VIC Full VIC write up.

Okay, so as per my previous thread (Land, what to buy or where to buy?)
I've written up a full overview of where Victoria and its housing market is at the moment.

There is no suggestions of where precisely to buy in this write up, however I've supplied most of the information you'll need to start determining if Victoria/ Melbourne is the right choice for your investment goals.

Personally, I think Melbourne has been the best city to invest in over the last decade (Melbourne: Only capital city to double in median house value this decade, stays strong.) .

It seems that Melbourne will continue to deliver better results than all other major cities, even Sydney. (I may be bias but the stats speak for themselves )

If Victoria is on your consideration list, here you'll find more than enough information to start working on suburb selection. My tip to investors is to follow the money.

Look at where the most growth is across industries, find out where the majority of those people work/ live (easy to do with ABS census data) and consider what types of properties those people will be purchasing as homes over the next decade.

Remember, roughly 70% of Australia's housing market is being controlled or owned by owner occupiers. It's home owners who primarily drive the market (Melbourne CBD excluded). Focusing on quality stock that intended home owners with increasing wages are buying is, in my opinion, a reasonable place to start your search.

Brief posted in sections below:

 

How has the property market been performing?

2015 was an exceptional year for capital growth in Melbourne’s property market. Much like Sydney, the city burst forth across virtually every area however there were some clear standouts.

The top three Urban Local Government Areas (LGA) to grow over the last 12 months were:

· City of Whitehorse: +21.4%;

· Manningham: 19.4%;

· Bayside: 19.2%.
​

Regional Victoria was in an upwards trend too but didn’t fare quite as well as The Greater City of Melbourne, experiencing somewhat subdued growth. There were some stand out areas with double digit results.

The top three Regional Local Government Areas (LGA) to grow over the last 12 months were:

· Frankston 12.8%

· Alpine 11.9%

· Yarra Ranges 10.9%​

Source: Residex

Looking over a longer time scale of five years we see that Victorian house prices peaked in 2010, boosted by post Global Financial Crisis stimulus packages. Once stimulus funding ceased a market correction followed in 2011. The continuing decline in prices was mitigated by official cash rate cuts from the RBA in November 2011 (4.75 to 4.5 basis points). Continuing monetary easement saw reductions in mortgage interest rates which spurred the Victorian property market on to grow again.



“Between September 2011 and 2015, the median Melbourne house increased 23.79 per cent in value to $718,000. The median unit increased by approximately 10.62 per cent in the same period, and is now worth $489,500.”
Source: Residex

From the graph above we can see that in 2015, Melbourne house values increased at almost 1.5% per month. That’s roughly an increase of $10,500 per month for properties close to the city’s median value.​

 

What part of the cycle is it in?

There are three parts to a property cycle, Boom/ Slump & Recovery. Victoria, across most areas is currently in the boom phase.​

Are there any patterns to the growth?

Source: Residex, edited by Jake Milne.

Historically, when Victoria experiences upwards momentum there are noticeable trend lines that form. These upswings are usually characterised by two or three peaks over the period. Seemingly, the final spike breaks through the trend line which signifies a transition into negative growth.

According to the latest data point from Residex, one could deduce that Melbourne dwellings are at the start of this series of peaks. This suggests that Melbourne could come into a peak rate of growth over the next 12 months.

Historically, Melbourne tends to follow Sydney’s patterns but with some delay, so continuing capital growth followed by some cooling next year is in line with expectations.​

 

How is the state performing in GSP?

“Victoria is a mid-sized economy that is larger than Singapore, New Zealand and most of South East Asia. The Victorian state economy has experienced strong growth over the last decade, increasing by an average of 2.4% annually over the ten years to June 2014. This is well above the International Monetary Fund figure of 1.4% average annual growth for developed countries over this same period.

