Investors are facing a potential cash-flow crunch, which threatens to weigh on real estate prices.
The Melbourne property market is poised for further capital growth, however a potential cash-flow crunch for investors, in conjunction with other headwinds, threatens to weigh on price performance, according to a new research report.
Property Market Spotlight: Melbourne, compiled by property investment consultancy Momentum Wealth, analysed the key demand and supply indicators that influence property values in the Victorian capital.
The report found that Melbourne’s strong population growth, growing labour market and an undersupply of established property listings would continue to underpin demand for property in the city, however there were several headwinds on the horizon.
Momentum Wealth managing director Damian Collins said that one of the larger challenges for Melbourne property investors were the record low rental yields, which are the lowest of any Australian capital city.
“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,” he 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,” Collins said.
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While the research report explains that the short-term capital growth indicators remain strong, not all segments of the Melbourne property market are likely to benefit.
“There is a big gap in the capital growth performance in Melbourne between houses and apartments,” Collins said, adding that the former was running at double-digit growth while the latter was only slightly above inflation.
“The research report forecasts this growth disparity to continue, with apartment values even beginning to fall in the short term,” Collins said.
“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,” Collins said.
“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,” Collins said.
Read more from Damian Collins:
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