Forget Sydney — Melbourne Property Market Presents the Best Opportunity for Investors

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Sydney has a knack of breaking new ground when it comes to the property market. Not a day goes by without the harbour city raising the benchmark. Sydney’s latest milestone might be its most impressive yet.

Median house prices in Sydney have broken the $1 million barrier, according to Domain Group. What’s striking is that this figure easily tops median prices in London. Median house prices in the UK capital ‘only’ fetch $900,000 by comparison. That’s some scalp to claim.

It goes without saying that property investors love Sydney. That’s self-evident.

What’s less clear is why Sydney outpaces Melbourne to the degree it does. When will Melbourne win over buyers in the way Sydney has?

It’s hard to tell if it ever will. But one thing’s for certain. There’s never been a better time to invest in Melbourne than now.

Affordability versus price growth

Melbourne currently represents the best value for money in the market.

Compared with Sydney, house prices are high, but affordable. At the same time, growth rates are lower than in Sydney, but attractive nonetheless. These are important points of difference. Sydney is struggling with affordability despite its rapid ascent in property values. Melbourne, on the other hand, is growing too, but is far more affordable at its entry point.

What Melbourne brings to the table is affordability combined with strong growth. As far as incentives go, it doesn’t get better than that. It’s the perfect combination of pull factors for investors and first time home buyers alike.

Let’s compare the yearlong trends across the two markets.

In the year to June, median house prices in Sydney rose by 22.9%. That’s the quickest rate of annual growth since the late 1980s. It also tops the price boom seen in the early 2000s.

It’s also well above the current national average growth rate of 11.7%. In fact, Sydney is by far the biggest contributor to the growth in national median house prices. Without it, there’d be no concerns that real estate is growing out of control.

In contrast, median house prices in Melbourne grew by 10.3% in the same period. The typical house in Melbourne now costs $668,030. That’s some $332,000 less than what you’d pay in Sydney.

It’s the same story with unit prices too.

The median price of units in Sydney is now $656,078. That’s a rise of 13.9% in the year to June. Melbourne unit prices grew by 4.5% in contrast, and are now worth $443,549.

As you can see, Sydney outdoes Melbourne on both fronts. But it’s for this reason that Melbourne presents such a unique opportunity. That’s as true for investors as it is for owner-occupiers.

At $668,000 and $443,000, house and unit prices are relatively affordable in Melbourne. Affordable compared to Sydney, anyway. Melbourne still has the second and third most expensive national house and unit prices respectively.

It’s foolish to try and predict at which point Sydney prices will hit a ceiling. But if we use Sydney as the benchmark, Melbourne still has lots of room to grow.

Both houses and units are growing by roughly 10% less than in Sydney annually. But the growth rates remain impressive nonetheless, by most standards. It’s hard to fault any market in which median dwelling prices grow by a combined 10% in the space of a year.

This is what matters to homebuyers. Owner-occupiers want to see affordable house prices. Melbourne has that. Investors are looking for signs that the market is still growing. Melbourne has that too, and is second only to Sydney nationally.

The cost-benefit of investing in Melbourne is obvious. The Victorian capital should, if it’s not already, attract more attention from investors.

Why Melbourne’s house prices are lower than in Sydney

Perhaps the biggest reason why prices in Melbourne are flatter than Sydney’s comes down to housing supply. Sydney is struggling with the issue of housing undersupply. Demand for properties currently outstrips the available supply on the market. That has a tendency to push prices in an upward direction.

Melbourne investors aren’t as lucky. They can’t rely on this dearth of housing supply to push prices up as quickly. But there is a silver lining to that as well.

By restraining Melbourne’s potential price growth, it opens up the door for affordable entry into the market. That’s true for owner-occupiers as it is for investors. In the long run, that might not be the best outcome for investors. Unless Melbourne’s housing supply suffers a shortage, it’s not likely prices that will grow quickly.

Sydney’s price growth, on the other hand, presents challenges for buyers. Non-homeowners in particular have little hope in entering the market with such prohibitive prices. The dream of owning a home is out of reach for many Sydney households.

Who can we trust?

It’s worth brining up that Domain’s data is as credible as any other source available to us.

There’s been a lot of conflicting data in recent months about national house price trends. Unfortunately, there’s a lot of inconsistency between the sources. In fact, these figures can often paint an entirely different picture of the property market.

Take the CoreLogic RP data from a month ago for instance. Their data says that median house prices in Sydney are currently closer to $900,000. That’s still in the ballpark of astronomical house prices. But it’s $100,000 less than Domain’s figures indicate.

That’s a significant difference if we’re assessing housing affordability. And it can wildly alter the perception of the market among investors.

But that’s not even the most glaring discrepancy between the sources. The Australian Bureau of Statistics suggests Sydney median house prices are actually $786,000. That was the figure from its most recent data in March. At over $250,000 less than Domain, that’s a massive point of difference.

What’s interesting though is that this difference isn’t seen with unit prices. Domain’s data is more or less in line with CoreLogic’s on this front, at $650,000 apiece. But that only casts further doubt on the credibility of median house prices.

So what does all this mean for Melbourne? Well, it can only be a good thing in my view.

The inconsistency in the figures doesn’t matter for Melbourne. That’s because its price growth trends alongside Sydney’s, regardless of what source we use.

The latest Domain figures will set the tone for future market expectations. Any statistics that overstate the actual growth in Sydney property prices can only benefit Melbourne.

What will stick out from Domain’s data? If you’re a shrew investor, one thing stands out. Sydney and Melbourne are both growing quickly, but only the latter remains affordable.

Mat Spasic,

Contributor, The Daily Reckoning

 

PS: The Aussie property market is still growing. It may be a two-speed market, but every city is still growing, minus Perth. The Daily Reckoning’s property expert, Phillip J. Anderson, is bullish on the market’s future.

Phil says that the national housing market is only set to continue growing. He says that Aussie real estate will boom for the next decade.

Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He correctly predicted the 2008 housing market crash. He also went against the trend in 2009, saying that house prices would go on to boom this decade.

He was right on both accounts.

In his latest free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.

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