The Melbourne property market has only a couple of weeks left to run for the year and with a clearance rate of 55% according to the REIV for the weekend, some vendors and agents alike will be glad to see the end of 2011. But what changes are in store for 2012.

I wrote last week about where property prices will go over the next decade and that for all intents and purposes it is a “no brainer”. We did have the usual comments from people saying that I have no idea what I am talking about. However, not one response offered any other alternative, or even any factual response. In fact the Valuer General data for the June Quarter was released last week showing that house prices increased in the Melbourne Metropolitan area by 2.2% from the previous quarter.

The median house price has risen from $489,000 in March to $500,000 in June. Volumes are however at the lowest quarterly level since June 2009. It has remained unchanged from the median of the same quarter last year. These statistics are not educated guesses or samples of less than 10% of the market. These numbers are a statistical analysis of all the sales collected by the Valuer General of Victoria.

Unit prices have also risen this quarter: up 2.4% on the previous quarter. But the number of sales last quarter was 5353 and the same period last year had 7969 sales.

The biggest movement was vacant land sales. Down in numbers by a whopping 65%, the numbers in the same quarter last year were 5249 and this year are 1848. However, the median price has moved from $185,000 to 213,000. This is a 15% movement.

Tomorrow the Reserve Bank will try to read the tea leaves and have to decide whether to decrease the interest rate again or remain on hold and see whether Europe actually implodes. Further to this, the banks have had a credit rating cut and suddenly their multi-Billion dollar profit margins might be pulled back a touch. Even if the RBA decides to cut 25 bps, there is no guarantee it will be passed on and therefore may be of little use to consumers anyway.

Now throw in the housing figures above. Mining is still surging ahead with investment, retail sales figures were up 0.6% and even some investment into our manufacturing industry was welcomed last month.

I do not think the RBA will cut interest rates tomorrow. I think they will “keep their powder dry” and if the need warrants, will drop 50 or 75 bps in one hit to make sure a substantial lowering of interest rates hits the consumer.

Early next year investors will re-enter the property market. Renters are already having a difficult time finding accommodation, and rents will increase steadily next year. There are still many potential tenants offering over and above asking price for rental accommodation. When we do see a cut in interest from the Reserve Bank, and loans are available around 6.5%, there will be a veritable flood of investors pushing prices in the range of $400k – $700k upwards. For an investor with good equity, who can borrow 106% for an investment property, the shortfall can be as low as $4500 for the year to purchase an excellent long term growth property in Metropolitan Melbourne.

I am not talking about off the plan sales in some mining town in the middle of nowhere where capital growth is usually non-existent, or an apartment block of several hundred, some of which are never even built. I am talking about established A – grade properties within 10 km’s of the CBD. And if the interest rate were to fall to 6% then it is nearly revenue neutral.

2012 will see the slow but steady rise in values, of both houses and units in Melbourne. This assumes our interest rates do not go up, our unemployment rate stays around the same as it is now and Europe remains a mess. If rates drop, unemployment goes down and Europe works out its problems, then our property prices will very quickly revert to a growth near 8% p.a.

The next couple of years will be very interesting for property buyers. If you are interested in buying a property and what some assistance please do not hesitate to call for an appointment

Ian James
Director JPP Buyer Advocates