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How did the media get it so wrong?

June 1, 2018

June 1, 2018

In 2017 the paid professional media that we rely so heavily on for our daily dose of "news" was adamant in many headlined articles that Melbourne was going to be in a massive property oversupply situation, causing a jump in rental vacancies and a huge price crash. 

The headlines and contents in the AFR and Domain (The Age) articles were "A predicted oversupply of apartments in Melbourne is much needed to relieve the city’s tightening rental market, an expert says". An article in Domain stated " BIS Shrapnel recently forecast Melbourne would be facing a substantial oversupply in the next few years, with 22,200 more homes than necessary in Victoria by 2018" "....high levels of vacancies just around the corner for Melbourne". The reality since then has in fact been mostly the reverse. 

How did a highly paid economic advisory firm, who the media are quoting, get it so wrong? Maybe they just looked at the town planning approval figures across Melbourne. It is never the case that all approvals get built. A more realistic figure to find is building commencements and over what time frame? Why can there be such a difference between approvals and commencements (what will actually be built)? There is a myriad of reasons.

For example, just because a site has been approved for a new construction; tightening of bank lending to developers has caused many developers to have to "shelve" projects, sell the site or even go into receivership. Just because a site has been approved by council for a construction does not mean that the approved construction will commence. 

When I was asked last year about the oversupply bad news being headlined my reply was that we were not seeing indicators showing up on the ground level of working in the real estate market in the direction of the media had stated.

Big changes do not easily arrive overnight like a vertical upward line of a graph. Market changes tend to roll in like a wave.

The sight of all those cranes and construction sites that we see everywhere did visually look like Melbourne had gone ballistic with a massive level of over construction and supply. 

Yet the demand for those residences is invisible. I say invisible demand because you can certainly see the visible new supply of properties but you cannot physically see the 150,000 (approx. yearly, 2016 to 2017) new people who live in Melbourne each year, that at an average of 2.5 people per household requires the construction of 60,000 additional residences in just one year in Melbourne to just keep up with demand.

What has occurred since the headlines in 2016 and 2017 about the upcoming residential oversupply is largely the reverse and that is how it felt working on the ground level in real estate

The required 60,000 additional residences to keep up with supply was not met so Melbourne's rental vacancy rate (the number and % of rental properties that are vacant) has narrowed down to about 2%, which also means 98% of rental properties are occupied.

This puts landlords in the beneficial position where their rental managers rents have been gaining higher rents for them. The rental increases, therefore, helps a property investor with the cash flow of the property. I am not saying that the rental increases are fair or unfair, it is just the reality of supply and demand in action.

Andrew Gabriel

Investment Property Researcher

0414 411 510
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This information in this article is for general discussion purposes only. It is not intended as financial or investment advice and should not be construed or relied on as such. Before making any decision of a financial nature you should seek advice from a qualified and registered financial, tax and legal adviser. No material contained within this article should be construed or relied upon as providing recommendations in relation to any financial products or assets or to make any decision. All readers should make independent inquiries to satisfy themselves of the accuracy and suitability of the information to their personal position. No liability is accepted for decisions made using any views in the article. All Content is provided "as is"and without warranties of any kind, either express or implied. Andrew Gabriel is an independent Property Researcher. The views expressed in this article are the views of the author, and do not necessarily reflect the views and opinions of BCV Financial Solutions.