Property investors should look outside of Melbourne as short-term rally ends: RP Data

The brief rally in Melbourne dwelling values ended in October with property values expected to bounce around near the bottom of the market for another 12 to 18 months, according to RP Data senior research analyst Cameron Kusher.

As the quarterly data (below) shows, Melbourne median house values are flat again, while unit prices are starting to decline after rising strongly in August and September. 

Source: RP Data. Note the median price is the middle price of all settled sales over the three months to the end of the final month.

“Melbourne did start to see a recovery in the last six months, but we were always a little bit surprised at this recovery,” Kusher says.

“The market did not correct for very long or by very much though and there is still the potential for further correction.”

Kusher says it could be 12 to 18 months before the market starts rising, and even then gains are likely to be modest.

Melbourne also has the weakest rental yields for both houses (3.6%) and units (4.5%) of all capital cities and is also the only capital city where gross returns (capital growth combined with rental income growth) are in negative territory (-0.8% in October), providing little  incentive for investors.

“Investors should be looking outside of Melbourne,” Kusher says.

“The low rental yields are just a function of strong price growth over the last four to five years to late 2011, but with no pressure on rents due to extra housing coming through from the inner city unit market,” he says.

Unit values fell 3.2% over October to a median of $420,000, and Kusher says oversupply from inner -city developments is definitely a factor.

“There is a huge amount of supply in areas like Docklands and the CBD.”

Kusher says property market observers should keep in mind that a market like Perth is just starting to turn around, having taken 5 ½ years to fall from its peak. This was also the case with the Sydney market.

“Perth is just turning around and is still 7% below its peak. Sydney fell 10% from peak to trough,” he says.

Melbourne property prices only started trending down in late 2011 and are currently down only 2.4% from a year ago – the recent rally helping to correct some of the previous losses.

Kusher says the outlook is a little better for Melbourne houses than units.

This is principally because residential developers, which hold of lot of land-banked stock on the outskirts of the city, can hold off releasing this to the market.

However, developers of inner-city apartments that have sold off the plan are already committed to build, or in many cases, apartment projects are already under construction.

For advice on navigating hotspots, download our free eBook: Tools for Getting Through the Hotspot Maze. This article first appeared on Property Observer.