Melbourne CBD and Inner-ring property market
Written on the 11 May 2017 by James Cagney
(A 5 minute read)
The Melbourne property market epitomizes what I have been talking about in my articles on "Demographics" trends and the "BOOM-BUBBLE-BUST" Cycle. Click >>> TRENDS for more details. The Melbourne property market has such vastly different socio-economic demographics per suburb that you cannot take Melbourne as one single property market. The best way to do this is to divide Melbourne into the following areas:
1. CBD and Inner-ring suburbs. See below.
2. East Melbourne to Packenham. Click EastMLB to access this FREE report
3. West Melbourne to Werribee. Click WestMLB to access this FREE report.
4. North West Melbourne to Bacchus Marsh. Click NthWestMLB to access this FREE report
5. South Melbourne to Frankston. Coming soon.
6. North Melbourne to Craigieburn. Coming soon.
7. Regional NSW. Coming soon.
Central Business District (CBD) and City
Well it's no secret the Central Business District (CBD) is oversupplied with small one bedroom and two bedroom apartments which were sold off the plan to gullible investors. Perhaps these units are best described as "Dog Boxes". The Marketers of these apartments raised "property spruiking" to another level. Many of these investors were overseas investors who, just like the investors who purchased into Docklands many years ago, will see negligible growth over the next ten years. False promises about easy profits where investors only put down 10% deposit and then told to wait for the big profit to appear at the end of the rainbow when the project is completed in three to five years. Many of these investors are persuaded to buy multiple properties in a single development by these unscrupulous sales people. They are told that they only need 105 deposit and prices will significantly increase in the time it takes to build the high-rise and the investors can then sell on of the units they have purchase to help pay for the second purchase. All these lies which gullible investors swallow hook, line and sinker.
The problem is by the time these developments are completed the supply will far exceed the demand and 'good luck' attempting to sell in an oversupplied market and find tenants at the rentals promised by the developer's spruikers. The law of supply and demand 'kicks in' and prices and rents will plummet.
Added to this Australian banks have lowered the amount they will lend to locals wanting to settle on these high rise "Dog Boxes" and the Chinese can't get funding from either the local banks or extract money from China because of the currency retractions in China. Many units will come back onto the market which will be difficult to sell even at reduced prices. There are legal implications of not being able to settle on these units so if you are in this situation get legal advice fast.
According to the Foreign Investment Board's (FIRB) 2015-16 figures from foreign investors was $248 Billion. That is staggering. What is even more surprising is Chinese buyers accounted for 30,611 property approvals followed by Hong Kong 1,470 and Malaysia 2,280. Of the total number of foreign residential real estate purchased nationally (40,138), Victoria (mostly Melbourne) accounted for 17,525, New South Wales (mostly Sydney) 12,931, Queensland (mostly in South East Qld) 6,728, with the next State - Western Australia dropping down to 1,646 dwellings. Immigrants traditionally have purchased in suburbs where many of their country folk have settled. This was seen in the 1950's and 1960's when the largest number of immigrants entered Australia. The Italians congregated together, the Greeks did the same etc. When the Vietnamese migrants came to Australia in 1970 they did the same. These large numbers of Chinese investors and immigrants numbers will change the demographic profile of the CBD and individual suburbs within Melbourne, Sydney and Brisbane. What did surprise me in the FIRB statistics is the absence of India investors in the statistics. The largest number of migrants in 2015-16 to settle in Australia were from India. A total of 12,000 settled in Australia. Therefore we can safely assume that these migrants are mostly renters or family members of existing migrants who are sharing the home of their children and reletives The "Contributory Parent" immigration policy could account for a fair proportion of these Indian migrants. I will cover this demographic when I discuss certain suburbs in Melbourne like Werribee and Hoppers Crossing where many of these migrants have settled over the years.
Another issue was the Melbourne Council's greedy bureaucrats allowing equally greedy developers to build such small apartments. The council obviously reaps the benefit of more rates and taxes but for investors buying two bedroom apartments around 50 square meters, where tenants have to close the door to get into bed - how ridiculous! Unethical Developers' who produce glossy brochures which camouflage the size of the apartments should be ashamed of themselves. What resale price can investors expect to get in the medium to long term? I don't believe I need to elaborate any further why these are CBD units are just not 'good investments'.
However, there is light at the end of the tunnel for these investors. The Gen Y (Millennial) will be able to afford to rent these "Dog Boxes" because they are single or mates sharing. These units will provide some independence at affordable prices for these Gen Ys. Overseas students from Asia used to cramped living spaces will be also be prospective tenants. These Gen Y's and overseas students able to rent at affordable prices can then buy what is important to them - electronics, motor cars, modern furniture and socializing at bars and restaurants. This change in the demographics within the CBD will change the Retail market in the city for many years to come.
