A brief history of Melbourne’s economic performance in the past two decades reminds us of how the fortunes of cities invariably ebb and flow given the global competitiveness for investment. Contrast the prosperity of the 2000s with the early to mid 1990s when Victoria bore the brunt of Australia’s macro-economic reforms and then had to swallow the bitter medicine of micro-economic and political reforms.
Property markets are inherently linked to the fortunes of their host cities. We witnessed this throughout the 2000s when Melbourne’s attractiveness as a city became manifest across its residential property markets (established housing, apartments and greenfield land) which were all national out-performers. Spurts of abnormally strong price growth and construction activity at both the beginning and end of the 2000s characterised the Melbourne story.
Just as the fortune of a city changes over time, property markets are also subject to cyclicality. All too often, as happened to some degree in the late 2000s, property markets get caught up in the ‘irrational exuberance’ of the moment and dismiss cyclicality.
The most obvious example of this exuberance has been the new apartment market. Astoundingly, there were more than 39,500 apartments contained in new projects released for sale across Melbourne in 2009 to 2011, with over 18,000 released in 2010 alone. This was more than double the quantum of 19,400 apartments offered during the previous market peak in 2001 to 2003. This unprecedented wave of new supply is planned to be delivered primarily between 2012 to 2014 which will coincide with population growth having already returned to trend levels of 65,000 – 70,000 per annum. Whilst population growth will be high by historic standards, it will be well short of the 93,000 increase in population achieved in 2008 to 2009 that placed Melbourne at the top of the priority list for both overseas and interstate investors.
Given that Melbourne’s status as ‘Golden Child’ is now in question, what are the implications for our housing markets? The importance of this question is heightened by the vulnerable position that all property markets find themselves in because of the much darker clouds affecting the global economy and financial markets.
Melbourne’s housing markets are already experiencing an inevitable adjustment from their recent outperformance based on a range of indicators. Undeniably, values have already fallen across the established sector, albeit still modest and most pronounced in upper end segments, with vacancy rates also rising. New apartments are harder to sell and off-the-plan prices have stopped escalating. Sales in greenfield estates have slumped by 42% over 2011 implying that Melbourne’s national market share fell from 43% in the first quarter of 2010 to just 21% by the fourth quarter of 2011 which is, in part, a consequence of its median lot price reaching over $220,000 and having increased by 15% over that same period.
Based on economic principles alone, it’s anticipated that further adjustments in residential property values will occur over the short term as uncertainties persist which will cause markets to re-calibrate their expectations of what ‘normal’ conditions should really be.
For Melbourne, these price adjustments are symptomatic of the reality that our city has now lost one of its previously enduring competitive advantages over other major cities being its relative affordability of housing, especially greenfield lots. Perhaps this decline in affordability was partly due to Melbourne becoming a victim of its own success as well as the chronic inability of other Australian cities to facilitate investment in housing markets through the delivery of new supply because of poor planning systems.
Melbourne’s planning system, despite its shortcomings, has delivered a competitive advantage to the city with the dividend being unprecedented levels of investment into the new apartment and greenfield land markets by interstate, and lately, international developers through the 2000s.
Melbourne reinvented itself in the early 1990s from a city of three million to four million by embracing opportunities available in its then declining centre that have now delivered a densely populated residential and commercial core across the CBD, Southbank, St Kilda Road and Docklands.
Undeniably, Melbourne will remain a robust and dynamic city with a population of five million residents within the next 15 to 20 years. However, Melbourne will increasingly face challenges to retain its economic competitiveness and liveability which must be addressed by investment in city-shaping transport infrastructure.
Despite the good fortune through the 2000s, in part a dividend from past investments, it’s inexcusable that there has been an element of complacency in making investments now for the city’s future wellbeing.
In 2012, it’s now time again for the Victorian Government to demonstrate decisive leadership in defining, or supporting, a strategic vision to underpin enduring competitive advantages for Melbourne and to ensure that Australia’s ‘Golden Child’ matures to become a vibrant, prosperous and productive global city for its current and future citizens.
Sam Nathan & Robert Papaleo
Charter Keck Cramer