-$700,000 auction market following the RBA cut, although it remains to be seen whether this is reflected in the longer-term figures.
Tougher market for overseas buyers
According to the Foreign Investment Review Board (FIRB), up to 20% of all Australian real estate is bought by those located overseas. Therefore borrowing restrictions for this group of overseas buyers can have a notable impact on the property market as a whole. Consequently it was a significant development when all four of Australia’s major banks made tweaks in the June quarter that affected the borrowing capacity of overseas buyers.
The Commonwealth Bank of Australia (CBA) tightened its maximum LVR (loan to value ratio) for loans by a further 10%, meaning temporary Australian residents can only now borrow 70% rather than 80% of the value of the property, significantly increasing the size of the required deposit. Not only that, the CBA stopped all lending to this group of buyers if their income was earned overseas. The National Australia Bank (NAB) acted similarly, reducing its LVR by a further 10% to just 60%, and reducing the amount of allowed foreign income in the assessment of an application by 25% (to 60%).
Like the CBA, ANZ Australia will also no longer lend on the basis of overseas income, while Westpac, St George, Bank of Melbourne and Bank SA will not lend to non-residents or temporary residents at all, having issued a complete moratorium.
Demonstrating that these restrictions have a significant effect on the activity of these borrowers, banks that did not immediately tighten their foreign lending rules showed a spike in loan applications. But the Australian Financial Review (AFR) said the Bank of Bendigo and Adelaide Bank eventually joined the other banks in putting the brakes on this sort of overseas lending.
Tightening due to fraud
The AFR explained that the clampdown on overseas lending has been “amid growing concerns about fraud and possible money laundering”. It reports that the Australian Securities and Investment Commission is looking into allegedly fraudulent loan applications made by mainly Chinese buyers, accounting for $1 billion in Australian property. ANZ and Westpac have admitted that “hundreds” of home loans based on fraudulent income documents bought for as little as $200 were approved.
But these further borrowing restrictions are causing some to worry that overseas buyers who successfully bid for properties and even pay deposits will then not be able to proceed to settlement due to failing to secure finance.
The Melbourne property sector hardest hit by the clampdown on overseas buying is off the plan units. A report in the ABC said this increased “settlement risk is likely to put severe downward pressure on unit prices”.
That is because units are typically the main target of foreign buyers, according to CoreLogic RP Data. And tougher lending criteria for foreign buyers is not the only factor hurting unit sales. A weaker Chinese economy is simply reducing demand, as are higher stamp duties and surcharges imposed by the Victorian government over the past two years.
Melbourne’s apartment market and beyond
CoreLogic RP Data has revealed a softening apartment market in central Melbourne. In the first quarter of 2016, unit prices dropped by 0.5%, but the median unit price dropped by as much as 17.2% in the Melbourne CBD, according to the Real Estate Institute of Victoria (REIV).
However, unit prices in Docklands and Southbank actually recorded price increases of more than 6% apiece, contributing to the fact that Victoria overall is actually Australia’s fastest growing state, having overtaken New South Wales.
The net growth rate is in fact up by 1.7% for the year until March 2016, compared to 1.4% for NSW. Indeed, Sydney home buyers are struggling ever more with housing affordability and therefore turning to alternatives like Melbourne instead.
Melbourne to take over from Sydney
Melbourne is even predicted to become Australia’s largest city by 2056, taking over from Sydney. The Australian Bureau of Statistics (ABS) released figures that show Victoria gained over 100,000 residents in the year to December.
The main reason for this is the Victorian economy, with the ABS predicting greater Melbourne’s population of 4.4 million will almost double by 2056. More people are flocking to Victoria than any other state in Australia, with Sydney actually losing a net 8,000 residents in the year to September 2015.
These trends are expected to translate directly to the property market, with Melbourne tipped to take over from Sydney with the fastest growing house values in 2016. Property prices should increase by a rate as high as 8% in Melbourne this year, compared to just 4% in Sydney. That is due mainly to housing affordability, with Sydney’s median house price of almost $1 million almost $300,000 higher than prices in Melbourne.
Melbourne’s property market situation has also been helped by the situation in Western Australia, where the decline in the resources sector means house prices have fallen almost 5% in the year until March 2016. In the same period, and also dating back to the years since the global financial crisis, Melbourne house prices have grown steadily, reinforcing a strong economy and property market.
- RBA, 2016
- Domain, 2016
- The Sydney Morning Herald, 2016
- Australian Financial Review, 2016
- CoreLogic RP Data, 2016
- ABS, 2016.
- REIV, 2016.
This report is not intended to be comprehensive or render advice and neither IPRG Pty Ltd nor any persons involved in the preparation of this report, accepts any form of liability for its contents.