It appears I am going mainstream with the release of a Morgan Stanley report yesterday that draws heavily upon my Melbourne analysis. It won’t be new to regular readers but the Melbourne Madness is worth repeating.
1. VIC Residential Market Poised Precariously for Pricing Pressure
Our Chart of the Week shows the number of dwellings under construction (houses and units) in the Victorian market as a percentage of the long-run average (since 1992), showing a significant spike since June 2009. Price growth fuelled by strong demand over past years in the Victorian (VIC) market has led to the state’s outperformance against all other states. Developers have favoured VIC for its strong population growth and relative affordability, and many have increased their exposure to capitalise on the strong fundamentals and avoid the oversupply situation in Queensland and the weaker relative conditions in NSW. However, in our view, with record levels of stock on market and record levels of dwellings under construction, VIC is precariously poised for continued pricing pressure.
2. At a time when established stock ‘on market’ is also at record levels. As we show in Exhibit 2, SQM Research data suggests that stock on market available for sale in Melbourne since March 2011 has peaked, particularly since the start of 2012. So not only do we have a record level of dwellings under construction, it comes at a time when there is already a significant number of established dwellings available for sale.
3. Pricing momentum is already weak. While other markets languished during the years following the global financial crisis, Melbourne had a very strong price correction of up to 20%, as shown in Exhibit 3. However, recent pricing trends for units and housing is already weak.
4. Melbourne is now the least affordable capital.
Affordability and confidence are two driving factors for property markets. As shown in Exhibit 4, Melbourne is now the least affordable property market relative to its longer-term average, and with the Australian dollar remaining relatively high, pressure remains on industries such as manufacturing, education and wholesale, all of which Melbourne has a higher relative weighting. With an already weakening pricing environment, and a number of recent announcements from both the VIC state government and corporates suggests employment growth and confidence will weaken in the near-to-medium term.
5. Weak confidence leads to notable buyer caution. As we show in Exhibit 5, VIC households are increasingly less likely to taken on leverage, with the average loan size now 3-4% below levels a year ago. In addition, for the first time since 2003, the net number of mortgages created has in fact declined since the start of 2012.
I am grateful to MS for acknowledging my work. It’s a lesson the broader media might learn.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
