The latest happenings in the Melbourne property market. For our Essays and The Secret Agent Report, see our Research page.

Category Archives For: Property Investment

Chronic Shortage of Supply – Inner City Locations

Stock levels across the country and state are up and this has a large impact on the law of supply and demand.

Times like the present are great at identifying areas prone to high supply during a weaker market.  Often that’s a good sign to stay away from investing into that area.

We do most of our acquisitions in Melbourne’s inner city suburbs.  The demographics have much to do with this shortage and the styles of property.

It doesn’t look like this is going to change anytime soon.

Private Debt Levels and Prices

Steve Keen is somewhat of a pessimistic economist who has actually produced some terrific,  if not controversial commentary on the property market.

If you have a spare 5 minutes,  I recommend you go and read his essay on private debt and how that influences asset prices including property.

An interesting piece.

What Happened to the tight Rental Market?

The most recent figures released by the REIV suggests that presently a 3.1% vacancy rate is present in the Melbourne market place at the moment.

Looking closer into the city centre it’s currently reported that 3.9% of property 0 – 4km of the CBD is vacant while 3.6% of property sitting within 4 – 10km of the CBD is also vacant.

The figures are collected from Real Estate Companies by way of survey  and the proportion of vacant property sitting on their rent rolls.

This is a rather profound shift and it’s one of the highest vacancy rates I’ve seen for some time.  It’s important to note that this rate is for a given month.  However if we look at the data below then we see some interesting things:

June 2009

0 – 4km of CBD : 1.2%

4 – 10km of CBD : 1.5%

June 2010

0 – 4km of CBD : 0.9%

4 – 10km of CBD : 1.3%

Present:  June 2011

0 – 4km of CBD :  3.9%

4 – 10km of CBD : 3.6%

So what’s the cause?

This time of year is generally a tougher slog for the rental market, however it doesn’t help explain the present statistics.  In fact the past few months of data shows some real concerns for landlords on the horizon.

My initial thoughts are a combination of factors:

  • 1.  We’ve overbuilt

We see plenty about the fact that we’re under supplied when it comes to housing.  I think in past times gone by,  this might have been the case.  However I think we are in a different situation now.  We’ve overbuilt in the past few years,  and we’ve overbuilt the wrong type of accommodation.

  • 2.  Population growth is slowing

Melbourne’s population has started to slow,  yet new projects and developments have only grown.

  • 3.  Prices has stagnated and fallen in many instances

As prices have softened,  this has led many owners forced to rent their property out rather than sell it.

  • 4.  International student levels have dropped off

International students aren’t coming in the same numbers as previous years.  High Australian dollar plus other reasons.

  • 5.  Staying at home longer + Sharing of space

A shift of youngsters staying home longer is evident plus those seeking to share accommodation.

  • 6.  No one wants to live in a box

Too much of what’s been built plus what’s going through construction at present,  is not the type of accommodation people want to live in.  People live in ‘a box’ when the market is so tight that they don’t have a choice.  Bring choice into the market and this stock gets absolutely left behind.

Now we are still seeing strong demand for the good stock, and I don’t think this will change.  Yet some big shifts are happening is this section of the market and it’s looking a little better for renters rather than landlords.

The push-pull of the rental market; what’s happening with rents?

An expectation of rents increasing in a flat / dropping market property market are always a strong viewpoint held by many.

While a property market suffering from confidence issues does push more prospective buyers to renting instead,  it also pushes many owners to rent out their property rather than sell.  Hence the push-pull effect of softening conditions on the rental market.

We also have a number of projects due for completion in and around the city areas.  In my experience a number have purchased with the viewpoint of a quick ‘flip’ in mind.  This will also push more onto the rental market.

So the great past rental shortage might not be as severe as we’ve experienced in Melbourne for the next few years.

Property sales down, vacancy rate on the rise

As property sales slow and the rental vacancy rate begins to creep up, it begs the question, where are people living?

There is no doubt we cannot generalise and say property sales are down and vacancy rates have increased everywhere – there is a huge contrast between the inner and outer city markets, still overall, if this is the case it leads us to to wonder whether or not we do have issue with housing shortage.

It would not be surprising if share accommodation figures have increased and many people have opted to rent a room, rather than a whole property. A very viable option for both parties and becoming increasingly common, especially with the flood of new share house websites.

I think we’ll see a pretty an increase in the number of people seeking and offering share house accommodation over coming years. The idea combats a number of issues including housing shortage and the cost of renting.

Melbourne’s population boom

The outer suburbs of Melbourne are growing rapidly – faster than any other area in Australia. Our population is now coming close to that of Sydney’s. In the past nine years Melbourne has gained 605,000 new residents.

