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Melbourne Hasn’t Seen Worst of Housing Drop as Glut Builds

Melbourne Hasn’t Seen Worst of Lower Home Prices as Glut Builds
Cranes stand over a construction site at Victoria Harbor in the Docklands precinct of Melbourne. Photographer: Carla Gottgens/Bloomberg

Melbourne, where home prices have fallen more than in any other major Australian city, may see further declines as a record number of new developments approved in the boom years hit the market.

Home values in the capital of Victoria state lost 6.6 percent in the year ended in June, the biggest drop among the eight state capitals, according to researcher RP Data. Building work started on a record 47,293 homes in Melbourne in the 12 months ended June 2011, compared with estimated demand of 32,334, according to figures from researcher BIS Shrapnel.

“You’ve got developers who’re producing a massive surge of supply and they’re all facing losing money unless they sell soon, so there’s huge discounting pressure,” said Steve Keen, author of the book “Debunking Economics” and associate professor in economics at the University of Western Sydney. “And listings are rising because demand has fallen severely.”

Prices surged 123 percent between 2002 and 2010, prompting the state to take steps to help speed up construction in response to forecasts for higher demand in the city. As developers responded, increasing the number of housing units 41 percent from 2008 to 2011, population growth slowed. That created the nation’s most over-supplied housing market.

Some 160,381 permits were granted to build houses and apartments in Melbourne in the four years to June 30, compared with 80,918 in Sydney, Australia’s biggest city, and 613,837 across the nation, statistics bureau data shows.

Apartment Projects

“New construction will keep a lid on any major recovery” in Melbourne, said Louis Christopher, managing director of Sydney-based property advisory firm SQM Research. “There are also a lot of foreign investors in the marketplace. This makes it potentially volatile, and, if they want to get out, it could be problematic.”

Far East Consortium Ltd., based in Hong Kong, is developing a A$1 billion ($1 billion), 2,600-apartment complex in the city center, about 2 kilometers (1.2 miles) from the Rod Laver Arena, where the Australian Open tennis championships are played. Malaysia’s SP Setia Bhd is building almost 800 apartments in two towers close to Melbourne’s 134-year-old Queen Victoria Market, also in the city center.

SP Setia sold 70 percent of the first building in Malaysia and about half of the second tower to buyers in Malaysia, Singapore, China and elsewhere in Asia, Choong Kai Wai, the company’s Australian chief executive officer, said in a telephone interview from Melbourne. It will begin marketing a second development in South Yarra, a riverside Melbourne suburb, this year, targeting mostly local buyers, he said.

Price ‘Resistance’

“I don’t think there’s an oversupply because the rental market is still good,” Choong said. “The reservation is the price point. Anything above A$600,000 has a bit of resistance.”

Permits to build homes in Victoria have accounted for about a third of the country’s total since the middle of 2008, according to the statistics bureau. The state has had the most dwelling starts in Australia since July 2008, statistics bureau figures show.

Melbourne’s rental vacancy rate was 2.9 percent in July, up from 2.5 percent a year ago, according to SQM. The number of homes listed for sale climbed 4.8 percent from a year earlier to 48,322 as demand slowed, SQM said. Both levels were the highest among Australia’s eight state and territory capitals.

Victoria’s moves to do away with tight land-release policies and zoning restrictions had won praise in a nation where such controls are blamed for a housing shortage that’s driving home prices beyond the reach of ordinary workers.

Low Density

The measures have helped lift Melbourne, known as Australia’s cultural capital for its art festivals and stage performances, to the top of the Economist Intelligence Unit’s Global Liveability Survey this year, which included Adelaide, Sydney and Perth in the top 10. The Economist cited the Australian cities’ low density and improvements to infrastructure as factors that contributed to their ranking.

Even after recent declines, Melbourne -- with its historic tram network and cafe culture -- remains the priciest city in Australia compared with long-term averages, according to Morgan Stanley.

