A snap shot of what is happening on the ground in Melbourne

I am receiving an increased amount of calls from investors asking me about the market conditions in Melbourne at the moment.

I thought I would post here so people can do a little bit of reading prior to making decisions about whether NOW is a good time for their Melbourne purchase. Depending on strategy, price point and goals for the property will depend on whether now is or isn't the right time.

IMPORTANT - my commentary is based on what is happening on the ground. I cannot change what is happening on the ground, no matter how many stats you might have that contradicts what I am saying, the commentary remains the same IT IS ON THE GROUND - ie) what I am seeing every week when I am inspecting, buying and attending auctions. if you don't value the information, just don't read it - its pretty simple.


What is happening statistically (these are real stats from real sources)

• lower vacancy rates
• more demand than supply (366 homes needed per week to keep up with demand)
  
• Increasing rental returns (please do servicing at 3% rent return. It is possible to obtain 3.7% depending on area, property type and overriding strategy)
• Increasing clearance rates (more on that later)
• Highest migration of all the states (migration drives economy and housing prices)
• Unemployment 5.4%
• Low stock on market
• Increase in DOM (days on market) from 28 days to 35 days (35 days is very short and is indicative of our auction market)
• Recorded first negative growth in 5 years - .08% or 1.2% down depending on the data source (please read "on the ground" commentary for a better indication of what is really happening)

On the ground market conditions - this is what I am actually seeing in reality, on the ground when buying property, bidding at auctions & evaluating prices/

After sitting through a few lectures over the last few days of property economists and property prediction experts, I have determined that ON THE GROUND knowledge is even more important than I once thought. We rely on stats and data when analysing the market conditions for our clients, and I thought that knowledge was 50/50. 50% stats and 50% on the ground knowledge, however now I am thinking it is 80% on the ground (combined with sound knowledge and experience of property and property markets in general), and 20% stats. I know there are some really good arguments against what I have just said and there will always be differing opinions, and I may even change my own opinion again in the future, but for now, I am pretty convinced that you NEED local knowledge to get it right, because stats on paper can look great, but when you know what else is going on locally you may choose a different course than the one the stats are pointing toward.


On the ground price changes

• Some areas have pulled back 10% (notice how the stats say 1%, this is why I say stats alone are not the whole picture)
• Some areas have pulled back 5%
• some areas have stabilized
• some areas are edging more towards growth still then cooling off

We literally have different things happening in different markets at the moment. It is not ONE market behaving exactly the same way.

On the ground conditions

• Buyer numbers have reduced (however, prices are still strong in many locations, selling above the range, selling quickly and selling at the top of the range, this is dependent on a number of things, like vendors expectations and trusting their agent with the advertised price recommendations. If the agent has the house priced properly, the home sells for ask price, close to ask or over reserve at auction. If it is priced incorrectly it will sit until the price is adjusted and then it sells once it meets the market)
• This is going to seem contradictory to point above - many more properties are passing in - HOWEVER - they are selling very quickly after auction and often at the top of the range or over the range. In some areas 5% below vendors expectations. It is area and property dependent.
• Auction clearance rates have been declining this year, however are now increasing again. This is typical for this time of year as buyers and vendors sit tight in June/July and we begin to see stock levels increase in August and in particular spring)
• Number of auctions being held are increasing back towards the number of auctions this time last year, which means stock on the market (houses for sale) is increasing
• Spring will be a good indicator of the strength of the market as it is traditionally our busiest time.

Is now the right time to purchase?

I will say the same thing I always say, IF Melbourne is a city you want to hold investments in, IF your personal circumstances mean you are emotionally, financially and physically ready to purchase IF you are not an experienced investor who knows how to pick the market, then YES, now could be the right time for YOU personally to purchase depending on your budget and your strategy.

But what about the market - is it a good time in the market to buy right now? What if it goes down further?

The market is the market. Most passive investors (that is people who buy 1-3 properties over a 5-10 years are really removed from the industry, focused on living rather than studying property every waking hour will ALWAYS MISS THE MARKET. It is unreasonable to expect someone who is not heavily involved in property to be able to "pick" the market. People rely on the media for commentary and the media is out of sync and 6 months behind reality By the time you have read it in a newspaper, it is old news where the property market is concerned. Property is more subtle than just stats and headlines. As you can see see from my notes that there is a subtle art to choosing the right strategy and location dependent of what is happening on the ground at the time.


2) There isn't a bell that rings when the market reaches the bottom - the bottom occurs (I suspect we have already hit the bottom in some locations), then it recovers and prices/demand etc begin to increase and we look BACK and say, "oh, that was the bottom". My solution - we can tell on the ground if things are softening further, so when they are, we negotiate even harder. We take advantage of "opportunities" and pay even less that the market at the time.

