Melbourne's 'fragile' property market 'smokescreen'

author-avatar By on May 18, 2021
Melbourne's 'fragile' property market 'smokescreen'

One expert has called Melbourne's increased property activity a "smokescreen" and criticised the state's stamp duty increases.

REA Group reported Victoria's auction clearance rate was 86% for the week ending Sunday 16 May, while Domain reported a clearance rate of 77% in Melbourne up to 15 May.

However, Propertyology's head of research Simon Pressley has called such metrics "misleading" and a "smokescreen".

"Those with an interest in Melbourne’s property market would be wise to stand back from today’s metrics-of-the-moment and objectively assess the fundamentals," he said.

“Melbourne’s weak economy, declining population, record high rental supply, and the ratcheting up of new housing construction are a collective group of fundamentals that are as weak as what Darwin and Perth saw throughout the last decade."


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Rates correct as of October 26, 2021. View disclaimer.

The ingredients to the "smokescreen"

A construction boom and falling migration to Melbourne are the two key ingredients to its "fragile" property market.

Propertyology's research shows nearly 41,000 dwellings were listed for sale in Melbourne as of 30 April.

That's 18.9% higher than a year ago, and "a significantly bigger supply increase than any other capital city". 

Pre-COVID housing supply pipelines were also around 45,000 extra dwellings per year.

Mr Pressley said Melbourne's median house price declined by $134,000 between January 2018 and May 2019, "caused by an over-stimulated construction sector". 

"Construction has always been integral to Melbourne’s economy. Stimulating this sector at a time when the population is effectively declining, and other economic factors are fragile, is not a recipe for property price growth," he said.

Australian Bureau of Statistics (ABS) figures show net migration fell more than 20,000 in six months to September 2020, when Melbourne usually welcomes up to 80,000 per year. 

“The impact of Melbourne’s four-month lockdown reminds us of what happened in Perth in 2014 when commodity prices tanked, inflicting several years of pain. Both economic events marked the beginning of a sharp reversal in migration patterns,” Mr Pressley said.

“The diminished housing demand is one thing, but the billions of lost revenue from those who left town, going on to spend their household budget elsewhere has just as much impact on a city’s property market.”

Simonpressley1.jpg

Simon Pressley, head of research at Propertyology. Picture supplied. 

Stamp duty increases "suppressing economic growth"

Ahead of this week's state budget, the Victorian Government announced stamp duty and land tax increases:

  • 0.25% land tax increase on properties between $1.8 million and $3 million.
  • A 'Premium' stamp duty on properties above $2 million - $110,000 plus 6.5% dutiable value.

Victorian Treasurer Tim Pallas says $2.7 billion would be raised by such measures, with the land tax increase affecting only 10% of Victorians who pay it and the 'Premium' stamp duty applying to more than 70,000 properties.

There will also be a 'windfall gain' tax, with profits as a result of council rezoning taxed up to 50%.

However, such increases have been slammed by groups such as the Real Estate Institute of Victoria (REIV), the Property Council of Australia, the Property Council of Victoria, and the Housing Industry Association (HIA).

Mr Pressley added to the chorus, saying the increases will 'suppress' economic growth.

"While every government around the world borrowed money to fund COVID economic stimulus, Victoria borrowed much more than other states," he told Savings.com.au.

"Sadly, I reckon the Victorian economy will now be one of the worst performers in the nation for many years.

"They have placed themselves in the same spot as Queensland with an enormous debt meaning an inability to sufficiently fund infrastructure and to support industry."

Standard and Poor's (S&P) downgraded Victoria's credit rating two notches from AAA to AA, the first time in 18 years the state had not retained the highest rating.

S&P forecast the state's debt to be more than $155 billion by 2024. 

Moody's Investors Service also downgraded Victoria's credit rating to AA1 from AAA late last year.

Melhousing.jpg


Image by Titus Aparici on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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Harrison is Savings.com.au's Assistant Editor. Prior to joining Savings in January 2020, he worked for some of Australia's largest comparison sites and media organisations. With a keen interest in the economy, housing policy, and personal finance, Harrison is passionate about breaking down complex financial topics for the everyday consumer.

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