By Steve Waters
The latest data may be showing some softer conditions in Melbourne but the Victorian market generally is still ticking a lot of boxes.
While some commentators are picking the peak of the market, I believe it’s far too early to predict that.
Thinking outside the box
There does seem to be weakening consumer sentiment in Melbourne with some buyers considering whether they should hold off for the time being.
This is partly being driven by higher property prices as well as higher interest rates, which is resulting in some buyer hesitation.
There are obviously some oversupplied parts of Melbourne, but the more affordable areas, including regional Victoria, are still performing solidly. Example, regional areas like Geelong have experienced strong growth over the past 12 months.
We’ve been investing in Geelong for a while because it’s affordable, it has better yields, and it has excellent transport back into Melbourne. Geelong, as well as other major regional locations, also have self-sufficient economies.
New CoreLogic data on internal migration shows an increasing number of interstate and intrastate population movements to either sea change/tree change regions or the outskirts of capital cities.
In fact, Geelong recorded the fourth highest rate of internal migration in the country, posting a net increase of some 4,216 people over the 15/16 financial year.
As property becomes more expensive, people will naturally start to move to more affordable locations, especially if the fundamentals such as infrastructure and job growth are also there.
I believe the next round of internal migration figures will show even higher results and that’s because it’s only in the past 12 months that interstate and intrastate migration has started to percolate once again.
Certain areas of Melbourne will soften, but that has already started. The big question mark is what the LVR positions, lending restrictions and serviceability calculations are going to be in the months ahead.
Another issue is when homebuyers and investors come off interest-only rates into principal and interest, then they’ll need to undergo a full submission to go back to interest-only. That is where we’re going to see a shift in the market.
That will be a catalyst for a market change, because some borrowers who qualified for interest-only in the lower yielding, higher priced parts of Melbourne, may not service in today’s lending environment.
What we might see is a flutter of properties on the market, which is another piece of the puzzle which may cause it to soften in the months ahead.
The Melbourne market may soften but I don’t believe there’s going to be a significant correction. It has had a good run over the past few years but the difference compared to Sydney is that Sydney has a lack of land, whereas Melbourne doesn’t.
In fact, there are still a lot of green field sites between the regional areas of Melbourne and the city hub.
The government talks about demand constantly but they can never get the supply right. If they released more land and loosened supply, then naturally the market will find its equilibrium. Without that, well, you have a problem.
Melbourne has the ability to release more land and change zoning for detached dwellings. I believe it’s detached dwellings that will offer the best investment opportunities going forward because they usually perform well throughout the corridors of Melbourne.
The new first home owners grant for Victorians buying in regional areas from 1 July will help some first-timers but I don’t think it will have a huge impact either way.
I do fear for off-the-plan buyers because LVR positions have changed and yet there are many developments that still haven’t completed.
So, if some buyers were relying on a 90/10 LVR but can only now get 80/20 or they have to go principal and interest at 90/10, what is going to happen to that segment of the market?
The upside, I suppose, is that if you really want an inner-city unit, you’re likely to pick one up for 80% of its original value.
Cash flow is king
One of the fundamentals now more than ever is cash flow because the cost of money is going up and lending is changing. Cash flow is king once again.
In today’s lending environment, all investors really need to forecast their numbers. They must understand how they would manage their loans if they were principal and interest and how that’s going to ultimately affect their cash flow position.
If those numbers show that their cash flow is going to be too tight, then perhaps they shouldn’t be buying at the moment.
The thing is, you don’t have to buy all the time, which might sound strange coming from a buyers’ agent, but sometimes it’s better to sit on your hands and wait for more favourable market and lending conditions.