3) If prices move back 5% or even 10% - think about what it matters to you. Does it impact your life in any way? Unless you are forced to sell at a time that you had not planned, your life it not affected. I have purchased 3 properties in 3 different markets towards the top of the boom. The properties all went up, then they went down 10%. Then they took 12 months to recover and they kept growing. One was a $420K purchase which went up to $460K then dropped down to $390K, and then 10 years on its worth $1.2m. Do you think I care about the $50K it went down? Do you think I would care about not waiting 12 months and saving the $50K? If I had of waited there is every chance I could have costed myself another $100K and how many times have we seen that happen. Trying to PICK the market is a gamble 50/50. Keep your eye on the bigger picture and move forward knowing its the long game. (buy and hold obviously)


Final thoughts

Rather than trying to "pick" the market, play the game that is there in front of you at the time.

IF YOU WANT TO INVEST IN MELBOURNE SPECIFICALLY - it's probably not going to get any cheaper. (some areas will, say 5%, 10% in other locations. However many areas are already down 10% so it is likely that they have already hit "their bottom" while other areas have not yet. There is an opportunity to take advantage of the market conditions since investors are being shut out (lending) and there is an opportunity to pounce on bargains as they present themselves.

We are picking up deals for clients at about 10% lower than last year in the $1.6m-2m mark.
a few outer suburbs have pulled back by 10% too (around $600K -$700K mark)
if you want to bargain shop and wait for a deal to pounce on, get your finance ready and get in the game. Its likeley these areas have dropped as much as they will before prices move again.

If you need some faster growth, then there are opportunities to jump into the suburbs and property types that are still flying (ie inner city villa units for example). Or go to a different state if you plan on investing on other states.

Land banking for future development - they are pretty hot in certain suburbs right now, but there are a few suburbs where prices have pulled back by 5% and there is potential with good negotiations to get it down another 5%.

Higher yields - they have started, there is still room for further increases. So those looking for a Melbourne purchase and need higher yields from day dot for servicing, it is likely better to wait, unless of course you are in a price point where things are moving (ie pakenham and the regional) then you wouldn't wait for a higher yield, because prices are still moving up so yield wont at the same time)

Of course if you like to try and Pick the market (and if you are experienced and have your finger on the pulse and will move fast as soon as the indicators are there) or you like buying only when the market is rising, disregard everything I have said and proceed as normal.

 

Very good article Lisa. Thank you. I must confess, say the one aspect that never really stood up for me in Melbourne, is getting descent rental returns, esp when compared to Sydney. And I am speaking as an investor here, not a property manager. I wish... just wish... I could get a little higher yields. So I hope you are right about the higher yields coming...

 

You left out tighter lending ... Kind of a big deal

 

I hear you on that front!!!
The yields will get up to 5% give or take (area and asset dependent) but it will be short lived - say 6 months, because the investors will flock and the cap growth market will go again. There is a "window". If I can remember to do so, I will create a post to let people know that the window is open.....

Where is your MGT business based?

 

For higher yields you had to pick outskirts around a year or two back. 5% would have been the least.


Regards

 

Thanks for the critique

TBH I really didn't think to add it because it's universal - everyone in every state is in the same boat, it isn't just a Melbourne market condition.

 

I thought I did! Sunshine West 3 years ago.... nice townhouse, tonnes of growth but my rent is still under $400/week!

 

The areas I was looking at have given nearly 50% growth with 7% gross yields approx. in just 3 years time.
All thanks to the house and land strategy that a lot of people were following on the forum.

 

Nicely done! Way before my time on these forums unfortunately! I love hearing these kind of stories. And with 7% yield you are also nicely positioned to take advantage of the upcoming opportunities!

 

Check some of my purchases here

Regards

 

Hmmm, that won't change too much anytime soon sadly. There's a real intolerance for rental raises in that section. It will change in time, but I wouldn't hold out for a big jump anytime soon at this point in time. It's a great capital Frith play, but yields are a real sore point.

Hopefully I'm wrong on my predictions around that!!!!

 

Great write up Lisa and totally agree with your sentiments of 80/20. Statistics as we all know can be bent to suit almost any scenario both positive and negative.

I obviously watch my own suburb very closely and their is no statistic available that could provide the insight I can via being on the ground. You can break it down to the best part of the suburb, the best street down to the best type of house if your truely watching.

 

Not sure I quite agree to be honest. My experience on the ground looking and being in the high income 30-40 age group with my friends and coworkers - there is a lot of wait and see on the buyers side. There is also no rush for them to enter the market or upgrade houses.

When spring comes and the market faces its real test I think we will find out quickly if prices come off further.

I feel we are too early to judge that prices are come off most of the way.

