Prospects for Melbourne property in 2013 are grim. I expect Melbourne to be the weakest of the capital markets market next year. But fortunately there’s more to Victoria than Melbourne.
Melbourne has two problems: oversupply and a state government that’s lost the plot.
Melbourne already has too many apartments in its inner-city market, but developers are intent on building more, and the state government seems hell-bent on helping them.
It also has too much residential stock for sale in the outer suburbs – and with the same problem of developers and politicians seeking to add to the surplus.
It’s a bad sign for any market when developers offer generous incentives to attract buyers. Rebates, discounts, free holidays, free cars – if developers can’t sell products without bribes, the market’s in trouble.
It’s an even worse sign when developers are running seminars in Asia, with financiers and solicitors in attendance to sign up foreign investors on the spot, to try to flog their product.
Developers like Central Equity, one of the big builders of high-rise units in central Melbourne, are staging events they like to call “Australian property expos” in Asian cities like Singapore.
Why are they up there? Because there is little local demand for their apartments.
The distortions created by incentives and overseas marketing are making its difficult to valuers to determine the true worth of apartments and house-and-land packages. Financiers are becoming increasingly suspicious of contract prices.
Lots of contracts are falling over. One research source suggests a third of residential land purchases in Melbourne’s outer suburbs are failing because valuations are not supporting contract prices.
This is a market in serious trouble.
But it’s likely to get worse. Premier Ted Baillieu and his government are behaving as if they believe there’s a shortage.
Like developers, government representatives are up in Asia courting investors to facilitate more high-rise development in Docklands and the new urban renewal precinct at Fishermans Bend.
Baillieu recently launched a new suburb in Wyndham City in Melbourne’s south-west, the region with the biggest oversupply problem in the mortgage belt. State government land will be carved up into another 7,000 home sites.
Clearly, Baillieu is listening to the wrong people. It feels like policy is being driven by mates and political donors who happen to be developers.
Thank goodness for the regions. While the Melbourne market is imploding, there are good prospects for investors beyond the capital city.
East Gippsland is an under-rated market. Towns like Sale, Bairnsdale and Paynesville have prospects, helped by the region’s links to Bass Strait resources development and to the Gippsland Lakes. BHP Billiton and ExxonMobil are spending $1 billion building gas infrastructure at Longford.
Geelong continues to present a strong and affordable alternative to Melbourne.
So while Melbourne’s short-term future is not bright, investors will find plenty of attractive options in the regions.
For more, watch Terry's free webinar Regions vs capital cities: Where to invest in 2013