Why Invest in Melbourne

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Why Invest in Melbourne

It’s human nature to believe the grass is always greener, indeed, sometimes it is.

If, however, you live and work in Melbourne, yet for some reason you’re considering investing in another state, I’m going to jump in and provide you with a few compelling reasons to invest in your own backyard.

Let me say from the outset that I’m not advocating investing in the same area as you live (although sometimes that can work) what I’m suggesting here is this: right now, we strongly feel that when giving investment property advice Melbourne still presents relatively good value on a national level, presents a lower level of holding risk and more promising capital growth prospects compared to other property investment options in Australia.

For clarity, we’re talking strictly about residential property here.

Below I will seek to substantiate this argument and offer some sage property investment advice.

Melbourne Offers Attractive Relative Value

First order of business here is understanding why relative value is important when investing in property, a distinctly different proposition to the more emotional set of values one might consider before buying a home. On the most basic level, relative value is a method of determining the value of one asset compared to similar assets. Why is this important to understand? Well, it’s fundamental to your decision of where to invest in property and an indicator of how the value of the property might shape up over the years and decades to come.

I don’t think I could find many people who would argue with me if we compared Melbourne to Sydney in terms of a world-class city that one might choose to live in and essentially enjoy the same opportunities and life expectations, therefore, I see no reason why I can’t draw your attention to the relative value of two similar investment properties in these two great cities.

 

Melbourne

Our clients invest in attractive, brand new, high quality 2 bed, 2 bath townhouses with a garage and large patio in a small development of only six townhouses for $450,000 $490,000 approximately 13km north of Flinders St. in a car via the most direct route.

Sydney

An hour on realestate.com.au (REA) and the best I could offer you is an ugly red brick 2 bed, 1 bath townhouse with carport probably more than twenty years old at $440,000 in Cabramatta (where?) which according to Google maps is 32km from the Sydney CBD in a car via the most direct route.

Flipping the relative value equation around slightly and locating a similar property in a similar area which is roughly the same distance from the CBD (a general but reasonable way to compare in this instance) the best we found in 45 mins of searching on REA is a 22 plus garage 14km from the CBD in Belsie for around $750,000. That’s coming up to 70% more expensive on a like-for-like basis Melbourne v Sydney.

So what? Granted this a very general comparison of relative value, but it does serve its purposes well here and is useful to you as an investor. Here’s why: do you think that Melbourne will always be more affordable than Sydney? No one knows for sure (and stop listening if they think they do) but I’d wager that there will be far less price discrepancy between the two cities in the next 30 years, for no other reason than the population of Melbourne is forecast to exceed that of Sydney by 2050 – Google that for yourself. This population growth, through a startlingly complex set of factors that would make an excellent essay, will all but guarantee that with sound property investment advice Melbourne townhouses will soon be where the price point in Sydney is currently.

Who knows when this is going to happen, but we’re at the coal face in this property market – working directly with the biggest investors – the developers, and I can tell you supply of this property type 13km north of the city at the mid $450,000 price point is almost non-existent now. In 2017, be prepared to pay $470,000 plus, and that’s only if you buy direct through IPH. Expect to pay closer to $500,000 if you’re going retail (auction, private sale, etc.)

Melbourne Is Low Risk

When we discuss risk with our clients we are primarily talking about holding risk. There is no real property-specific definition, however I’m prepared to offer one here: “Holding risk is the financial risk of being unable to service the loan on an investment property thereby placing the owner in a position where they may be forced to liquidate.”

In the years I’ve been in this industry, if there’s one unknown that new investors fear, it’s the risk of not finding a tenant. It’s easy to understand why when the client is sitting in front of a contract for an investment property worth around half a million dollars. They want some confidence, certainty, if not a guarantee that they are going to have help in covering the loan repayments on the property through a dependable stream of rental income.

In the first six months of 2016, IPH settled on 78 properties – all of them rented within one week of settlement, often for a larger amount than we had initially budgeted for in our cash flow forecasts and planning. I took a call yesterday from an existing client who told me their tenant had just re-signed a lease for a further twelve months at an increase of $10 per week and he was ecstatic. Positively geared after tax to the tune of around $6,000 within 12 months of owning the property.

I don’t write this to impress you, but to impress upon you the importance of what I like to call ‘rentability’ when it comes to choosing a property to invest in. Let me explain. On a local level this means ticking all the boxes of desirability: proximity to transport, amenity, schools, parks, entertainment, employment and so on. On a financial level you must ensure that the property will rent for an amount that when all costs are considered versus income, the investment still stacks up –and importantly, remains stacked up if you have to drop the rent a few percent or more. On a ‘city’ level, you must ensure that the investment property is located in a city where there is a relatively stable employment base due to a relatively stable local economy, and it’s this that I want to expand on briefly, if for no other reason than you thought I was going off topic before.

I’m from Perth. I love that city. I grew up there, it’s clean, the weather could be the most liveable in world, but what about jobs? Within eight months of leaving university, I was on a plane to London to look for work. I didn’t know exactly what I wanted to get into at that stage (I was 22) but found myself working in London’s busiest real estate office by turnover and volume. So what relevance is this to you, other than to tell you I started in the property industry more than 15 years ago? It tells you I left Perth because while I didn’t know what I wanted to do, I did know that I wasn’t interested in anything to do with mining, agriculture or fishing.