Victoria accounts for 3% of Australia's land mass and 22% of Australia's total Gross Domestic Product (GDP). Around 2.9 million people are employed in Victoria, which is 25.2% of all employed workers in Australia. The Victorian economy is a significant exporter of goods and services and was responsible for A$13.4 billion or over 23% of Australia's export of services in 2013-14. In total, our state economy generated A$350.3 billion in Gross State Product (GSP) in 2013-14.”

Victoria had a good year in 2015 with State Final Demand over the year to September hitting 4.2 per cent. This was the best result the state had delivered since September 2010 and was also the strongest increase experienced by any Australian State or Territory.

NSW was the second best performing state after Victoria, posting in increase in state final demand of 2.6 per cent.
​

Victoria Records Strongest Economic Growth In The Country
5206.0 - Australian National Accounts: National Income, Expenditure and Product, Sep 2012


What is the future outlook for GSP?

Victoria has 4.3 million people or 24.9% of Australia's population. The state economy will continue to benefit from on-going population growth.

The State Budget out-years Real Gross State Product forecasts estimate a growth rate of 2.75% until 2019.

CPI is expected to be between 2. 5% and 2. 75%.​

State Budget 2015-16 - Level of Nominal Gross State Product - Victorian Government Data Directory

 

What industries are the main contributors to GSP?

Growth contribution in Victoria was broadly based, with private consumption, dwelling investment and business investment all doing better compared to the same time in 2014.​

“Primary industry

Victoria produces almost a quarter of Australia’s total rural output.

Agricultural and pastoral products include wool, sheep meat and beef, wheat, oats, barley, maize, tobacco, hops and fodder crops, citrus, grapes, apples, stone fruits and vegetables and dairy products. Victoria is Australia’s main producer of mutton and lamb, dairy products and dried vine fruits and substantial amounts are exported.

Victoria is also an important producer of timber from its 8 million hectares of forests. This includes 223 000 hectares of forest plantations.
​

Oil and mining

The Latrobe Valley, east of Melbourne, has one of the world’s largest deposits of brown coal and is the resource base for Victoria’s internationally competitive supply of electricity. The coal is used to produce most of the State’s electricity.

Large oil and natural gas fields exist in the Gippsland Basin, off the coast of eastern Victoria. These provide 50 per cent of Australia’s domestic oil production, while assuring Victoria of natural gas supplies well into the next century.

Most of Australia’s large mining and minerals processing companies are headquartered in Melbourne. It is also a major centre for mining project management, research and development.​

Manufacturing

Victoria is one of Australia’s major manufacturing States. Its factories employ about 34 per cent of the national labour force. Large industries include automotive manufacture, food processing, textiles, clothing and footwear, paper and paper products, oil refining, petrochemicals, aluminium smelting, information technology and telecommunications and aircraft production.

The food processing sector contributes 26 per cent of the State’s manufactured exports.

A major aluminium smelting industry is located at Portland and Point Henry, producing about half a million tonnes of aluminium a year.

Victoria accounts for some 45 per cent of Australia’s communications industry production. Major telecommunications equipment manufacturers and computer companies are also located in the state.

Other significant industries include forest products (including pulp and paper production), chemicals, plastics and rubber and scientific and medical instruments.”​

Victoria Facts | About Australia
Industry Atlas of Victoria | Publications, Research & Data | Department of State Development, Business and Innovation

 

How will those industries perform into the future?

Most sectors are set to expand with the exception of Construction.
​

What is the unemployment rate and (more importantly) trend?

Unemployment rate is budgeted to decline from 6.5% to 5.75% by 2019.​

How much job creation has there been/ will be?

73,000 jobs since the labor premier was elected plans to create 100,000 more jobs primarily in industries such as: new energy, food, fibre and education.​

How is population growing/ contracting? (Migration?)

The Australian Bureau of Statistics forecasts Victoria's population to reach between 6.8 million and 7.2 million people by 2025. Melbourne is predicted to be Australia's largest city as early as 2030.​

 

How many dwelling approvals have been issued?