As a side note. This might be a strange idea, but the idea that being close to the activity makes it easier to judge the market isn’t always true. There is millions of brokers, agents, investors, and Wall Street dudes who thought their inside line meant they knew the market best in 2008.

It was the outsiders who looked at things more analytically that made bank. They were not invested in real estate via work or emotion, so they made clearer decisions.

Don’t get me wrong, they smelt something rotten and then went “boots on deck” and things like that to confirm their belief.

Anyway, not saying that you are wrong, just saying that sometimes industry performance is like standing too close to one of those dot paintings.

A good example of how I applied this. About 4 months ago I dumped my Facebook stock. I realized most people I knew were moving away from Facebook or were not creating new content. It got my attention and then I had a closer dig and I felt it had run long and hard enough for me so I sold. Ignoring the Cambridge analytic stuff - now we see they missed earnings. There is also major investors who are close to Facebook kicking of legal matters saying that Facebook mislead them on its current performance. My point is not that “I’m smart” (it still went up after I sold), just that being close to things come with its own risks and bias.

Anyway i digress a bit - but I did enjoy reading your opinion.

 

What locations on the ground are you and your team following or referencing the above info from?

 

"it's probably not going to get any cheaper."

Just wondering, what's your rational for coming to that conclusion at this point in time?

What about the impact of

• 480bn$ IO2PI rollover by 2021?
• DTI cap?
• Credit Tightening?
• Out of cycle Rate hikes?
• Sellers FOMO

Even if all the above factors are across the country, it will impact some cities(with froth) more then the others especially Sydney/Melb.

I think PC is usually a leading indicator for what's to hit the mainstream masses.
Have you noticed the sentiments of some of the bulls on PC? it has shifted from laughing at a mention of 10%fall, to not defending the prospects of even a 20%fall in Sydney and Melbourne.

The rapidity and extent of the fall should already be a big red flag and this while market has not fully hit major headwinds yet.

The game is the game, always has been always will be. ... but its the very nature of the game one has to adapt to what's changed and what's changing, there is no certainty, there is not guarantee.

 

Thanks for your on the ground comments.

Back to credit squeeze, its major and yes it impacts on all markets.

The issue here is if you can not source finance you can not buy, therefore we will see more stock come to market, when this happens prices fall.

I think Melb is a great State for future, but no rush in current climate.

MTR

 

We haven't even experience a slow down let a lone a down turn.

Wait another few years when cheap credit is gone, tougher lender rules, back to 80s sort of lending style then things can get really cheap doesn't matter where it is, no easy and cheap credit, tougher lender rules, it is properties public enemy number #1.

Check out stock market price when there isn't much margin lending going around
and when margin lending pickup, follow by correction and a withdraw of margin lending.

a lot of gain can be attributed to when people can access credits, when that is gone hum ha cheap cheap and no buyer lot of sellers

 

That is sentiment that you are commenting on, and you are bang on as far as sentiment of people. And the sentiment is what is creating the current market dynamics

 

Are you currently active in multiple markets across Melbourne to be able to determine if there has been a slow down or not?

 

Housing slowdown continues

House prices have fallen 1.6 per cent over the past year in the largest decline since 2012, the latest Corelogic Hedonic Home Value Index shows.

While the decline in prices continues with no signs of abating, according to Corelogic, the falls are still minimal compared to the appreciation in dwelling values of nearly 70 per cent in the past five years for Sydney, and over 50 per cent for Melbourne.

In the quarter to July, Melbourne led the downturn in prices. Prices were down 1.8 per cent for the quarter outpacing Sydney at 1.1 per cent and Perth at 1.5 per cent.

In July, Melbourne's prices fell 0.9 per cent - the biggest across capital cities - while Sydney's prices dipped 0.6 per cent.


Lisa has you been through any down turn? the thing about down turn is things may look cheap but it keeps getting cheaper as there is no credit

Most experience investors know there is direct correlation between credit and asset price, you seen credit squeeze has started last year and look at the current market
it just the beginning ...here is something that has happened 10 years ago but properties been doing a 25 years run so it easy to ignore correlation, but a case studies will be done once the fall out end

This is from the RBA studies
Margin loans enable households to borrow to invest directly in shares or managed funds, thereby gaining leveraged exposure to the equities market. In Australia, margin debt grew rapidly between 2000 and 2007, reflecting households' greater willingness to borrow to invest in equities during a period of strong share market returns, and the associated expansion of the range of margin loan products offered by lenders. However, over 2008, the value of outstanding margin debt halved, amid volatile and falling equity markets.


check out the share market between 2000-2007, we peaked in 2007 then the crashed comes and guess what margin lending has start to pick up again and look at the stock market now
I am watching and waiting the day I cashed out shares the same thing I cashed out properties 2 years ago