Oversimplified certainly, however, the bulk of WA’s dough comes from the sale of natural resources. If you’re in Perth, you’re there to work in resources or a supporting industry. And this is fantastic for those of you who are engineers and want an opportunity to earn, say $200,000 that you won’t earn in Melbourne or Sydney, but guess what? Those opportunities only last for a few years at a time, and when they go, those highly paid staff and all of the workers, tradies and grunts who have donned the hi-viz to make good coin get on a plane and head back east. And you know what this does to rents? They go down, way down, like more than 20% down – and this is in the most desirable suburbs of Perth.

On a more regional scale, let’s use Gladstone in Queensland or Karratha in WA or even Darwin, where the drop in rents can be even more dramatic. This isn’t a problem if you own the investment property outright or have a small loan to cover, but if you were one of those who found themselves excited about making overnight capital gains and bought near the top of the market in one of these places, you are in a potentially dangerous predicament. There’s every chance you might find yourself without a tenant or receiving rent well below your holding costs, further compounded by having a negative equity position.

I think it’s also worthwhile to highlight this scenario is not just isolated to mining towns but also regional towns dependent on a few large employers (i.e. Traralgon) or rural towns or beachside towns dependent on tourism. Don’t be misguided by the idea of investing in a property for $230,000 in a quaint seaside town just because there’s a pretty beach and the yield is attractive. Or worse, you’re at a seminar listening to a shark who’s suggesting you invest in property and this is the type of strategy they suggest. In tough times, it’s places like this that are hit hardest as some of the already-small population rotates back to the major employment centres to regroup and tourism declines.

Investment rules of ‘play it safe’ and ‘keep it simple’ apply here. Melbourne is as robust an economy as anywhere in Australia or any major city in the Southern Hemisphere for that matter. Job opportunities, good ideas, major employers, lots of national and international immigration and even Melbourne being such a bloody fantastic place to live will underpin the rental income on your investment property and substantially, if not entirely mitigate your holding risk. People cock this up all the time – don’t be one of them.

Growth

Six months ago I was referred to a young jazz musician/psychologist by one of my past clients. Apparently he’d saved for a deposit and wanted to invest whilst still living with his folks. When he rocked up at the café near his work where we had planned to meet, his dad was in tow – a doctor. A few coffees and a good amount of discussion later, we started talking about property prices in Melbourne’s inner suburbs. Instead of talking, I asked them what their opinion was. Dad jumps in straight away with something like this: ‘Look, Brodie, I bought my first property when I was 23, I’m now 64. It’s what has put me here and probably the reason I only work a few days a week. I remember when I wanted to buy my own building for my Practice in the late 80’s and it was a few hundred thousand, everyone thought I had lost my mind. They told me it was too expensive, property is overpriced, it can’t keep going up, etc. It was paying a lease or buying, so I bought. That property is worth millions now’. His son purchased, and is going to do very well over the long term, just like dad.

Over-debated it may be, I’d still like to touch on price growth and why according to trustworthy property investment advisors Melbourne investment property and property in general will continue to increase over the long term, notwithstanding any ups and downs that are the norm for a moving market. Property price growth, much like that in any broader investment type i.e. the stock market is governed by a complex mix of factors. We don’t need to bring them together and explain them here, except for one major influencer.

Population Growth

There’s no need to reference the stats I’m about to drop here, because the internet is awash with them and you should be reading them for yourself. Get this: in the last fifteen years, the population of Greater Melbourne has increased by one third to more than 4.6 million people. And according to the Victorian Government’s own population growth predictions, we could see the population of Greater Melbourne at 8 million people by 2051, nearly 75% more people. Can’t think that far ahead? By 2031 the population is forecast to be more than 6 million people. Where are they going to live? In as desirable an area as they can afford, as close to the City as they can afford, as will their kids. Imagine, if you will, the pressure this population growth is going to put on the price of property in Melbourne. You don’t need to think too deeply about it, and there’s too many things to investigate here, however a confluence of factors will guarantee significant long-term price growth in quality property across Melbourne.

There aren’t any hard and fast rules around buying investment property. We’ve got our recipe, it works well, our clients like it, we like it, it’s proven, affordable, simple and profitable. If you ask me there isn’t much more you need out of an investment proposition of any sort so that you live the dream when the income tap is turned off. However – and I say this often – successful investing is as much about mitigating losses as it is about getting capital growth. Arguably more so, because if you invest unwisely just once by following some dumb advice that a well-meaning someone has suggested to you and find yourself invested in, say, an apartment Coogee in WA (or Melbourne CBD for that matter) or somewhere ‘near Adelaide on the coast’, or worse still – anywhere in Tasmania, then there’s a very real chance your ambitions of a hefty financial cushion in retirement will sit on ice for a good few years.

Stick to what you know. Seek dependable investment property advice. Providing you get the property choice right, investing in a ‘good’ area of Melbourne is going to give you all you might hope for out of a property investment. Sounds like a big job you’d prefer to get some help with? Feel free to get in touch with us today.

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