Assessment 2 - Melbourne\'s CBD Apartment Price PDF

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Melbourne's CBD Apartment Price...

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ASSESSMENT 2 Melbourne’s CBD Housing Market

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Introduction: The housing market has a huge impact on the Australian economy, as it is the primary source of wealth for majority of Australian households. In the last 4 years, Melbourne’s Central Business District (CBD) has increased in high-rise apartment developments to meet the demand of consumers. Recently, the housing market have been inconsistent due to the impact of COVID-19 pandemic, which has affected people’s ability to maintain the repayments of mortgage and interest rates. The main purpose of this analysis is to reflect on the house price along with the supply and demand needs that Melbourne CBD has to offer for Melburnians and how government interventions can assist real estate agents and buyers getting maximum output. Economic agents: The house prices have been irregular due to the demand and supply factor for many years. Melbourne CBD has been a desired place for most individuals, investors and firms that are looking for houses and apartments because it is convenient to travel with-in or from the city to other places in Melbourne or Victoria. Workers or university students can travel to anywhere in the city quickly and conveniently. In 2016, the population was 37,975 people with a median age of 26 years old, this indicates that individuals who choose to live in Melbourne CBD are workers or students, that like robustness and convenience (ABS 2016). More than half of the population are renting apartments because they cannot afford or there is not enough supply for their budget. According to the Census, a majority of individuals living in the CBD are South-East Asians like Chinese, Malaysian or Singaporeans, this implies that they’re overseas students or workers working for corporations in the city. Therefore, the demand for housing to live in the heart of Melbourne has never decreased because it is a very convenient location, close to offices, educational institutions, and cheap transport (Signorelli & Stapledon 2014). Impact of COVID-19 on housing prices: The housing market has declined due to the outbreak of COVID-19, many people in the labour force have lost their jobs (full-time, part-time and casual), some were struggling to repay their loans, whom are at risk of losing their houses to their bank. The House Price Index has dropped overall, this implies that Melbourne’s CBD house values have dropped because the economy has weakened in response to the lower cash rate (Owen 2020). Melbourne CBD had suffered the most from the outbreak, as people have lost their jobs which has led many young people with no options other than move back to their parents’ places or sharing rentals. Hence, the housing demand has reduced significantly, which leaves many investors unprepared as the vacancy rates have spiked as many international students were not allowed to be back in the country, investors are left with no choice but to sell the apartments. Due to the housing crash, one third of apartments in the CBD were sold for less than the initial purchase price (Duke 2020). This pandemic has decreased the growth in dwelling values as investors are urgently selling their properties to fund other necessities during this financial crisis.

Factors causing the price to fluctuate: There are many variables that affect directly on the prices of apartments in the CBD: - Location: Consumers tend to look for places that are close to work or educational institutions because less time will be spent on travelling back and forth (Holdsworth et al., 2018). Which makes Melbourne CBD an ideal place to live, as it has everything from attractions, restaurants to shopping centres, located every 500 metres. Therefore, the demand will be higher than other suburbs in the metropolitan areas, as a result it causes the price of apartments to surge. - Economic Growth: The economy has a huge influence on the fluctuation of the housing market. Consumers with a higher income will be able to afford higher mortgages, thus it allows them to buy an apartment in Melbourne CBD. Investors are likely to invest in apartments because the demand for housing progresses rapidly. - Interest Rates: When the Reserve Bank of Australia (RBA) lower the interest rate, it would most likely encourage consumer to borrow credit because it is cheaper, therefore, increasing demand for housing so investors or home buyers are induced to enter the market. An increase in demand for apartments will steer property values to rise, which may cause a shortage of supply on apartments. Demand and Supply Equilibrium: S1

S

S2 P2 P1 P1 D2

P2 D1

D1 Q2 nd curve before COVID-19 Figure 1.1: Su Q1 Figure 1.2: Supply and Demand curve after COVID-19

D2 Q1 Q2

According to figure 1.1, the demand for apartments in Melbourne’s CBD rose each year while the supply of apartments remained steady because each year only a certain number of apartments are on sale compared to the demand required by home buyers and investors. This demand curve shows that apartments’ prices goes up due to the high demand from renters and investors. However, after the outbreak of this pandemic, the vacancy rates spiked due to unemployment or people who could not afford to pay rent. Figure 1.2 demonstrates the oversupply of apartments while the demand dropped since some of the overseas students were not allowed to enter Australia causing the investors to lose revenue. Investors would not be able to make a profit in the housing market due to the decline in demand and oversupply of apartments, which makes it harder for them to sell apartments as the apartments’ prices decreased.

