Melbourne Property Investment

As inner city Melbourne investment property development opportunities lessen, Melbourne developers are turning their sights toward the city's middle and outer ring suburbs. Contact Australian Property Investor Planning for more details of current and future property investment opportunities in the growth areas of Melbourne property market.

2008 Overview:

With Melbourne's property market following the national trend of a stabilisation phase that's set to continue into the forseeable future, its paramount for investors to consider potential long-term real estate prospects based on their overall historic performance.

Stick to property investing fundamentals and ignore opinions as to where the market is going, whether good or bad. Buying strong investment properties is more about asset selection rather than timing. Timing is impossible to consistently get right. Don't wait for the right time to buy. Wait for the right property to buy.

The important thing at all times is to focus on the value of the land, because it's land that you can't create more of. The scracity of land is what drives property prices, so investor should seek properties with more land value as well as some scarcity or uniqueness.

Like any real estate investment, locating and purchasing the right property in the right suburb requires careful consideration and research. Buyers should look for suburbs that have strong positive attributes. For example overall appeal, good public transport, good schools, shops, close to arterials and above all, invest in areas that are conistently showing a growth in population. For example, South East Queensland.

Affordability. Melbourne residential and investment property sector is performing well and is predicted to continue doing so. Here are some reasons why:

Melbourne apartment prices have historically been approximately 20-25% more affordable than Sydney, however the current price difference inner city apartments is over 45% meaning there is plenty of upside potential in Melbourne.

Melbourne home prices are rising from a lower base providing a higher proportionate gain.

Pent up demand. Many leading economic forecasters believe there is an undersupply of new housing in Victoria.

High consumer confidence motivates people to make more long term decisions such as purchasing a new home.

Improved immigration numbers. Melbourne's population is now increasing at a faster rate than many other capital cities leading to an increase in the demand for housing. Population growth is around 4%.

Returns on Investment Properties

Real estate investors in Melbourne should be aware that the prime reason for investing in property is capital growth, and capital growth is driven by the scarcity of an asset. When selecting a property for capital growth there should always be a consistently greater level of demand than supply. Melbourne high-rise inner-city units lack scarcity value at the moment because they are ‘a dime a dozen’. This factor is also a major influence on the level of rental returns achievable. Hundreds of virtually the same style of units are now on the market. Most of these buildings are at a risk of rapid architectural obsolescence, which is likely to further undermine capital appreciation.

In addition to their lack of scarcity value, the vast majority of high-rise inner-city units are occupied by tenants rather than owner occupiers. This is likely to create problems for investors. Owner occupiers drive the market from a price perspective because they usually have a greater financial and emotional stake in their properties than tenants. Unless the current ratio of approximately 70% tenants and 30% owner occupiers in inner-city units reverts to the usual 30% tenant to 70% owner occupier ratio we are unlikely to see significant or consistent price growth in this sector of the unit market – especially in the $350,000 to $500,000 price range. Future price growth in mid priced CBD units will depend on achieving a consistently higher level of demand from owners occupiers and limiting the pace of development.

Both the lack of scarcity value and inflated asking prices on initial sales means significant numbers of apartment re-sales in multi-unit developments are being recorded at substantially lower levels than the original purchase price. In recent years in Melbourne, some owners have sold their units for up to $50,000 less than what they originally paid, even in “name” buildings.

Most of the value of these apartments, is tied up in the building, rather than the land component, and this, together with the abundant supply and competition from similar units in nearby towers, are additional factors in the lower re-sale value. Strongly rising land value is one of the most important prerequisites for good capital growth.Without it, the potential for a property to rise in value above inflation is severely limited. In many run-of-the-mill complexes the land component accounts for only 10% of the property’s total value. By contrast, most houses in the inner and outer suburbs have a land component that forms at least 60-70% of the total value of the property.

Recent analysis on the median price growth of Melbourne apartment complexes in St. Kilda Road, the CBD and Southbank since 1990 clearly shows that homebuyers and investors are not receiving the capital growth returns they had expected. The analysis, conducted by The Age newspaper and based on figures published by Mlebourne based company Cityscope Publications, compared the price and time difference between the first and the last sale of apartments in buildings with more than 20 residences. It found that the 2.66% overall rise for these three areas was far less than the median house price rise of 8.9% a year for houses and 9.1% a year for suburban apartments.

CONCLUSION

Remember, that when you select a unit as an investment, succumbing to the lure of tax savings is a fundamental mistake for investors. You do not attain financial independence through saving tax - you gain financial independence through the ongoing capital growth of your assets.

The Annual Return Index measures the capital growth of an investment property togther with net rental income, to give an accurate comparison between Australia's cities. Melbournes residential property has made a steady start in 2008 and will continue to do so in the long term. Investors should be very selective in terms of suburbs they consider for property investment. As always, look at the level of infrastructure and population growth of any new areas in Melbourne. Comparisons between the Capital cities are best considered over 7 to 10 year periods with Melbourne, Sydney and Brisbane continuing to be good options for property investment in the future.