by Jarrod McCabe
With a career background in valuations, I’ve always been fascinated by property price movements. Particularly the complex interplay influencing their directions, both up and down.
Over the years, I’ve determined that the main drivers can be grouped into three major categories – the general economy, the property market, and the property itself.
Let’s explore these categories and how they might be impacting your property investments.
Economic drivers
Interest Rates: The prevailing economic factor impacting pieces is interest rate levels. It’s an issue that has been front of mind over the last 18 months, with ongoing rate rises, as the Reserve Bank of Australia continues to attempt to wrestle down inflation. Interest rates can either fuel or cool down the market. When interest rates drop, it often stimulates buyer confidence. People feel they have more spending capacity, which can lead to increased property demand and, subsequently, rising prices. Conversely, consistent interest rate hikes can have a dampening effect on the property market, as we’ve observed over the past 18 months.
Unemployment Rates: The state of the job market plays a pivotal role on market sentiment. When unemployment rates are low, people feel secure in their income and financial future, boosting their confidence to invest in property. In contrast, economic instability and job insecurity can lead to reduced confidence, weighing down property sales and prices.
Inflation: This ties into the previous two economic factors. Inflation rates can serve as a barometer of market confidence. Higher inflation often leads to a stronger property market, although this isn’t always the case. In Melbourne, despite strong inflation, the property market has remained relatively stable recently, especially amid the increasing interest rates.
Global Issues: Melbourne, like any major city, is not immune to the impact of global events. These include international conflicts, such as the war in Ukraine, or political shifts, like Trump’s election or Brexit, as well as global economic and health crises, such as the GFC and COVID-19. These can have ripple effects on local property markets. Having said that, their influence can vary widely, and the real term impacts on property prices are often difficult to predict and measure.
Property market dynamics
Seasonal Markets: Melbourne experiences distinct seasonal variations in property market activity. Summer tends to be dead, with most activity concentrated in the first weeks of December. Autumn is characterised by increased activity, as the market builds from the summer lull. Winter is typically quite dormant, while Spring is the prime selling season with the highest supply of properties. These differing levels of market activity throughout the year all have a direct impact on the supply and demand equation, and in turn property prices.
Supply Levels: The supply of properties available on the market is a crucial determinant of property prices. Oversupply can lead to price reductions if demand doesn’t match, while undersupply can create upward pressure on prices.
A market with limited supply, even when demand is modest, can contribute to a stable property market. This was seen during the initial six to eight months of 2023 in Melbourne. Supply remained relatively scarce, and demand was not exceptionally strong, resulting in a well-balanced market.
Nonetheless, it is imperative to always scrutinise supply levels carefully, and understand whether upwards price movements are being driven by strong demand or in fact lack of supply. And vice versa for downwards price movements.
Clearance Rates: Clearance rates are a reliable indicator of market sentiment. When they exceed 70%, it often signifies a seller’s market, where competition among buyers is strong. Conversely, rates below 60% may suggest a buyer’s market. Clearance rates in the 60-70% range, which we’ve seen more recently, indicate a balanced market. This may result in some really strong results, but quite a few pass-ins, thus presenting opportunities for both buyers and sellers.
Market Sentiment: Beyond statistics, market sentiment plays a pivotal role in property pricing. It’s something that we look at closely when we’re assessing property values. It reflects how buyers and sellers perceive the market’s health. Understanding sentiment is essential for assessing property values accurately. Market sentiment must be paired with a technical point of view, by analysing past property prices and sales to help determine the value of the property. However, it’s essential not to focus solely on the rearview mirror. Monitoring price current trends and prospective competition levels is crucial to anticipate future market dynamics.
Property-specific elements
Location: This is a paramount factor in property assessment. As the old adage goes, it’s all about location, location, location. Consider the proximity to services that align with the property’s likely buyer profiles. For instance, if you anticipate families as potential buyers, think about nearby schools, public transport, parks, and amenities. On the other hand, downsizers often seek proximity to shopping districts, public transport, dining options, medical facilities, and recreational spaces. Investors prioritise access to education, employment opportunities, and public transportation for prospective renters. Understanding these location-related factors is vital in property valuation.
Land Size: Consider the plot size in relation to the buyer profile. Downsizers may prefer smaller plots, while families often desire larger backyards. Land size significantly impacts property value, especially in areas where land is scarce and valuable.
Building Size: Consider the property’s building size and the accommodation it offers. The number of bedrooms, bathrooms, and living zones matters significantly. Balanced accommodation is crucial; for example, having four bedrooms, but only one living zone or one bathroom can lead to an unbalanced property. In some areas, car accommodation is highly sought after and commands a premium, while in others, it’s not as critical. Outdoor features like entertaining areas, sheds, and swimming pools also impact a building’s value.
Condition: The condition and style of the property’s fit-out are instrumental in influencing its pricing. In the current market, properties in turnkey condition are highly sought after, as buyers prefer homes that are ready to move into without the need for significant renovations or updates.This may change in favour of renovator’s delights in the future, but for the moment that’s the prevailing trend.
Style: Different suburbs and areas in Melbourne have varying preferences for property styles. Understanding the prevailing preferences in a given area can significantly affect pricing. Some neighbourhoods may favour contemporary designs, while others may prefer period homes.
Take home message
Melbourne’s property prices are influenced by a complex interplay of economic factors, market dynamics, and property-specific elements. These dynamics collectively shape the city’s market and can have significant implications for both buyers and sellers, and their investment portfolio. By understanding these influences, you can make more informed and rewarding property decisions now and into the future.