Melbourne Property Market Update May 2019

With inner Melbourne land in short supply, outer suburbs are booming with vacant land releases. At the height of the property market in 2017, developers were struggling to keep up with demand. Nowadays, sales have slowed and in many estates later releases that were not pre-sold are struggling to sell in the current market.

This brings us to the question – is building in this market still a reasonable option for owner-occupiers and investors? It’s also worth noting that there has been an increase in construction in more established areas where older homes are being knocked down to make way for townhouses or multi-level dwellings.

We investigate the question of whether land and build really equals value in this current Victorian market and whether the trends are likely to continue.

North Property Updates

The Melbourne population has risen immensely since 2010 with an increase of one million people over nine years. The rapid population increase has led to heavy migration to the outer northern suburbs where there is a high supply of house and land packages available in areas such as Craigieburn, Mickleham and Kalkallo.

Land sales in January 2019 show that purchasers can buy a 500 square metre block of land in Craigieburn for circa $380,000. The same block of land in January 2018 sold for $420,000.

Purchasers who bought their land off-the-plan in one of the estates such as Highlands (Craigieburn), Cloverton (Kalkallo) and Aston (Mickleham) are still in front from their purchase price in 2016. However, the bank’s tightened lending criteria and more housing estates producing greater supply is restricting an increase of land prices in the outer north in 2019.

Land values are still strong, however with the scarcity of vacant land within close proximity to the CBD, the inner northern suburbs are well sought after. A 250 to 300 square metre block of land in Brunswick will come with a price point range of $900,000 to $1.1 million (source: Core Logic, 2019) which is only feasible for purchasers or investors with high capital available.

As the majority of land purchases are typically followed by a new housing construction contract, it is paramount to find a builder that will provide an excellent quality home for the lowest possible price. With an abundance of home builders in the area, it is important to establish a low price per square metre of living area and not over capitalise. In the outer north, a four-bedroom, two-bathroom, single-storey dwelling can be built for circa $280,000 with a liveable area of 175 to 190 square metres, for a rate of $1,475 to $1,600 per square metre.

Construction rates in the outer north compared to the inner north vary considerably, with Heritage overlays and increased building difficulty in Carlton, Brunswick and Collingwood. The construction or renovation of a dwelling with a living area of 160 to 180 square metres can be (depending on quality) from $550,000 to $850,000.

The high-end can reap rewards for owner-occupiers and investors, as A grade renovated dwellings are withstanding the downturn well compared to the B grade unrenovated stock which is being pushed down in value in the currently declining property market.

Speak with a Craigieburn Mortgage Broker today.

South-east Property Updates

Construction is continuing to boom in outer southeastern suburbs, as blocks purchased last year are settling and are now ready to build on. There are huge estates in Pakenham, Officer, Clyde, Clyde North, Cranbourne South and Botanic Ridge just to name a few. As the market has slowed, those who bought at the peak are having difficulty obtaining finance as the land value has either remained stagnant or in some cases, has even decreased. Conversely, in some estates where land was purchased a couple of years ago (circa 2016) and due to construction delays has only recently settled, we are seeing an increase in value compared to the initial contract price.

Vacant land values in the south-east remain largely stagnant. Some developers are even offering to pay building deposits in order to lure potential land buyers. This trend in land prices looks set to continue for the foreseeable future.

Some examples of vacant land prices are: Clyde North, 19 Kakadu Street sold for $275,000 in January (350 square metre block); a larger sized block (648 square metres) at 42 Ramlegh Boulevard sold in April for $410,000. In more established peninsula areas such as Dromana, 10 Somerset Drive sold for $680,000 in December (1,320 square metres) and 5 Monaco Parade sold for $440,000 in February (780 square metres).

There are some established builders with set plans and specifications, meaning the home can be built at a low cost. For owner-occupiers who wish to live in a brand-new home designed with their needs in mind, building in one of these new estates is indeed a viable option. Buying in a more established area will often cost the same as vacant land and a new build, with the downsize of having to purchase a much older dwelling. A typical three-bedroom, two-bathroom dwelling can be built for as little as $200,000 in a new estate.

