3 Key Metrics Before Investing in Melbourne Suburbs

Last episode, Junge spoke about the five worst areas of Melbourne. Today, I'm going to unpack the three metrics you need to understand before you invest in any suburb in Melbourne. And stick around to the end, because I'll even be sharing five specific suburbs, whilst also helping you understand vacancy rates, lower quartile pricing, and the importance of avoiding units, no matter how tempting they might seem. This information is so valuable for anyone looking to invest in Melbourne. I'm Arjun Paliwal, CEO of InvestorKit.

Let's get into it. So the first trend I'm going to start off with in terms of data points is relating to avoiding units. Now, I know it might sound simple where someone goes, hey, yeah, don't buy a unit, buy a house, but you'd be surprised, especially with how many there are out there, how many there are being sold and rented, of course, that people go and make these investment decisions. I'm in the business, actually, not of property investing to help investors grow a portfolio, but of late, I've realized I'm actually in the business of fixing broken portfolios. And the biggest thing that comes up is this.

It's buying units, in particular, in Melbourne, right? So I'm going to go through a few data points just to share what in Melbourne is standing out. And the two suburbs I've got here are Melbourne CBD and South Bank. So the first thing to recognize is based on our data, they're quite affordable. The Melbourne CBD has a unit price of around $540,000, and the Melbourne CBD extending out to South Bank now has a unit price of $593,000 as a median.

Now, in terms of these two areas, you'd think that they've done well or they've done okay, being Melbourne, a major city, overseas migration, big population, shiny buildings, great CBD, restaurants, foodies, cafes, you know, all the good stuff that everyone talks about when they think an area is good. Well, in fact, these areas, Melbourne CBD up 4. 33%, and then South Bank up 8. 78%. Now, you might be wondering, Arjun, well, that's great.

Well, that's over 10 years. Pretty, pretty crap. Now, there is thoughts and data, though, that when an area hasn't done well over 10 years, it's going to return. But it's not that simple, because returning to averages is one metric, but there has to be pressure around it that changes something. There's got to be a sign of life coming up that makes that change.

Let's go deeper into some of the data to see if that sign of life is there or showing. Now, the first part of life coming up in Melbourne units is affordability. So the good news is that's there, but that's just one sign. The second sign, though, is actually around days on market, the time it takes to sell. Well, the CBD in Melbourne is up 6.

98% over the last year, meaning it's taking 7% longer to sell a property. And the suburb of South Bank is up 32%, meaning it's taking 32% longer. It's almost a third on top of what it took the year before to sell a property, right? So that's a huge amount of time of an increase. And now we go to the next metric, which is inventory levels.

So this is the ratio of how many listings are there in comparison to how many sales are occurring. And for those new to this metric, if you had 30 listings in a suburb and you had 10 monthly average sales, that would represent three months of stock, meaning if no new listings came on, in about three months, all the stock would be taken. That represents a pretty balanced market. But over here, we've got Melbourne CBD with 5. 4 months of inventory and South Bank at 6.

8 months of inventory. So definitely oversupplied from established listings for sale. Now we go to vacancy rate thinking, hey, I've got a great apartment. It's in the CBD. It's cheap.

It's fancy. The lift, the gym, the sauna, the rooftop. Like this is, you know, Gary Bricker, his dream property, right? With all the health facilities and everything like that. You'd think that this is perfect.

Well, vacancy rates in Melbourne CBD, 3. 59%. And then vacancy rates at South Bank at about 2. 91%. And if you're wondering what a balanced market is, it's about that 1.

75 to 2% vacancy rate mark. Some suburbs you could say 1. 5, but that 1. 75 for two is balanced. Over here, in terms of the one year change of that vacancy rate, Melbourne CBD up 11.

62 and then South Bank up 13. 9%. So clearly you can see in two major markets of Melbourne for unit prices, the only thing that's going well for it is that it's affordable and hasn't grown much. But you shouldn't use that metric alone. Too many people go through that mistake of thinking that they've timed the market perfectly and that everything's going to run back up just because it was cheap and a great price to get in.

I don't think that's the case unless pressure changes or is showing some change because right now it's not, it's still worsening. And to go deeper into the units of Melbourne, something you should clearly avoid, let's look at something we call incoming supply. Now for those new to incoming supply, it's how many buildings there are currently in the area and how much is in approval coming through. Now in isolation, I've studied this metric deeply. We've done correlation tests.

We've run it back through many decades of review and we don't see a clear correlation in isolation, meaning alone this data set doesn't move it. But if you have a triple whammy, which I call vacancy rates being up, established listings being up and new supply being up, then where does that demand actually go into? It's just going into that oversupply. So it's not creating price pressure. In this particular case, let's look at the incoming supply of Melbourne CBD.

So Melbourne CBD's current unit supply from data we could gather was around 27,000 units. There could be a little more in some areas that may not have flowed through to some of the data points, but let's just say there's 27,000 here. We've already seen around 7,700 new ones in the pipeline. So that means there's 28. 26% of incoming unit supply.

Ridiculous. Like that's not a small amount of unit supplies. Now you might think that, hey Arjun, nationally supply trends are down, but there can be pockets where they're up. Now in isolation, that's not a big issue, but if you look across the other points with established supply and vacancy rate that I took you through, it's clearly still an issue. So that just shows there's a fair bit of units coming soon.

Some are not confirmed on completion date. Some are quite clear on completion date. So yes, approvals is one thing, starting off the ground and actually completing is another, and they don't always match with each other at the same time. But the key thing here is to recognize there is that vision, there is that thought to put a lot more apartments there and a lot as a proportion of how much current supply there is. So that's the first trend, avoiding units.

Let's jump into the second one. The second particular trend is called lower quartile pricing. So lower quartile pricing is a really interesting one, and it simply means this. If you took, say, a market of, say, a million dollars in price point, and then that million dollar market or that city had three areas or four areas where sales could occur, sales where there's under 500 sales and there's a portion there, then there might be, say, 5 to 750 and above. Now, that's not the exact quartile, but what I'm just trying to visualize to you is that if you divide the sales into brackets, those brackets of sales making up that overall price point is where you get different levels of activity.

For example, there's blue chip markets or premium markets that represent the upper quartile of pricing, the priciest areas of a city, and they're obviously well above median prices in the city itself. And so that's kind of the upper quartile and the lower quartile might be the lower socio, the outer rings, or the more affordable prices. Now, you can even have lower quartile pricing within a suburb because it's got its own median, it's got above that and below that, but the key thing here is to say it's affordable price trends across the city. Now, affordable can mean different things. Someone on a million dollars a year might think a multimillion dollar property is affordable to them in their suburb, so it's not affordability in terms of incomes, it's just affordability in terms of the lowest prices of that city.

So that's the lower quartile. Now, with the lower quartile, something nationally has been occurring, and that's where over the last couple of years since interest rates have increased, that price bracket of the lower quartile has been growing faster than markets in the upper price bracket, which simply means there's a trend line of, say, three lines, middle, upper, and lower, and that lower one is catching up to the middle and upper, and it's closing the gap. Now, this can do a few things. A, it can be great for upsizing markets in the future when people cash out of great growth in the lower tiers. B, it can make people consider upper and middle markets, not just from an upsize, but because they look more valuable in the fact that they're closer in price points.

But C, the last thing to share, it also means that the price is rising in the lower quartile because it's closing the gap, which means it's growing better. And this isn't just a Melbourne thing. This is all over. Perth, Brisbane, the more affordable markets have been crushing it.