While Melbourne is set for further capital growth, investors are warned that the area poses a potential “cash-flow crunch”, according to a recent report.
Data collected by property investment consultancy Momentum Wealth and compiled into the Property Market Spotlight: Melbourne report found the capital city to expect a high demand for property due to strong population growth, a growing labour market and an undersupply of property listings.
However, the report also warned investors these signs were not completely positive.
One point of concern for investors mentioned was record low rental yields, which Damian Collins, Momentum Wealth’s managing director, said were lower than Australia’s other capital cities.
“The research report explains that with the combination of record low yields, record low income growth and rising interest rates, investors who have negative cash flow on an investment property will find it increasingly difficult to meet their loan repayments,” Mr Collins said.
“This will particularly be the case if lenders continue to make out-of-cycle rate hikes for investment loans while rental yields remain constrained, and will most impact those with tighter cash flows.
“The research report shows that this cash-flow crunch, along with affordability constraints, tighter finance markets and increasing supply of new stock, is likely to cool the double-digit property price growth Melbourne has experienced in recent years.
The report also revealed not all of Melbourne’s property market will increase, with apartments running just above inflation rates, compared to houses reaching double-digit growth.
“There is a big gap in the capital growth performance in Melbourne between houses and apartments,” Mr Collins said.
“The research report forecasts this growth disparity to continue, with apartment values even beginning to fall in the short term. This is likely as demand for apartments wanes following the reintroduction of stamp duty for off-the-plan purchases by investors, the new vacant property tax and tighter lending conditions.
“These demand-side pressures have the potential to rattle the Melbourne apartment market at a time when there is a record level of apartments under construction.”