Published:
March 05, 2020

Australia’s housing market rebound looks set to keep rising into 2020, with experts predicting values to trend higher in 2020 following a 0.9 per cent increase in CoreLogic’s national home value index in January alone.

Nationally, housing values have recovered 6.7 per cent since bottoming out in June 2017, with CoreLogic’s head of research Tim Lawless identifying this as a continuation of the broader recovery trend which began halfway through 2019.

After recording the largest downturn the market has seen in over 40 years, Australian home values are seeing signs of life, recording a year-on-year annualised growth rate of 4.1 per cent since December 2017.

The housing market improvement has been driven by an easing of credit standards alongside the Reserve Bank of Australia (RBA) cutting the cash rate to a historic low of 0.25 per cent.
This low-interest environment will see demand continue to grow throughout 2020, with Domain Economist Trent Wiltshire saying in early March that, “The RBA has been reluctant to cut rates further due to a fear that additional cuts would add fuel to the rapid rebound in Sydney and Melbourne property prices.”

McGrath Chief Executive Geoff Lucas predicts that these continued cuts are, “quite a significant move that will further underpin buyer demand,” as the most recent 25 basis point cut in the cash rate from 0.5 to 0.25 is more significant in percentage terms than a cut from a higher base cash rate.

Melbournes Projected population growth

Rate cutes remain crucial drivers of the housing market and with interest rates remaining low while advertised property stock is likely to rise, CoreLogic predicts dwelling sales to increase further as housing prices are on track to hit all-time highs and overtake their previous records.

Despite improved confidence within the broader market, Lawless predicts a period of undersupply in 2020 relative to the rate of population growth, “From a supply perspective, new housing construction remains in decline… This may lead to undersupply pressures across the new housing sector later this year, providing support for housing prices through the year.”

Amid predictions of affordability issues, CoreLogic reports that approved housing supply fell by 21.4 per cent in trend terms over 2019, influenced largely by a 31.2 per cent decline in apartment dwellings approved for construction.

By mid-2021, buyers can expect the housing market to be in a position of undersupply, reports CoreLogic. Prior to this, consumption of existing residual stock will grow due to Australia’s strong population growth and looming sharp falls in new development approvals for construction.

JLL reports the number of apartments under construction in inner-city regions of Australia’s major capital cities fell 23 per cent over the past year and over 30 per cent from its peak.

While Sydney and Melbourne lead Australia’s market recovery, the strongest growth segment nationally has been the premium offerings of the Melbourne market, which boasts an 11.5 per cent annual value growth.

They’ll continue to grow through the year because we’ll be in the same environment of low, or even lower, interest rates and we’re passing the peaks in units supply.AMP Capital Chief Economist Shane Oliver

Data from the Australian Bureau of Statistics (ABS) points to Melbourne as Australia’s fastest-growing capital city with a growth rate of 2.7 per cent in 2016/17. This particularly high growth rate has led demographer, Bernard Salt, to predict Melbourne’s population will rise beyond five million by 2021 — surpassing Sydney as the most populated capital of Australia by 2030.

Melbourne’s very strong population growth could lead to a housing affordability crisis. With the sharp rise in housing prices already indicating the beginning of an undersupply within the market as more buyers opt for high-rise homes in the inner-city. ABS data shows the population of inner-city Melbourne increasing by 6.8%, the third-largest growth area in Victoria during 2017/18.

“Constrained by tighter lending conditions for both developers and potential purchasers, the development pipeline for inner-city apartments is projected to decrease in the coming years despite the vacancy level falling below 2% and rents growing to all-time highs,” Urban Property Australia (UPA) reports.

Melbournes Annual Apartment Completions and Population

RBA Deputy Governor, Guy Debelle, corroborates this shortfall in supply prediction, “While the increase in supply has finally met the earlier increase in demand, demand will continue to grow given population growth but supply is going to decline. So there is quite likely to be a shortfall again in the foreseeable future.”

The level of new apartments completed in 2019 was the lowest annual total of new supply since 2013 reports UPA, sitting at a 16% decrease in completion rates. While there are several inner-city high-rise developments currently underway, development completions are projected to decline significantly from 2023 onwards.

The AFR reports the tight housing market has resulted in dwelling sales well above their valuation price. With current dwelling values having increased by 8.2 per cent in the past year, bringing them to just 1.2 per cent below their 2017 peak.

As a result of the two opposing market forces, strong population growth and declining dwelling construction pipeline, further increases in housing values and rents in the inner-city precinct, along with the broader metropolitan area, are predicted by the UPA.

At these current growth rates, Melbourne dwellings are predicted to surpass their peak values in the first half of 2020.

Melbourne Fundamentals

Population Growth:

Melbourne is Australia’s fastest-growing capital city, with a growth rate of 2.3 per cent in 2018/19. Net overseas migration was a key component of Melbourne’s population change, accounting for almost ⅔ of the increase. It is projected to be the largest city in Australia, surpassing the population of Sydney by 2031.

Property Market Growth:

Melbourne is one of two Australian capitals leading the housing market recovery. Due to low-interest rates and high population growth, Melbourne dwelling values are projected to grow at a rate of 7 per cent in 2020 — with many dwelling values already above their valuation prices and well on their way to surpass their peak values in the first half of 2020.

Economic Growth:

In 2018/19, Melbourne contributed 39.8 per cent of Australia’s national GDP growth, making it the largest contribution of all regions nationwide. Currently standing at 4 per cent, Melbourne’s GDP growth has been the strongest seen for 15-20 years with Melbourne’s inner-city economy being valued at $92 billion.

Major employment industries:

There has been broad growth across most Melbourne industries, with health care and professional services being the largest contributors. The fastest-growing industries remain as professional, scientific and technical services.

Most Livable City:

In 2017, Melbourne was ranked the world’s most livable city — for its seventh year.

Environmental:

The World Health Organisation states that Melbourne has low air pollution and high air quality. Since 2014, the city has reported less than five days of poor air quality.

Favourite migration destination for Chinese:

Overseas migration accounts for a large proportion of Melbourne’s increasing population, with all these key elements making it an extremely desirable destination during these volatile times. As such, Mandarin speaking is increasing in popularity in Greater Melbourne.

References:

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Melbourne’s Inner City Pipeline Slumps to Six Year Low. (2019). Retrieved 22 March 2020 from https://theurbandeveloper.com/

Melbourne To Witness Apartment Supply Crunch?. (2019). Retrieved 22 March 2020 from
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