Melbourne city apartment outperformance

As we enter a new calendar year, there is plenty of apprehension around our interest rate movement and the overall impact on already-declining capital city property values. However, unlike other periods of interest rate increases this one is different. We’ve come out of a global pandemic, and particularly in Victoria, our regional city capital growth performance has been a stark contrast from our capital city.

The exodus of city dwellers to regional and interstate destinations was palpable.

Charts showed soaring rents, ridiculous monthly capital growth and some of the tightest vacancy rates we’ve experienced, ever.

Yet, when we fast-forward the clock two years, we see a different tale. Our most recent CoreLogic report shows a stunning statistic that few have commented on (surprisingly). Almost one year ago we thought this phenomenal change could occur.

Of our ‘top’ ten rolling 12-month capital growth performers, all but one are in negative territory. Melbourne City LGA is not only in positive territory, though – it’s exhibiting over six per cent growth despite the interest rate impact and first home owner jitters. Considering the median price would typify a first home buyer budget, the growth of this dwelling type suggests that there is more that meets the eye.

There are four key reasons why Melbourne apartments have outperformed in such a stellar way.

1. Many bosses are calling the troops back to the office. Whether it be full time, or a hybrid work place arrangement, the sea-changers don’t particularly enjoy their commutes now that traffic is thicker and the city is thriving.
2. Plenty of owner occupier purchasers have relished the chance to buy close in to the city, and now that our exciting city is once again buzzing, the appeal is quite high.
3. Rents are soaring. Investors know it and plenty have made a decision to capitalise on this. I note, however that this strategy needs to be executed carefully. High rise Owners Corporation fees and any special levies can erode profits from rent and a false economy is an investor’s risk.
4. Students are back in higher numbers than pre-pandemic.

It is mainly points 1, 2 and 4 that are having the greatest impact on the value growth in our capital city LGA. Investor figures are broadly low compared to previous years, although anecdotally agents are reporting investor purchase activity in this LGA also.

We have certainly seen a ‘return to the city’, particularly from those who were previously based more than a 90 minute commute from the CBD. Some have returned from regional rental properties, while others have sold their COVID escape and returned. It is the dual-property purchasers whom we have been more acquainted with as clients though. For many, the option to have a ‘city pad’ and a country/coastal home has been their vote.

Buyers can still purchase a sub-$600,000 two bedroom dwelling in the city and for many, this is compelling.

Some consider a backup plan such as private rental, Air BnB and ‘share house’ use, while others are happy to use it exclusively, part-time. It’s of little wonder that this segment of the market has performed in contrast to other unit LGA’s in our capital city.

It is the international student figures that could now exacerbate the situation. While university entrance figures are yet to be released, student visa approvals are a telling sign of what’s to come.

According to an article in the Sydney Morning Herald, (Paul Sakkal, Jan 7 2023);

“Education authorities say Chinese student demand to stay and learn in Australia shot up as a direct result of the calmed relationship between the two nations’ governments, but Australia’s largest accommodation provider says it is running out of beds in major cities.”

“Overall student visa applications were 40 per cent higher in the second half of 2022 than during the same period in 2019, before the pandemic dented the lucrative export sector that added $40 billion to the Australian economy.”

“Enrolment data for 2023 is not yet available, but industry leaders who study the Chinese market – International Education Association of Australia chief executive Phil Honeywood and Scape student accommodation founder Craig Carracher – said renewed dialogue with China’s leaders had spurred dormant interest.”

“Honeywood said several education agencies in China reported “massive” rises in inquiries from their students after Prime Minister Anthony Albanese met the Chinese president in Bali in November.”

Enrolment data for 2023 is not yet available, but industry leaders who study the Chinese market – International Education Association of Australia chief executive Phil Honeywood and Scape student accommodation founder Craig Carracher – said renewed dialogue with China’s leaders had spurred dormant interest.

“There were about 135,000 student visa applications from all countries in the second half of last year, compared to 97,000 in the corresponding period of 2019.”

In addition to student arrivals, broader migration increases will also put further pressure on our already tight city rental market. This will no doubt create demand for city apartment acquisitions.

According to the Guardian, (Elias Visontay, 5 Jan 2023);

“Despite losing some ground to Sydney because of an exodus of citizens during the pandemic, Melbourne is still on track to become Australia’s most populous city, as it once again becomes the destination of choice for overseas and internal migrants.”

Melbourne has long attracted a larger share of net overseas migration compared to Sydney, in large part due to past policies from the Victorian government, says Prof Nick Parr, a demographer at Macquarie University.

“This has long been a factor. Victorian governments actively sought to encourage international migration to their state,” Parr said.

“Melbourne has more liberal requirements for skilled migrants looking to move permanently, as well as a dynamic related to international students moving temporarily, Parr said.”

“Net internal migration data even showed there has consistently been a distinctive group of people moving from Sydney to Melbourne.”

“Sydneysiders moving to Melbourne are attracted to the cheaper house prices and the better cost of living, Parr said. “There’s an affordability factor.””

“For Australians moving to Melbourne from elsewhere, the Victorian capital’s “economic and job opportunities are an important part of the picture” according to Parr.”

“Additionally, demographers have noticed a trend of recent international migrants who first moved to Sydney later moving to Melbourne. This group accounts for about half of interstate flows from Sydney to Melbourne, and is largely migrants from south Asian countries such as India and Sri Lanka, Parr said.”

This chart below shows the significant spike in migration activity in Australia when contrasted to pre-pandemic levels.

Our own inner-city purchase activity spiked in 2022. The number of city acquisitions we assisted with was greater than the sum of the previous six years.

While there is a great number of compromised and expensive buildings in our CBD, there are also some superbly run, well-located gems. Inner-city apartment purchases need very careful due diligence, particularly in relation to owners corporation activity and pending issues. But when executed well, a slice of the city can be a wonderful abode.