Over 60,000 dwelling approvals were issued in 2015.​

What is the under/ oversupply of housing?

Estimations are that there is an oversupply of 23,000 to 27,000 dwellings. These properties mainly consist of medium-high density projects situated in the CBD and in growth centres throughout the city. Additionally the rapid development of house and land precincts in outer Melbourne add to this oversupply.​

What is the affordability situation?

Median Household Income: $100,731 p.a.
Assumed Tax Rate: 17.2%
Median House Cost: $718,000
Median Unit Cost: $489,500
Assumed Deposit: 20%
Assumed Interest Rate: 4.98% p.a. convertible monthly
Rental Yield Houses: 3.30% p.a.
Rental Yield Units: 4.34% p.a.

“Loan repayment for house = 48.24% of after tax household income or after loan repayments borrower has $827 per week to spend on other things.

Rent for house = 28.43% of after tax household income or after rent tenant has $1144 per week to spend on other things.
- - - -
Loan repayment for unit = 32.89% of after tax household income or after loan repayments borrower has $1073 per week to spend on other things.

Rent for unit = 25.45% of after tax household income or after rent tenant has $1192 per week to spend on other things.”
Source: Residex Market Commentary VIC, 2015

Ideally investors should consider areas where loan repayments are 33% or less of after tax household income.​

Volume & Liquidity

Melbourne has a relatively liquid housing market right now. Last year 51,423 houses were sold and 9,865 unit sales also took place.​

12 month & 10 year average growth?

Melbourne was the only Australian capital city in the last decade to have property prices double with a 109% increase in values in the period of 2005-2015. Melbourne averaged 11% capital growth over 10 years. 12 month growth for Houses was 9.66% with units experiencing a +5.36% shift.
​

Sources:
State Budget 2015-16 - Level of Nominal Gross State Product - Victorian Government Data Directory
http://business.nab.com.au/wp-content/uploads/2015/04/State-Economic-Handbook-April-2015.pdf
Victoria (Australia) - Wikipedia, the free encyclopedia
Victoria Facts | About Australia
Industry Atlas of Victoria | Publications, Research & Data | Department of State Development, Business and Innovation
http://dsdbi.vic.gov.au/__data/assets/pdf_file/0013/1005250/Industry_Atlas_Ch1_web.pdf
http://dsdbi.vic.gov.au/__data/assets/pdf_file/0015/1005252/Industry_Atlas_Ch3_web.pdf
Future of farming in Victoria’s hands < Media Releases | National Farmers' Federation
Premier of Victoria
http://theconversation.com/victoria-votes-where-will-the-growth-and-jobs-of-the-future-be-33831
Building approvals hit highest level on record
http://www.abs.gov.au/ausstats/[email protected]/Previousproducts/5206.0Main Features6Sep 2012?opendocument&tabname=Summary&prodno=5206.0&issue=Sep 2012&num=&view=
5220.0 - Australian National Accounts: State Accounts, 2014-15
List of Australian states and territories by gross state product - Wikipedia, the free encyclopedia
Economic indicators - Invest Victoria
https://broker.marketfacts.residex.com.au/
Victoria Records Strongest Economic Growth In The Country
5206.0 - Australian National Accounts: National Income, Expenditure and Product, Sep 2012

 

In your opinion do you really see a further 38,300 jobs created in the manufacturing sector?

The reason I ask is that I work for one of the larger 1st tier supplier to the carmakers and see certain things happening. I don't know what the actual number of people working directly or indirectly to automotive, but its probably around 50 - 80,000 people. Ford shuts operations on October 7 this year and holden and Toyota most likely sometime next year(no date yet). A number of the first and second tiier suppliers have attempted to diversify into non-automotive since the announcements were made a few years ago, but only a few of them were successful with a small number of products. Adding further to this, other non-automotive companies that use similar commodoties (to that in automotive) are already starting to feel the pinch (ie as the volume consumed of the commodities, eg rubbers/aluminium etc in automotive reduces, the price the small players pay begins to increase).

