Could Melbourne's house price boom derail its global city status?

Melbourne is the world’s “most liveable” city. If you can afford the property prices, that is.

12/07/2017

Ryan Bennett

Ryan Bennett

Securities Analyst, Real Estate

As we found on our recent visit, Melbourne boasts an enviable wealth of cultural offerings and quality higher education establishments. Its employment pool is diverse, driven by finance, real estate, healthcare and education.

Little surprise, then, that in 2016 Melbourne was named the world’s most liveable city for the sixth year in a row by the Economist Intelligence Unit.

The attractiveness of a city is a key part of how we grade it in our own Schroders Global Cities investment index. It is one of many measures. We also examine the prospects for economic growth and the quality of a city’s universities, for example.

The allure of Melbourne, which is ranked eight in our index, has resulted in one million people joining the city’s population in the past 12 years. To put that in perspective, Sydney’s population has grown by 820,000 over the same period.

In response, 500,000 residential housing units have been built in Melbourne.  But it hasn’t been enough. 

Over the last five years, home values have increased by over 50%.  As a result, housing values in the city now account for roughly nine times that of Melbourne’s median income. A multiple of three times is a normal level of affordability. 

From an investment perspective, this provides an opportunity for developers such as Mirvac to grow its earnings over the next several years through the continued development of new apartments and homes.

Our verdict

Melbourne earns a position in our top 10 Global Cities due to its diverse economy and strong university system. However, home affordability is clearly an issue that needs to be addressed.

Hopefully, developers can work with local municipalities in order to incentivise new construction in order to maintain its status.

Schroders Global Cities index ranking: 8th

Strengths

  • Diversified economy
  • Strong university system
  • Good public infrastructure

Weaknesses

  • Low barriers to new supply
  • High cost of housing
  • Risk of a slowdown in immigration driven by political reform

Important Information: The views and opinions contained herein are those of Schroders' Global Cities Team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or schroders.com contains additional disclaimers which apply to third party data. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.