Calmer Waters Ahead

The Sunday Age

Sunday September 7, 2008

Karin Derkley

It's been a tough year at the top end of the market, but the sun has been shining in the west and the blue chips will hold value in the long term, writes Karin Derkley.

FORGET the mini-boom of 2007, when Melbourne's median property price grew by more than 20% for the calendar year and 12.8% just in the December quarter, and auction clearance rates exceeded 80%. That was an aberration, says the REIV, the "peak in a very short-term cycle''. With two back-to-back quarters of subdued growth since then, we're back to what the REIV calls a sustainable market.

Median house prices were down 8.4% in the March quarter this year, and only partly recovered with a 4.9% gain in the June quarter. Which makes the seemingly very healthy 15.3% growth in the median house price to $448,000 in the year to July 2008 reflect the strength of the market in late 2007 rather than that of this year's more sluggish market.

Last year, the biggest gains were in the leafy eastern suburbs, where buyers flush from the sharemarket fought to pay well above the list price. That's all over now. This year, with those paper profits erased by the sharemarket downturn, and the pain of an economy in contraction, the froth and bubble at the top has subsided, and buyers who last year felt entitled to upgrade to a bigger house with a pool in Toorak are sitting tight, perhaps thinking about renovating instead. "A lot of wealth has been wiped out this year at that top end and people are having to tighten their belts,'' says the REIV's president Enzo Raimondo.

In Kew, for example, house prices fell 6.9% for the June quarter. In Toorak they were down 14.6%, although up for the year.

Buyers' advocate Mal James, who acts for clients looking for properties with price tags of $1million to $3million, has noticed a distinct cooling off in this sector. "Properties in this price range are just not selling as fast,'' he says, "and some are not selling at all. The people who last year were doing well on the stockmarket are not there, and those that are looking are sitting back and waiting for the right price.''

When prices aren't dropping it's because the owners don't need to sell, Mr James says, and are instead quietly withdrawing their properties once it's clear they won't fetch the hoped-for price. To Mr James that makes it a great time for astute buyers. "Down markets are a great time to trade up smartly,'' he says, "because the gap between a good property and a great property is a lot smaller. This is a time when the patient, long-term property players make very good money by upgrading at a very good price.''

Taking into account that longer-term growth in the inner east and south-eastern suburbs could make the area a wise choice for buyers, REIV figures show that the top 10 suburbs in Melbourne for median price growth over the past five years are all in the dress circle - from Kew, through Armadale and around to Hampton, where prices have risen, on average, more than 13% a year since 2003, a period that included the property market slump of 2003 to 2005.

These suburbs are the blue chips of Melbourne's housing market, Mr Raimondo says. "They might get dragged down during tougher markets, but long term they will show strong growth because they are where people want to live, but land in these suburbs is scarce and properties there are tightly held.''

However, in the past year, the bigger story has not been in the leafy eastern suburbs but in an area many eastern suburbs' residents may barely realise exists. Yarraville, in the inner west, has been on the radar for several years, but in the past year interest has spread to more westerly suburbs such as Braybrook, Maidstone and Altona North where median prices have risen 41.7%, 38% and 37% respectively. Those rises may come off a low base - Braybrook's median is still $350,000 even after the latest price hike, while Maidstone's is $435,000 - but, says Mr Raimondo, these suburbs have the ingredients for longer-term appeal because of their proximity to the CBD.

"In the past, buyers have not been able to see past the concentration of heavy industry in these areas, but the increasing cost of petrol is making them very attractive,'' Mr Raimondo says. "And prices in these suburbs are at or even lower than the median for all of Melbourne.''

That's made such suburbs hugely attractive for buyers on limited budgets. It is still possible to buy a reasonably sized house on a reasonably sized block in Maidstone for less than $400,000, whereas prices in Yarraville and Seddon are pushing $540,000. "It's the ripple effect,'' says Mr Raimondo, of the natural progression of buyers to suburbs adjoining those that become priced beyond their budgets.

With the heat out of the top end of the market, the coastal and country boom of the early part of the decade continues to be subdued. Transaction numbers in many towns, such as Balnarring Beach, Red Hill and St Andrews have dropped below double figures and prices have fallen in some areas. On the Mornington Peninsula, the lower-end holiday and retirement destinations of Dromana and Safety Beach both lost ground, with median house prices falling 7.1% and 2.4% respectively.

But further down the peninsula trading was brisker. House prices in Blairgowrie rose nearly 26% in the past year to $529,000, based on 138 sales, and in nearby Tootgarook by 30% to $336,000, based on 64 sales. At the top end Sorrento and Portsea continued as stalwarts, rising 26.5% to $835,000 (on 110 sales) and 27% to $1.4 million (43 sales) respectively last year.

The REIV's star rating system attempts to predict which suburbs are most likely to be a safe bet in the short to medium term, both for home owners because it's nice to know you're buying into an appreciating area, and for investors for whom capital gain is paramount.

David Hall, the REIV's research officer, says the star ratings are derived "by looking at historical performance and factors that will contribute to future growth such as the performance of neighbouring areas, new infrastructure and so forth''.

The rankings, from five stars down to one, don't guarantee a positive performance, Mr Hall says. And there may well be surprises, with the price of an inner-west suburb such as Braybrook surging in the short term.

However the market performs in the next few years, Mr Hall says, the expectation is that the four and five-star suburbs are likely to show most growth and substantially outperform one and two-star areas in the long term.

Almost without exception suburbs that make it into the top five-star category for house price growth are in the inner ring of Melbourne. That ring includes northern and inner-west suburbs such as Brunswick, and Northcote, Flemington and Kensington that have now been elevated into the blue-chip circle along with Mont Albert, Sandringham and Ivanhoe.

Mr Raimondo says the inner circle provides the best prospects for investors as well as owner-occupiers. "The biggest influence on where to buy property at the moment is the cost of petrol - people are naturally gravitating towards areas that are close to public transport, and other infrastructure. By nature these tend to be the inner suburbs.''

This is particularly important for those looking for investment opportunities, Mr Raimondo says.

Investors are taking their time to dip their toes back in after successive interest rate rises and a credit crunch had a direct effect on their ability to borrow money. But with rental vacancy rates at all-time lows and not likely to ease soon, the opportunities are huge, Mr Raimondo says.

The last time there was a glut in supply was 2003, he says and many developments have been shelved since then.

The median price growth of units was more subdued than houses, but still a respectable 13.9% rise overall.

The biggest growth areas for the past 12 months were in places including Dromana and Kooyong (both 62.4%) as well as the outer north-eastern suburb of Diamond Creek (46.1%).

In the longer term the stalwarts for unit price growth are bayside Albert Park, and the outer-eastern suburb of Ashburton, where prices for units have grown 17.5% and 14.2% a year respectively for the past five years.

Best prospects for long-term price growth in units, according to the REIV's star ratings, are the inner bayside suburbs of Elwood, Port Melbourne, St Kilda and St Kilda West, along with Windsor in the inner south.

Mr Raimondo also recommends townhouses and units in the middle suburbs. "There is a lot of demand from couples and small families for more affordable options in middle family-friendly suburbs,'' he says. Examples include Elsternwick, where unit prices rose by 26.7% in the past 12 months, Malvern East (26.3%), Hampton (18.2%) and Armadale (26.8%).

© 2008 The Sunday Age

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