Many in retirement are travelling comfortably, with three key factors contributing to their happiness – good physical and mental health and enough money to enjoy life.
Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Melbourne property prices poised for take-off: REA Group
Self-funded retirees with a penchant for residential housing investment should sit up and take notice – the Melbourne real estate market is poised for a strong recovery, according to Anne Flaherty, senior economist for the global digital business, REA Group (ASX:REA).
Addressing investors at a Trilogy Funds event in Melbourne, she told them that, in her opinion, Melbourne was ready to see a recovery this year with its value proposition “extremely strong right now”.
Flaherty agreed that this market assessment might seem counter-intuitive, with the Melbourne the weakest-performing capital city property market since March 2020 – the onset of the COVID pandemic.
“We have seen astronomical price growth in markets such as Perth, Brisbane – the median house price is now higher than Melbourne – and Adelaide over this five-year period with their markets up more than 80 per cent. At the other end of the spectrum is Melbourne, with growth of just 15 per cent over the same period. Last year, prices fell 2.5 per cent compared with double-digit growth in Brisbane, Adelaide and Perth.
“But interestingly, Melbourne had the strongest price growth in February (O.7 per cent) on the other side of the Reserve Bank’s 25-basis-points rate cut. It remains to be seen if this was just a monthly blip or if it’s the start of Melbourne’s recovery.”
Victoria’s fall from grace, of which Melbourne is the most poignant symbol, has been well documented. During COVID, there was net migration from Victoria. In the regions it was partly offset by people moving there from Melbourne, but overall, there was strong negative net interstate migration.
Another reason might surprise. Until about two years ago, Victoria was better than the other states at providing housing. As Flaherty says, that’s really what slowed price growth in Victoria. But now we’re looking at an under-supply of housing “that’s very likely to get worse”.
There are three other factors at play. First, Australia’s population is estimated to grow to about 31 million over the next decade – 900 new people every day, with most coming from overseas. This will initially put pressure on the rental market and then housing as they seek to become homeowners, with Victoria at the forefront of housing demand as it remains a favoured destination for migrants.
Second, there is still an undersupply of new housing coming on to the market, with Clinton Arentz, Trilogy’s executive director, property & leasing, telling investors that by 2028-29, there will be a shortfall of more than 300,000 houses based on completed dwellings over the past five years compared with government housing targets for the next five years (2024-29).
The third reason is Victoria-centric – it’s a difficult market for investors. Flaherty estimates that the rental market has fallen by about 21,000 as investors have left the market.
“We have the highest property taxes. We have a lot of compliance that continues growing. Investor sentiment is quite negative in Victoria. If we look at the number of new loans that have been made to investors across the country, in Victoria it’s up just 10 per cent compared to a year ago – and that’s from a low base.”
So, why is Flaherty bullish on Melbourne property? “Strong population growth coupled with a slowdown in allocating funds to building new houses. This doesn’t really bode well for future housing supply, but, of course, the flip side is that it does bode well for potential capital growth.
“As far as building costs are concerned, they have never increased so rapidly in such a short space of time. This is why we have seen such chaos in the construction sector and why we’re seeing a lot of projects that are just not viable, as well as those projects that are viable taking longer to build.”
All these factors are coalescing to put pressure on demand – and that’s positive for capital growth.
Rents, too, are lower in Melbourne compared with other capital cities. That might surprise people either looking to rent or grumpy about their latest increase, but Flaherty’s data shows rental affordability is better in Victoria than any other state.
“I think it’s inevitable that with the population growth that we’re seeing, that rents will rise further in Victoria,” she said.
Flaherty didn’t venture into the political realm. But it’s fair to at least speculate that a State Government facing growing demand for housing – rental or owning – will finally address those issues such as exorbitant land taxes on investment properties that are keeping investors away. If that happens, the economic laws of supply and demand should do the rest.