Related Market: buy or invest in other suburbs Rather than investing or buying home in the CBD, investors or first-home buyers can purchase property at other metropolitan areas that are fast-growing as well. For example, Epping is a suburb that lies 20km north of Melbourne’s CBD, the house price there are reasonable as the median property prices are just over $575,000, home to new developing estates for family homes (Real Estate). The average rent $385/per week for a standard 3 bedrooms with spacious backyard and driveway, is something that apartment blocks in Melbourne’s CBD cannot offer due to limited space. Epping has everything that a buyer or investor needs in its area, from Epping Pacific Shopping Centres to Northern Health which is right next to each other. Epping would a be desirable place to start a family or a large family as the average land size is nearly double the apartment space in the CBD. Investors are able to yield capital gains of 3.5% for rental houses for an investment property. Moreover, there’s an increasing trend on compound growth for both houses and units, as Epping is easily accessible to the M80 Freeway if people want to travel to city or other places in Melbourne. Welfare Implications: - Externalities: There are many positive and negative side-effects to consider when purchasing a property in Melbourne’s CBD. A positive externality of building new apartments in the CBD will create job opportunities for local business and employees that are looking for a workplace. However, living in Melbourne’s CBD can be negative as it has a high-density environment, which means that apartments have little to none private open space, noise pollution from other tenants and other external factors like traffic and transport. - Government Intervention: The Federal government has encouraged individuals, couples and families to buy their first property by offering a stimulus tool, First Home-Owner Grant. The stimulus package is set to help first home buyers receiving stamp duty reduction up to $15,000, however there are conditions that must be applied to this grant. Most apartments in Melbourne’s CBD are newly built, which fits the criteria requested by the government, although most of the buyers are investors and overseas students. Therefore, not many purchasers are able to claim this grant. Conclusion: In summary, the housing market has a vast impact on the Australian economy, as it is the primary source of wealth for a majority of Australians. Due to the COVID-19 pandemic, the housing market has been inconsistent. In the last 4 years, Melbourne’s Central Business District (CBD) has had an increase in the number of high-rise apartment developments to meet the demand of consumers. Melbourne CBD has been a desired place for many people that are looking for houses and apartments because it is convenient to travel within the city or to other places in Melbourne. The House Price Index has dropped overall, this shows that Melbourne’s CBD house values have dropped as well because the economy has weakened in response to the lower cash rate, inducing an increase in demand and a fall in supply.

References:

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Abs.gov.au. (2016). 2016 Census QuickStats: 3000, VIC. Available at:

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https://quickstats.censusdata.abs.gov.au/census_services/getproduct/census/2016/quic kstat/POA3000?opendocument. Duke, J. (2020). One in three Melbourne CBD apartments sold at a loss in March quarter: CoreLogic. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/politics/federal/one-in-three-melbourne-cbd-apartmentssold-at-a-loss-in-march-quarter-corelogic-20200710-p55asn.html.

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Holdsworth, S, Kenny, D, Cooke, J and Matfin, S 2018, ‘Are We Living with Our Heads in the Clouds? Perceptions of Liveability in the Melbourne High-Rise Apartment Market’, Energy Performance in the Australian Built Environment, pp.181–198. Owen, E 2020. How Will Unemployment Affect the Housing Market? [online] The Urban Developer. Available at: https://theurbandeveloper.com/articles/what-does-the-

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latest-employment-data-mean-for-the-housing-market. Realestate.com.au. (2020). Epping Property Market, House Prices, Suburb Profile & Investment Data. Available at https://www.realestate.com.au/neighbourhoods/epping3076-vic.

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Signorelli, J and Stapledon, N 2014 ‘Modelling The Ripple Effect of Prices In The Melbourne Housing Market’,...