What is the outlook for Melbourne?

On occasion I get asked if it’s time to start considering our interstate capitals now that Melbourne has had a recent and fabulous run. Naturally many investors are keen to identify the next booming city to perform for their portfolio. Before they take our beloved city off the shopping list, I bring their attention to a few compelling reasons why Melbourne is still a great city to invest in.

Firstly, Melbourne’s population now sits at above 4 million people with the latest ABS figures indicating that the growth of 79,000 people in the last financial year placed Melbourne as the fastest growing Australian capital city for the ninth year in a row.  Although two thirds of our new residents live in excess of 20km from the CBD, there is definitely growing pressure within the inner suburbs and this is reflected by the sharply increasing house prices, tighter auction clearance rates than the outer urban areas, and rising rents.

This consistently growing population is placing pressure on our roads and freeways adding to congestion every day. In addition, our public transport system is overcrowded and many residents are opting for a more urban lifestyle where work, shopping, cafes and parklands are all within a walk or a tram ride. Not to forget mentioning rising petrol prices; it is not without careful consideration of the impact that long commutes have on household budgets that lead people to a more urban lifestyle also.

To compound the issue of affordability (or lack thereof) in the inner city areas, we are seeing a “NIMBY” (Not In My Backyard) Syndrome whereby owners and residents are limiting redevelopment and essentially blocking further supply of housing. Not only is this forcing house prices up, it is also changing the demographic within these areas to a higher income base for households.

When I speak to investors who are looking for capital growth opportunities, I always consider the average household income level for the area and in particular, any recent trends or changes relating to household incomes.

This element of research forms one of the many elements required, but is certainly a good indicator of potential growth in the short to medium term.

As a second valuable reason to consider investing in Melbourne, I always raise the question of rental demand and vacancy rates. With our city’s ever-increasing population and our relatively slow new housing starts, our vacancy rates are tighter than they have been for decades.  While the news is not so good for tenants, it certainly is good for investors.

Thirdly—our Liberal Government’s proposed Victorian Stamp Duty Concession arrangement seems to be making a difference in the housing market now. We are seeing First Home Buyers standing back in anticipation of the concession coming into effect on July 1st this year. The concession at this stage is potentially offering a 20% discount off the full Stamp Duty Fee—which at a purchase price of $450,000 would see a buyer saving $3794.

It seems ridiculous that buyers could opt out of the market in the interim in order to save this amount, when everybody knows from the FHOG Boost days that this strategy can prove quite costly to buyers. After all, if an exodus of buyers flood the market again on July 1st, it’s likely that prices will be forced up by a magnitude far greater than the 20% discount. And with forecasted increases into this subsidy for First Home Buyers year on year for the next few years, the outlook is interesting for those who currently hold property in Melbourne.

When we consider the stellar growth in population that Melbourne has experienced so far, we can see that the ’gap’ between Melbourne and Sydney’s population figure is closing—and with a gap of now less than 500,000 people (and closing), could Melbourne one day be the largest city of the future?