The Dark Side of Melbourne

Unemployment, vacancies, high levels of stock on market, oversupply and government deficits are just some of the issues starting to manifest and cause problems for Melbourne’s property market.

As noted previously, Melbourne has led the nation in housing construction since the onset of the Global Financial Crisis. Melbourne approvals surged from early 2009, accounting for a whopping 38% of capital city dwelling approvals in the four years to February 2013. Recent signs have not been good; the Victorian detached new home markets (house and land) looks particularly sick, posting its worst sales on record, and the lowest annual house sales in the HIA housing series 16.5 year history.

Just like the house and land market the apartment market is showing significant cracks. The flood of apartment stock is depressing rental yields and is expected to lead to a blowout in vacancies. Meanwhile, apartment prices across inner Melbourne have reportedly fallen by between 7% and 11% in the past 12 months, with some 20,000 off-the-plan apartments due for completion over the next 2.5 years facing negative equity.

Any housing construction downturn would obviously have a detrimental impact on the Victorian economy and government stamp duty receipts. According to the latest ABS figures, construction accounts for 8.8% of total Victorian employment, versus 7.7% in New South Wales.

More broadly, with Victoria’s manufacturing industry in terminal decline, the economy has become overly dependent on housing construction and population growth to drive the economy. Such an economic model only works as long as Melbourne keeps on building and growing its population.

Things aren’t slowing down either. Victoria’s planning minister Matthew Guy recently approved the monumental ‘Australia 108’ development, which if built will become the tallest tower in the Southern Hemisphere. Mr Guy has currently approved more than 17,000 apartments in 30 projects within the City of Melbourne since taking office in 2010.

And it seems approvals are just ramping up if you take note of some comments made by Mr Guy in March 2013, most notably:

  • “We’ve approved a number of buildings over 200 metres and will continue to do so,” (To put that into perspective that is THREE times taller than Australia Towers at Olympic park.)
  • “Melbourne CBD is ripe for more high-rise development and has the investment interest and population growth to have the most tower-dominant skyline of all the ­capitals…”

This is in stark contrast to comments made by the RBA’s Finacial Stability Review board, stating: “the current stock of land for sale is at a high level and building approvals data point to increases in the stock of housing, and potential oversupply, in some parts of Melbourne, particularly the inner-city apartment market…”

While Westpac enconomists predict that Victoria will generate just 17,500 new jobs in 2013-14, less than half the 43,500 jobs forecast in the state budget.

It is unknown if all the approved developments will get off the ground but one thing is for sure, if the market shows any signs recovery there will be plenty of developers on the sideline ready to build if the market turns. A pro-development planning minister, weak economic conditions, soft yields and an oversupply of stock will suppress any chance of a recovery or growth in Melbourne’s apartment market in the near to medium future.

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