The median price of a home in Melbourne was $493,688 as of July 31, according to RP Data, based on the exchange rate on that day. That compares with $340,600 in New York, according to real estate data provider Zillow Inc., and $564,593 as of June 30 in London, based on the most recent figures from the Land Registry.

‘Pricing Pressure’

“With significant spikes in dwellings under construction and dwellings on market, weaker population growth and now the lowest relative affordability of all markets, we expect pricing pressure in Victoria will continue for some time,” Morgan Stanley analysts, led by Lou Pirenc, wrote in a July 23 report.

Homes under construction in the city are now 80 percent above the 20-year average, the analysts wrote.

Relative to incomes, Melbourne had the fourth-most unaffordable homes among metropolitan areas with populations of more than 1.5 million people in the developed world, consultancy Demographia said in a report in January, behind Hong Kong, Vancouver and Sydney. Melbourne’s median home price is 8.4 times median household income, compared with 6.9 times in London, 6.2 times in New York and 5.5 times in Toronto.

The Housing Industry Association-Commonwealth Bank Housing Affordability Index for Melbourne rose 7.3 percent in the first quarter of 2012, partly driven by falling land prices.

Cheaper Land

The median price of a land lot fell to A$210,000 in the quarter ended June 30, from a peak of A$225,750 as of Dec. 31, 2010, according to Melbourne-based property services company Oliver Hume Real Estate Group. When incentives and rebates were included, the actual price fell below A$200,000 for the first time since June 2010, according to Andrew Perkins, the group’s national head of research.

Melbourne’s population growth slowed from 2.4 percent in the year ended June 2009 to 2 percent the following year and 1.6 percent in the 12 months ended June 2011, according to state government figures.

The city of 4.1 million people on the estuary of the Yarra River boasts the Australian head offices of mining giants BHP Billiton Ltd. and Rio Tinto Group, and lenders Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd.

Despite the concerns about a glut, “it’s too early to conclude that Victoria’s planning policy failed or created a massive oversupply problem,” Matthew Hassan, Sydney-based senior economist at Westpac Banking Corp., said in a telephone interview. “We expect a few moves downward from the Reserve Bank next year, which will bolster a very patchy stabilization process.”

Rate Cuts

The Reserve Bank of Australia has reduced the overnight cash rate by 1.25 percentage points since November 2011 to 3.5 percent, partly in response to a stalling housing market, as the lack of affordable homes and economic uncertainty kept buyers on the sidelines. The rate cuts, as well as rising rental yields, have likely increased the attractiveness of investing in housing, the central bank said in minutes of its Aug. 7 board meeting.

Credit to consumers across Australia to buy homes rose 0.3 percent in July from the previous month, and 4.9 percent from a year earlier, the RBA said in a report today. Total lending rose 4.2 percent from a year ago.

Along with SP Setia and Far East Consortium, local groups are also building major housing and apartment projects. The Industry Superannuation Property Trust, an Australian direct property investment manager owned by pension funds, is planning a complex with six buildings containing 2,900 apartments. Listed trust Mirvac Group’s projects include Yarra’s Edge, a five-tower neighborhood that includes luxury apartments and homes in the Docklands.

Empty Houses

“We’re in a period in the short-term where we have seen some signs of oversupply,” Brett Draffen, chief executive officer of Mirvac’s development division, said in a telephone interview from Sydney. “But underlying fundamentals will be strong for the medium term and beyond, and that’s when those projects come online.”

The number of unoccupied homes further exacerbates the issue, according to tax-reform advocacy group Prosper Australia. About 246,742, or 11.3 percent, of homes across Victoria were unoccupied, data from the 2011 Census showed. Melbourne alone has about 90,730 empty houses, according to a report by Earthsharing Australia, a subsidiary of Prosper, based on the number of homes that used less than 50 liters (13.2 gallons) of water a day between July and December.

“There’s a profound oversupply in both apartments in the city and in the outer suburbs,” said David Collyer, campaign manager at Prosper. “We’re not seeing anything like the demand response needed to sustain a recovery. The market has nowhere to go but down.”

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