Strata vs Land?

As we approach the finish line for this financial year, we reflect on the Victorian property market performance over the last twelve months, the significant change which our markets have exhibited, and the regulator move which created this change.

Earlier in 2015 Australia's Prudential Regulator (APRA) changed capitalisation requirements across our local lenders in an effort to underpin the stability of the Australian banking industry. In basic terms, the lenders were instructed to reduce their exposure to investment lending, and this took place via three main forms;

- Lending rates were hiked up for investment loans

- Loan to Value Ratios (LVRs) were decreased substantially, and

- Scrutiny increased in relation to the various types of securities (properties) which banks were prepared to lend against.

Of all of these restrictions, it became apparent that the increased interest rates were the least of investors' problems. Lower LVRs meant that investors had to contribute more of their equity or savings to purchase just one property.

For now, the days of higher leveraging and spreading equity thinner to buy more property is a thing of the past.

One significant effect of these changes has been quite damaging to a certain segment of our Victorian market; caused by higher scrutiny around more 'risky' securities. While many property types are considered risky by the lenders, our oversupply of high-rise apartments, combined with general negativity about limited capital growth of inner-city apartments have given apartments a bit of a stigma; and this has been noticeable at the coal face.

To dampen apartment investment-appeal further, decreased overseas investor numbers, and higher-than-previous-years-vacancy rates in some of the more popular apartment-centric areas in our inner south-east have rattled investor sentiment somewhat also.

The effect of cautious sentiment and higher bank scrutiny on this category of property dwelling type has created a palpable and measurable market shift. 

As of the March 2016 quarter, Melbourne Metro House and Unit Median prices have experienced differing growth figures, with house price growth far outweighing units in the same annualised period:

Houses moved 8.3% within the year to sit at a median of $708,000

Units moved 4.2% to sit at a median of $535,000



This chart (sourced from the REIV) demonstrates the widening gap between the two, but importantly, it also shows that the APRA changes didn't instigate the divide. The performance rates have been running at dual speeds for some time now and this can also be apportioned to the relative oversupply of units in our inner suburbs. Importantly, the changes since APRA stepped in show a decline in growth of units, amid a stunning capital growth run for houses over this past year.

What does this chart suggest?

Two forces have acted in tandem to slow down sentiment and the numbers of units purchased in Victoria. Higher bank scrutiny and oversupply in some areas have dampened buyer spirits. These will ease and units will perform again one day, but the real question is when.

Some see this as a time to seek out houses on land, or strata properties with land on title. Others could read this as an exciting time to buy well while sentiment is lower.

One thing is for certain...while lending restrictions remain tough, money is still the cheapest it has ever been. Having a great investment loan set-up and seeking the advice of a skilled investment broker is one of the most valuable actions an investor can take.

June saw some interesting sales results and Cate was interviewed on some of these. An increased number of Sydney investors targeting the outer western suburb of Melton was one interview which Cate tackled the risks in such a strategy. With limited growth-drivers present, this suburb sits 35kms west of the CBD, and is surrounded by plenty of house and land suburbs still offering brand new options with government incentives. Selecting houses on land is not a suitable strategy in its own right; an investor needs to understand growth drivers and inhibitors to tenants being attracted. Considering commute times, road links and the historical rate of household income growth is important. Other outer-ring owner-occupier areas  have had strong documented growth; particularly in the northern suburbs but much of this growth has been fuelled by home-buyers.

June saw the inner-ring Melbourne house auction market exhibit some high clearance rates and record sales. The cause of this can be put down to low supply and high buyer-demand and Cate shared her thoughts in a recent interview with YIP's Phil McCarroll. One record sale in particular was an old house in Yarraville on a massive 1866sqm block for $3.2M.

In the theme of Seeking Independent Advice, Amy's article for Smart Property Online was well received. Cate was also prompted to write about Why Tax Benefits Should Never Be a Reason For Investing in Property. And offering some of her gold to readers, Amy was interviewed by API about how she Conducts Comparable Sales Analysis.