How will our property market cope with this kind of growth?

Much of this growth is occurring in the outer suburbs, however the inner city has also seen a big hike in numbers, with the inner city population growing 30% in the last 9 years. With new development limited in inner city areas and demand for housing so high, new comers and low income earners are forced to live far out. Without sufficient housing supply, property prices will see a rise.

New development is on the rise, with the number of new building approvals up, this should help to ease some of the demand. It’s true no one wants to live next door to the nine story apartment building, yet new development is needed everywhere, inner and outer suburbs to cope with Melbourne’s population growth and housing needs.

Property Maintenance and Period Property

There are many advantages to investing your money into period property, aside from the obvious charm, the capital growth potential is a huge factor – period property tends to hold value better than newer property. Period property cannot be rebuilt or replicated and therefore capital growth levels are normally high.

However with this, comes a lot of up keep to ensure your property is in good knick. Its fair to say period property does present its fair share of maintenance issues. It’s important to keep an eye out for certain issues –

•    Cracks – are often just what goes with a period property and do not always indicate serious issues. It’s important to distinguish between old movement and major structural flaws.

•    Dampness – again does not always indicate a serious problem. But should be monitored and rectified accordingly. In some cases dampness can have serious effects on property.

•    Floor issues – where floors require attention to the stump area. This will often result in bounce in the floor and stumps below ground could show large movement or erosion,

•    Old and inadequate wiring – ensure wiring is up to regulation. This is also important to ensure safety of tenants.

•    Pests – keep an eye out for mice and termites etc. Termites especially can be damaging to the structure of a property.

A whole raft of other issues can also present themselves with period property.  It’s important to get places carefully checked over before pursuing.  Period property are not ‘perfect’.  This is part of the attraction as well as the flaw.

Good Rents vs Good Tenants

Often landlords will push for higher rents, regardless of the tenant quality. In the end a great tenant will always be a better investment than $10 or $20 more in rent per week.

When your investment is marketed at the right price level, you will have floods of tenants to choose from, whereas if your property is pitched too high you will often only have few applicants to choose from and often tenant quality diminishes.

Your tenant will live in and take care of your property, often for a period of 12 months or more. It would seem common sense to have an A grade tenant occupy your property. This makes for an easy, stress free investment.

Focus on securing high quality tenants, over higher rent. Focusing too much on a high rent may see you paying for that extra rent at the end of the tenancy or waiting out over long vacancy periods.

Past investment review – how we would have gone

Back in June 2008,  we reviewed a property at 2/449 St Kilda Road. We didn’t buy this property which was a shame. Yet I wanted to fast forward and try and understand how this property might have performed in today’s market.

The property is part of the Kio Ora building,  an Art Deco building on St Kilda Road that benefits from close proximity to everything.

I’ve listed below some points on the positives of this property for an investment:

• Scarcity :  How many Art Deco apartments are located within walking distance of Melbourne’s centre?  Very few.  Also the period appeal of an era never to be re built also adds a certain scarcity factor.
• Spacious and Ground Floor :  This gives the property the widest possible market appeal in my opinion.  It suits baby boomers,  young professionals and investors.  Also the older nature allows for bigger interior spaces than most developers will offer.
• Lifestyle and Location :  A tram or a short walk to wherever you want to go.   That says it all.  These factors also allows the property to be very flexible as an investment.  Long term,  short term and furnished rental are all options for an investor who wishes to maximize returns.  This is literally right in town.
• Special Attributes : Balcony overlooking garden, natural light, carport and genuine fireplaces are those extras which help separate this asset from the next.  It appeals strongly to the owner occupier market.

The price paid then was $485,000.  This was excellent value and a great purchase.

The last sale in the block was unit 29.  In my opinion not in the same league yet sold for $675,000 at the end of 2009.   My thoughts on value now would now be $710,000 – $730,000.  Maybe a touch more under intense competition.

A very healthy return indeed.

Leasing out furnished property

Investing in the furnished property market can provide great reward when done right – the right property, right location, right furnishings etc. However along with great reward comes hard work, more so than leasing out unfurnished property.

Here’s some tips for leasing out furnished property;

  • Take a detailed furniture inventory – noting type and condition of all furniture throughout the property
  • Take video footage of the property – ensuring all rooms and furniture are captured
  • Take photos of property and furniture – noting any current maintenance issues
  • Pay very close attention to the condition report – be very thorough when noting the condition of the property
  • Ensure you have copies on any manuals required for the property
  • Invest in a good cleaning team and linen cleaning facility – when furnished property these will be used often as leases are generally short