How beaten down Melbourne became a ‘buy’ for investors

Australia’s leading private land developer, Nigel Satterley, told the Financial Review Property Summit in Sydney this week that investors had pulled back from buying in Perth and were instead shifting their focus to Melbourne. “It will be cheaper today than in six months’ time,” he said.

However, through the summit – which focused on the new, upbeat mood in commercial real estate, and the challenge of affordably housing all Australians – there were more comments on Melbourne’s negatives than the positives.

GPT Group chief executive Russell Proutt pointed to Victoria’s congestion levies, temporary COVID-19 tax, emergency services levies – which had been turned into property taxes and then doubled – vacant land tax, and the changes in stamp duty. “All those things are not generating confidence in the investment market in Victoria,” he said.

Others pointed to the extra land tax and stamp duty required of foreign investors, which is not only a major deterrent to offshore capital but a disincentive to domestic buyers who understand that the impost will eventually see them sell into a market with less liquidity than other Australian capitals.

The comments follow weeks of corporate focus on violence in Victoria, both in stores and in homes, and the proposed work-from-home legislation of the Allan government.

Yet, a change is taking place in the residential market.

“I think the media has been too negative about Melbourne,” said another speaker at the summit, Andrew Schwartz, the group managing director and co-founder of leading alternative real estate investment manager Qualitas.

Satterley pointed to a “fragile recovery” under way in Melbourne’s land markets. On his estimates, around 15,000 new housing lots will be sold in Melbourne this year, still short of boom time levels but well up on the nadir of just 9000 lots a year.

Loans to first home buyers in Victoria rose by 5 per cent in the year to June, well ahead of the national 1 per cent, and are likely to rise further when the Albanese government’s expanded home guarantee scheme opens in October. In the same year, the number of loans to investors in Victoria rose by 9 per cent, which is less than the 12 per cent across the nation, but moving in a positive direction.

Victoria’s one-year off-the-plan stamp duty concession, which expires on October 21, may have boosted investor interest, particularly as buyer groups were redirected out of South-East Queensland.

The bigger picture is that Melbourne experienced an exodus of private investors post-COVID, partly because of the surge in land tax, but also because of the capital expenses needed for older properties to meet the mandatory leasing requirements for heating, cooling and other services. The legacy of that exodus is a median dwelling price in Melbourne – $803,194 at the end of August, according to international property data house Cotality – which is lower than Sydney, Brisbane, Perth, Adelaide and Canberra.

In fact, Brisbane’s median dwelling value, at $949,583, is close to $150,000 above the Melbourne figure. New apartments on the Gold Coast come in at around $30,000 per square metre and for Brisbane around $25,000, compared with around $18,000 to $20,000 in Melbourne.

Unless Melbourne’s housing market has undergone a fundamental down-weighting, those relativities are out of whack.

Greville Pabst, chairman of the WBP Group with a 30-year record as an independent property valuer and advisor, tells investors that Melbourne was “grossly undervalued” relative to other capital cities. “Over the past decade, Melbourne house prices have increased by just 41 per cent compared to 103 per cent in Brisbane and 107 in Adelaide,” he writes.

The five-year comparison from Cotality is just as revealing, with the Melbourne median still below its March 2022 peak. Of course, the last five years include some explosive catch-up in the smaller capitals, which is unlikely to be repeated over the next five years.

Cotality Australia research director Tim Lawless expects home values to rise at a more sustainable pace with “demand dampened by affordability constraints, more normal rates of population growth and cautious lending policy”.

“I would be surprised if we saw the monthly rate of change in the national Home Value Index getting anywhere near these earlier cyclical peaks, given how stretched housing affordability has become.”

Over the next three years, Melbourne will also experience more housing supply than other capitals.

Susan Lloyd-Hurwitz, the chairwoman of the National Housing Supply and Affordability Council, told the summit that Victoria would be the only state to meet the new housing target set by the Albanese government. On NHSAC’s last published numbers, that is an extra 300,000 homes – on a gross basis before withdrawals – in the years 2024-25 to 2028-29.

Nevertheless, Pabst says the recent interest rate cuts have brought out the buyers. “We are seeing interstate investors enter the Melbourne market to take advantage of low prices comparatively.”

“There are some headwinds to navigate, but also real opportunities emerging,” he writes. “The land tax changes in Victoria, including the COVID debt levy and vacant land tax expansion, have made holding property more expensive. With rental reforms under way, landlords need to stay across regulatory updates.”

At the same time, “rising unemployment and real wage decline are impacting borrowing capacity and confidence”.

“The positive news is that Melbourne appears to be awakening from a five-year slumber and there is plenty of catch-up to do.”

In summing up her long-term outlook for housing, Barrenjoey chief economist Jo Masters told the summit that young Australians would go “where they can afford a house and get a job”.