Melbourne house price surge suggests market is overheated, low growth predicted for 2010

House prices are overheated in some areas and will become out of reach if current trends continue over the next year, several property experts have warned.

The comments come as new figures from the Real Estate Institute of Victoria show the median price of a Melbourne house reached $540,500 as of 31 December, representing an increase of 15% during the quarter.

Some suburbs recorded unusually high rises. In the eastern suburbs, the median price of a home in Burwood, increased by 23% to $810,000 in just three months, while prices in the suburb of Ringwood grew 16%. The median price of apartments and units grew by 7.6% to $441,000.

Matthew Bell, economist for Australian Property Monitors, says some areas of the country are undoubtedly recording overheated rises.

“The reasons behind these rises I view from a very macro level. It’s a supply and demand issue, and there are definitely areas where prices will have been overbid and they are much more susceptible to things like the first home owner’s incentive.”

“Of course, easier credit and lower interest rates are factors, but I think you can’t discount the undersupply and strong population growth and I think we’ve just had good growth for a long period of time.”

Bell’s comments regarding a housing shortage come after figures from SQM Research last week revealed vacancy rates in major capital cities, including Melbourne, actually rose during December. Founder Louis Christopher said this indicated price rises were due to ease of credit, rather than a housing shortage.

However, Bell maintains much of the price growth is driven by a “mismatch between supply and demand”. And although this behaviour is unsustainable, he says, the market will not react quickly.

“This is driven by supply and demand, and it’s therefore hard to see a short-term price crash because that’s not something that changes quickly, it takes years to react. That said, there are areas which are overbid and you could see some falls there.”

However, Christopher says the substantial increases in the eastern suburbs are simply anomalies, which can appear from time to time in a stronger market.

“We’ve got to be careful, because we have no doubt seen some rises and some areas have been stronger than others. This is an anomaly. These areas have risen faster than the overall market for a number of reasons, the suburbs could be more popular, more people want to live there for whatever reasons, etc. A combination of factors.”

Christopher says while the market will perform strongly over 2010, it will nevertheless experience a slowdown. Partly, he says, due to Westpac’s recent changes to its mortgage lending practices.

“The move to cut loan-to-value ratios to about 87% in some instances, means the borrowing capacity of a lot of first home owners has been cut in half. If that moves along to other banks, it could change the market.”

David Airey, president of the Real Estate Institute of Australia, also says some areas of the market are overheated.

“If those rises are happening in a short period, that would generally be referred to as being overheated. It’s also unlikely to be sustained because the properties are becoming too pricey.”

“Rises purely come out of people wanting to live in a particular suburb at the same time. As a consequence, prices rises, and that is happening in every city in the country – but Melbourne has gone absolutely crazy in some parts.”

Airey says the risk of a crash is minimal due to the strength of the market, but warns the market could stall if prices rise high enough.

“These rises are quite unusual, but they won’t be sustained beyond two or three quarters. They just become too high and it would be hard to see that continuing because it’s too far out of normal price ranges.”