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Should you still be targeting Melbourne for long-term rent roll growth?

19 March 2018 Sasha Karen
Melbourne for long-term rent roll growth

Savvy BDMs understand that sustainable rent rolls often depend on investors holding property for the long term. Melbourne is in the spotlight this time, with some experts claiming that the world’s most liveable city still has high potential for long-term growth, but others aren’t so sure.

According to RiskWise Property Review, Melbourne has a lot to offer investors looking to invest for the long haul — healthy auction results, the highest population growth figures in Australia and positive economic growth — claiming that the capital city market is “far less risky” than others.

The auction rates, RiskWise noted, remained solid this year despite the seasonal change and the end of the housing boom, and the capital city also experienced strong population growth and migration from both interstate and overseas, bolstering demand in the middle ring and the western suburbs.

Despite RiskWise CEO Doron Peleg admitting that the residential market had experienced a cooling and the unit market still has high levels of risk, Melbourne’s low-medium housing risk meant good things for long-term capital growth.

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“The Melbourne property market is being looked at unfavourably by many so-called experts and this is having a dramatic impact on ‘mum and dad investors’ as well as policymakers,” Mr Peleg said.

“However, our research has shown that, in fact, Melbourne is a good option for investors, particularly the housing market in affordable areas, such as the western suburbs.

“It seems the perception appears to be one of negativity due to people making generalisations about the market, overreacting to slight fluctuations and taking a shortsighted approach instead of a long-term view.”

Mr Peleg claimed that pundits who see price weakness this year in the Melbourne market “fail to acknowledge there are many different markets, all with their own idiosyncrasies”.

“They also fail to distinguish between houses and units, rather using the term ‘dwelling’ for an all-encompassing view,” the CEO said.

“It also doesn’t help that some commentators are suggesting there will be ‘5 to 10 per cent price falls in 2018’. This just causes an overreaction by investors who then become afraid to enter the market.

“The likelihood that houses in Melbourne will experience a significant correction is low.”

Cameron Kusher, head of research for Australia at CoreLogic, said that, in the short term, Melbourne has experienced the second-highest rate of value growth, with only Sydney in front, and agreed with Mr Peleg’s claims of a strong economy and population growth.

However, dismissing the slowing value growth is something that should not be overlooked.

“Over recent times, value growth in Melbourne has slowed, with some monthly falls which are likely to be linked to stretched housing affordability and a pull-back in investor demand,” Mr Kusher told Smart Property Investment.

“These inhibiting factors are likely to persist this year, while demand is likely to continue to be driven by strong rates of population growth. Overall, we expect that value growth will be much slower over 2018, with values fairly flat.”

Looking to the longer term, Mr Kusher said that while values are likely to trend higher with strong demand due to population growth, the market may not be all it appears to be.

“We anticipate that growth over the coming years will be much more moderate than it has been [in] recent years, especially once mortgage rates start to move higher from their current low levels,” the head researcher warned.

Simon Pressley, managing director of Propertyology, agreed with Mr Kusher’s claims.

“Melbourne hasn’t had any months of price declines, but the rates of growth are significantly less than what they saw for those four strong years, and we think we’re probably only a couple of months away before we hear the Domains and CoreLogics of the world saying, ‘Oh, there was a small fall in Melbourne property prices last month,’” Mr Pressley told Smart Property Investment.

Should you still be targeting Melbourne for long-term rent roll growth?
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