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Melbourne Tipped to Become Australia’s Most Expensive City

By Anqi Wang

As the property market begins to reawaken for 2017, the media is full of recaps of last year’s property market results, along with predictions for the coming twelve months. Amidst the usual suspects, the weekend Financial Review has published its second annual review of how last year’s predictions stacked up against actual market performance.

Interestingly, the majority of forecasters had stated the market would decline last year, if not crash. Instead, two interest rate cuts in May and August teamed with strong population growth and a shortfall of listings against buyer demand saw the Melbourne market record its strongest growth in seven years. CoreLogic reported Melbourne prices grew by 13.7% over 2016, with total growth since 2009 now at 83.7%.  The result meant Louis Christopher of SQM was the most accurate forecaster for the second year in a row, having predicted 2016 growth in Melbourne of between 8 and 13 percent.

Christopher told the AFR the reason so many property forecasters get it wrong is that it’s an emotional asset class with many intricacies that take many years to fully grasp. He says because of the emotional factor, prices are rarely driven by whether the market is overvalued or not.

Going forward, SQM’s forecast for 2017 again includes double digit growth, with Melbourne prices slated to rise by a further 10-15% if no action is taken to cool the market, despite prices being “dangerously” overvalued by 40%.

Interestingly, a separate piece by reported Melbourne may eventually overtake Sydney as Australia’s most expensive property market, with prices growing faster in the southern capital according to the latest ABS data. The increases are being driven by strong demand, with comparatively better affordability and a reputation as a cultural and sporting mecca attracting more new residents from interstate and overseas. For the past two years, demographers have been predicting Melbourne will be Australia’s largest city by 2050 – Sydney’s population hit 5 million in 2016, while Melbourne was at 4.7 million.

But one factor that could slow the market is out-of-cycle increases in interest rates that are slowly being introduced by lenders. Despite the lack of official movement by the RBA, Suncorp became the latest mid-tier lender this month to hike rates for both existing and new owner occupier borrowings by 15 basis points.

In most price segments, buyer demand continues to outstrip the available property for sale, yielding healthy results, particularly at auction. With conditions as difficult to predict as always going forward, we would encourage any vendor considering a sale to explore an early year campaign.

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