Closer to the city, there are fewer estates being released. In Mulgrave we have Waverley Park and in Keysborough we have the Somerfield Estate. In these areas we tend to see much higher building contracts, in line with the premium paid for the land in an established location. Building contracts in these areas often range from $500,000 to $800,000. There are also more high-end builders in these areas who offer finishes including refrigerated heating/cooling, premium range appliances and full height wall tiling in bathrooms.

Building in more established areas does usually come at a premium due to increased traffic management needs, the need to demolish an existing dwelling and clearing/levelling the site. Owners in these areas tend to go with smaller local builders rather than the bulk building companies who are used to contending with these issues.

For investors, the difficulty with buying land and building in some of these new estates is having the capital tied up whilst the estate completes the infrastructure, and then the time it takes to complete the dwelling. In contrast, if an investor bought an existing dwelling and had tenants move in right away, they could start earning a return on their investment immediately. Developers tend to look to more established areas such as Bentleigh East, where they are able to demolish older dwellings and build dual occupancy sites.

There are examples of over capitalisation in areas such as Officer where people spend upwards of $800,000 on the build construction alone whereas the median house price is $625,000 (source: Propertydata.com.au). This can result in the final value of the property being a few hundred thousand dollars less than the combined cost of the land and construction.

Speak with a Cranbourne or Mulgrave Mortgage Broker today.

East Property Updates

Supply and demand of land in the east does not meet at an equilibrium, so most home buyers are left to buy properties to knock down and rebuild, or renovate and extend.

In the past few years we have seen a few developments such as the Tullamore in Doncaster, which was once the Eastern Golf Course for more than 70 years with 47 hectares of mature trees and greens. Mirvac acquired the site on Doncaster Hill in 2011 and has now transformed it into around 800 new contemporary homes. The development is located 13 kilometres from the CBD, 800 metres from the Westfield Doncaster shopping centre and 900 metres from Doncaster’s bus terminal.

A stage 1 land sale was 2 Furlong Lane, Doncaster. This vacant land of 353 square metres was sold in 2015 for $615,000. If we allow $600,000 to build the dwelling, total costs would be approximately $1.215 million. After three years, this same property was sold in 2018 for $1.57 million, creating a capital gain of $355,000.

Later stage releases included vacant land in Caladenia Circuit of 375 square metres which sold in March 2018 for $1.01 million. It has a contract to build a fivebedroom, four-bathroom, two-car garage home for $730,000, reflecting a total outlay of $1.74 million. When compared to the sale of 4 Fromhold Drive, Doncaster with a land size of 733 square metres in June 2018 for $1.73 million, it does not stack up due to superior land size for almost the same price.

Burwood Brickworks is located 19 kilometres from Melbourne’s CBD in the highly sought-after eastern suburb of Burwood East. The precinct is set to feature a mix of 700 townhouses, apartments, 2.5 hectares of open space and parks where an additional 500 trees are to be planted, community facilities and an urban plaza next to the shopping centre, which will also have an urban farm on its rooftop.

Burwood’s median house price is currently $1.39 million, while its median unit price is $724,000. Land lots at Burwood Brickworks range in price from $877,000 to $1.2 million. Apartment prices start at $388,000 for homes with one bedroom, one bathroom, one car space and storage, to $733,000 for two bedrooms, two bathrooms, one car space and storage. Just three semi-detached homes are available starting at $940,000 for three bedrooms, two bathrooms and one car space, to $1.2 million for four bedrooms, 2.5 bathrooms and two car spaces. Future releases are expected to include a range of four and five-bedroom family homes.

In the outer east, we expect demand to increase as the Kinley development at the old Lilydale Quarry was released to buyers in late 2018. It’s expected that the $2 billion project will create 3,200 new homes for 8,000 people and a 70 percent increase in Lilydale’s population. House and land packages range from $700,000 to just under $1 million.

Speak with a Doncaster or Burwood Mortgage Broker today.