The large supermarket chains are already onto it. Woolworth "Metro" and IGA Express caters for these consumers who no longer buy a week's worth of groceries like their parents did. They buy what they need to eat that night and then microwave it. If they have mates or girlfriends over they may splash out and cook something and, believe it or not - in an oven. Or why not us all meet at the local bistro or buy take-out food on their mobile phones - very Millennial. Watch for the trend for international food outlets opening up in the CBD as consumers seek out different cuisines to make the gathering of friends an occasion. This trend will revolutionize shop fronts in the CBD. However don't expect this trend to happen overnight but as investors you can look forward to ever increasing rental returns year on year.
Another demographic group are the Baby Boomers and childless Gen Xs & Gen Y moving into the city because they are sick and tired of the traffic delays getting into and out of the CBD of Melbourne. These are usually professional higher income individuals and couples who want to enjoy city life. Let's call them "City Slickers" . They like to frequent good coffee shops and restaurants, the theater, cinemas, take walks and exercise in the parks within the city. They have dinner parties with their friends colleagues and brag about their new w lifestyle. They don't own a motor vehicle they "Car Share" through business like GoGet. They walk or take a tram or train to work and are sitting at their desk within 15 minutes. Unfortunately for investors they are not interested in the "Dog Boxes" available for sale or rent. They want spacious, upmarket apartments to buy or rent. So if you insist on buying an investment in the Melbourne CBD go this route.
An opposing trend to take into account is that many of these Millennials are staying at home well into their late twenties and early thirties. In fact many of these Millennial are having children and they are still living with Mum and Dad. Their excuse being that they are saving for a deposit on their home. In reality they are more likely to spend their income on them meeting friends for dinner and going to nightclubs.
Frustrated parents, Baby Boomers, who looked forward to peace and simplicity during their golden years, have become the unpaid child carers. The Baby Boomer parents are forking out for food, Wi-Fi, rates, electricity etc whilst their children enjoy the good life. Baby Boomers also have to cope with their grand kids who tend to 'rule the roost' at home as Milennials do not believe in old school discipline. This creates conflict with the parents and hopefully persuade the Millennials to move out so Baby Boomers can get their life back. Sorry no sympathy to Milennials doing this as I am a Baby Boomer myself with grand kids and have sympathy for my demographic.
Melbourne's Inner-Ring Suburbs
This is a good investment if you are an owner occupier. Good public transport and arterial roads are definitely a plus factor. Many of these older suburbs have leafy streets and nearby parks. These residents enjoy a social lifestyle with a plethora of coffee shops and restaurants in these suburbs. A great opportunity in these suburbs are the low rise units which are springing up as developers buy old houses in the suburbs knock them down and build units thereon.
The councils are overjoyed because these developments give them more money. Firstly; each council receives development and infrastructure funds from developers. Secondly; the councils will get multiple rates, water and sewerage charges, instead of less income from houses with large blocks of land. Owner occupiers also win because they get a start buying into the market in a desirable suburb at a reduced entry level. The prices of a one bedroom units range from $400,000 to $450,000 for an upmarket unit and a two bedroom unit would cost around $650,000 to $700,000 plus mark That means rentals will vary from $400 to $425 per week for a one bedroom and $600 to $620 per week for a two bedroom. Investors bear in mind that is a lot of money to expect a renter to pay so you can get a decent return. The capital growth will be good because of the demographic trends I gave above for CBD apartments. These tenants want to live out of the CBD but only want to spend a maximum of 20 to 30 minutes to get to work on public transport.
If you are interested I buying a property in Melbourne give James Cagney a call: +61 416 137 645 or click >>> HERE and he will show you how to invest wisely.
FREE reports on Melbourne available:
Melbourne Eastern Suburbs. Click >>>EastMLB
Melbourne Western Suburbs. Click >>> WestMLB
Melbourne North Western Suburbs >>> NthWestMLB
This is not financial advice. You should not act solely on the basis of the material contained in this article for your investment strategies. Changes in government and legislation occur frequently and without prior notice and financial markets are unpredictable.
This information was written and compiled by James Cagney. The opinions expressed herein do not necessarily represent the views and opinions of his associates including
Thank you to the resources of Terry Ryder, Property Observer, The ABS, BIS Shrapnel, Michael Matusik, Property Monitors, Colliers, On the House, Corelogic, RP Data, Residex, SQM, Herron Todd White, NAB Residential Property Survey, Australian Bureau of Statistics, Peter Wargent, Port Phillip Publishing, Economy & Markets, Harry S. Dent and the many others for the material discussed above.
Author: James Cagney