So, in effect, is the real growth in manufacturing going to be 120,000, to counter for the losses in automotive?

 

Really great point to raise. I'm no expert, but in a previous life, worked closely with the manufacturing industry and the outlook back then wasn't great, so I understand your point of view. Sorry if this is a delicate topic for you.

There is a silver lining though: Explanation as to why Manufacturing will grow:

My take on it, as far as automotive goes, is there are seriously, serious challenges for those companies directly affected ahead. Ford, Toyota and Holden will all be shut down by 2017.

55% of Australia's car manufacturing jobs are in Victoria. That's more than 100,000 people who are potentially out there looking for work within 10-24 months. So, in the short term manufacturing unemployment looks like it will be on the rise; which in turn should warn investors that buying in areas that are primarily reliant on the automotive industry now may not be the safest play.

Now; the Victorian Government has forecast unemployment to trend down to 5.75% by 2019. Personally, I think that may be a little too optimistic but here's hoping.

While I remember, there was a sobering read published last year by Victoria Universities, Dr. Dixon: https://www.vu.edu.au/sites/default...ds-have-peaked-cops-report-economic-forum.pdf

Andrews' Labor Government has previously stated that they're concerned that transition planning in the automotive industry has not started. Even if companies are working towards changing income streams now it could take several years before client bases are established. The state may have to decide if they're going to support industry, and how much assistance is to granted to the effected businesses.

That being said the predictions that Manufacturing will recover and grow are surprising and promising. I'm confident that Victoria University has their finger on the pulse of these issues so I'll trust their findings.

The take home message for me is that Industries such as Information Technology,
Tech Industry, Communication, New Energy, Healthcare, Financial Services and similar professional industries are the ones to keep an eye on for the major share of our state growth.

Investors can use ABS census data to locate suburbs with higher than normal concentrations of young professionals in the above industries as they'll be the ones with high household incomes which in turn (with the right suburban ingredients) has a higher likelihood of rising rents and house prices.

Interesting related article:
Australia's 'five pillar economy' - manufacturing

Edit: Found more info on why manufacturing will grow.

TLDR (Too Long Didn't Read): Areas that rely on car manufacturing are potentially high risk areas to buy into over the next 3 years. Focus on areas away from them where employment situations won't be as troublesome.

 

That's a hell of a post. Thanks for sharing

 

Thanks Bran, appreciate the encouragement, means a lot.

 

Thanks @Jake Milne I will have to read these posts again before my trip to Melbourne in the Easter period. I will endeavour to drive through the selected suburbs.

 

@Jake Milne

Perfect Data research and information!

We gave an example of similar research on Adelaide thread to give an overview of overall market.

Investors shouldn't over look at above numbers and information. We have been drip feeding Melbourne data on forum (keeping "Not Spruiking" in mind)

Good work!!!!

 

I obviously missed that @Be Developer! Where's the link? ;-)

 

Do you have a link to this?

 

So in this situation we still expect prices to rise?

 

Yes, affordability hasn't stopped Sydney's market and they're at 12.2 x median income whereas Melbourne is at 9.7 x.

"Despite Australian cities ranking poorly for affordability globally in the survey, home loan repayments are at “average” levels, Domain Group senior economist Andrew Wilson said.

He said the modelling was “misleading” because income was only important when considering the cost of repayments, which are at manageable levels due to low interest rates.

...“Home ownership levels are largely stable across Melbourne and Sydney, while mortgage defaults are among the lowest on record,” he said."​

Source @Jennifer Duke's article: http://www.domain.com.au/news/sydne...ost-unaffordable-demographia-20160125-gmd7x2/

 

Repayment levels are pretty dependent on IRs though - so if they get hiked this will change I guess!

 

Jake, How are you? Great post its been awhile. You still at Infolio?

 

That would be geelong broadmeadows etc. where lots of people stay there who work in the factories etc.