Is the Melbourne Property Market Now Cheap?

Melbourne vs. Brisbane: The Ongoing Divergence

Since our last update the biggest takeaway is that the trends that have been persistent in the Melbourne and Brisbane property markets for some time have remained largely consistent – namely Melbourne is now firmly in decline (-2% in the three months ending 31 January, -3.3% in the last year),  Sydney has entered negative growth (-1.4% for the Quarter, +1.2% in the last year) and Brisbane remains positive, albeit at a slower rate (+1.2% for the Quarter and +10.4% in the last year). 

Brisbane’s Outperformance Over Melbourne.

Brisbane has considerably out-performed Melbourne over the last five years. Since 2020 Brisbane property prices have increased >70% whereas Melbourne’s have increased a lousy 7%. In the near-term this trend doesn’t appear to be changing with advertised stock levels (i.e. the number of properties listed for sale), a good lead indicator for short-term property price movements, are above the their long-term trend in Melbourne and below trend in Brisbane. 

Does This Mean Melbourne Is an Investor's Market?

Real estate investment is a long-term game, and short-term price declines don’t define long-term outcomes. As we've previously shared, the eastern seaboard capitals have a long history of reverting back to their long-term price differential between markets. In other words, the out-performance of Brisbane relative to Melbourne and vice versa has happened consistently three times in both markets over the last 40 years (see below).  

 

What Does This Mean for Investors?

Right now, the price differential between the two markets is as high as it’s been for 15 years. So, by a historical standpoint, Melbourne very much looks like an investor buyer's market. That certainly does not mean that in the near term the outperformance of Brisbane relative to Melbourne is about to change. As shown above there have been periods of outperformance that have lasted closed to a decade including in Melbourne between 2009-2018. However statistically it is more likely that over the next 5-10 years that Melbourne should claw back the out-performance gains that have been experienced in Brisbane.  

The Case for Diversification in Property Investment

 

Market timing is difficult - spreading risk is key.

What this data demonstrates is the importance of diversification in investment decision making. It is very difficult to predict the short-medium term performance of any market at any point in time, so having properties diversified across markets helps spread investment risk (and also helps minimise rental and state-based tax risks).

Whilst a small proportion of our clients do have properties spread across markets, in practice it is quite difficult. Not only from a financial standpoint (less than 25% of investors own more than one property), but it’s also practically challenging to purchase and manage properties across several markets, even if with the support of professionals such as LongView.

LongView’s Approach to Property Diversification

This is yet another reason why an increasing number of our clients are complimenting their direct investment properties with our LongView Investment Fund. The fund provides investors an avenue to invest in a diversified pool of high-quality properties, without the purchasing and management challenges. As at the end of January, the fund has invested alongside 60 homeowners across the eastern seaboard capitals in properties collectively worth close to $100m.  

Rental Market: Why Are Rents Falling in Some Cities?

The six-month trend in rental growth has turned negative across both Sydney (-0.4%) and Melbourne (-0.6%), with larger falls across the unit sector. The Brisbane market experienced modest rental growth and retains the lowest vacancy rate, so further price growth could occur.  

Why Is Melbourne’s Rental Market Weakening?

The surprising part is that all of this is occurring against a background of continued population growth (albeit at a lower rate) and lower volumes of rental stock as investors have left the market. So, with more demand (population) and less supply (property investors) one would expect that rents should be going up. So why aren't they?

The Rise of Household Consolidation

Whilst this is true on the supply side, demand is a bit more complicated than just population growth. It’s hard to locate hard data on this the likely cause, which we are experiencing daily in our leasing teams. In our view, it is mainly due to household consolidation – i.e. people living with housemates and/or back with mum and dad. There has also been a modest uptake in home-ownership rates which may be having some modest impact on rental demand.

So, What’s Next for the Rental Market?

For now, it appears the era of rapid rent increases is over. Melbourne’s vacancy rate has risen to 2.2%, much closer to its long-term trend. By contrast, Brisbane remains at 1.2%, where it has been for several years.

We expect that rental prices are now returning to a long-term growth rate of around 2% per year.