Building boom can mean over-supply - and no growth

By Terry Ryder, 21st February 2012

It sounds like a good thing. Six of the top 10 building and population hotspots in Australia are in the Melbourne metropolitan area, with two more just outside the top 10.

But what it describes is the biggest problem in the Melbourne property market: over-supply.

The latest edition of the Population and Residential Building Hotspots report published by the HIA Economics Group shows that the No.1 and No.2 spots nationally are held by Statistical Local Areas in Melbourne.

The Victoria capital also provides No.5, No.6. No.7, No.8, No.9, No.11 and No.13 on the National Top 20 list. That’s a tremendous record for a city which lacks the huge growth impetus that cities like Brisbane and Perth get from the resources sector.

The report provides a snapshot of Australia’s fastest growing metropolitan and regional areas. To qualify for the ranking lists, SLAs must satisfy two conditions: a population growth rate above the national average and residential building work above $100 million for the year (the benchmark is $50 million for SLAs in the smaller states and territories).

The standout areas in Melbourne are the municipalities of Whittlesea (northern suburbs), Wyndham (south-west), Melton (north-west) and Casey (south-east).

Some organisations which purport to advise investors have a simplistic philosophy of following population growth. Population growth and building activity equals demand for housing and therefore capital growth, under this all-too-common mantra.

But this is fools’ gold. The way the development industry works in Australia, high population growth invariably means over-supply. And over-supply means inferior capital growth.

The three leading population growth areas of Queensland are also the three worst performers on capital growth over the past five years: the Fraser Coast, the Sunshine Coast and the Gold Coast.

The high-growth heavy-construction areas of Melbourne are heading the same way. In Wyndham City, in the south-west heading towards Geelong, Werribee has a vacancy rate above 10 per cent, while Wyndham Vale is nudging 16 per cent, according to figures from SQMresearch. The new growth suburbs around Tarneit have vacancies around 14 per cent.

Out in another growth area, Melton Shire on the north-western fringe of Melbourne, the postcode which includes the suburbs of Melton, Melton West and Kurunjang has a vacancy rate close to 11 per cent.

Craigieburn in the Whittlesea municipality up in the northern growth areas of Melbourne has a 10 per cent vacancy rate.

This is at a time when it’s common to find city areas with vacancies under 2 per cent.

The outlying suburbs define one part of the over-supply problem for Melbourne. The other part is the inner-city apartment market, where far too many units are being built in the CBD, South Bank and Docklands.

These two parts of the same problem have an element in common: lots of sales being made to Chinese investors. When lack of local demand forces developers to find buyers offshore, it’s a danger signal for the market.

Property analyst Michael Matusik who recently spoke at an Urban Development Institute of Australia conference in Melbourne, says there’s no doubt Melbourne is over-supplied and “may take years to recover”.

He says the number of new dwellings built in Victoria last year was 80 per cent higher than required, with most of it happening in Melbourne.

Matusik says: “Melbourne is facing a bit of a shock. There’s a general perception there that everything will be okay and it’s just a short-term blip.

“But the market is over-supplied with both new and existing stock for sale. Melbourne’s vacancy rate is twice what it is in Brisbane, Adelaide and Perth, and two and half times Sydney.

“Unless there’s a massive fall in new dwelling starts, Melbourne could be in for a long term period of over-supply. It needs to correct itself in terms of new construction.”

Matusik says one outcome is that valuations of new house-and-land dwellings are often up to 25 per cent below the asking price.

“I am not saying the valuers are always right – there’s enormous bank pressure to value a certain way – but a lot of the reasoning behind why they are valuing 25 per cent below list price is because of the over-supply factor.”

All of this means investors need to be very selective about where they put their money in Victoria. The Mornington Peninsula still looks solid and Geelong continues to impress with its sustainable growth and improvements to infrastructure.

And the regional cities of Bendigo and Ballarat have multiple growth factors, affordability and an absence of the supply issues that will hamper Melbourne this year and beyond.

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