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An investor owns a townhouse in Altona North in Melbourne, at least what looks like empty land surrounding it. They're worried that future oversupply could kill the growth of this property. Is that concern justified? Let's let the data speak. This episode, we are trying a new format.
At InvestorKit, the research team would receive questions from the strategy team and the clients. Most of these questions are about property performance, suburb performance, or market trends. From time to time, some of these properties or portfolios are quite interesting and are worth sharing with you. And in our episodes, I'll be sharing the questions with you and how we would approach them. And of course, I'll be keeping everything anonymous.
We'll be focusing on the question behind the question, not the specific property itself. Now let's get into the question today. This client owns a two-bedroom townhouse in the Melbourne suburb of Altona North. They're concerned about the potential future oversupply in the area. If oversupply occurs at a certain time, they might be considering selling that property before it comes.
For context, Altona North is a suburb in Hobsons Bay. It is around 13 kilometers west of Melbourne CBD or around 20 minutes drive from the CBD. It's not a big suburb with only 5,000 dwellings in 2021. Because the concern is about oversupply, first want to see how the suburb looks like. Does it have a lot of empty land to be developed?
From a satellite map, we can see that it is a small suburb, well-established overall. On the eastern side, it's the residential area. And on the western side, it's industrial land. To the north of the suburb, we see a large patch of industrial land across the Westgate Highway. Anything looking like empty land, it would be at the top right corner of the suburb.
We see a green patch with new townhouses being built. Seemingly more dwellings are to be built. After checking local planning documents, we found that this area, surrounded by New Street, Kyle Road, Black Shores Road, and Westgate Freeway, there was actually a plan for it. It was rezoned to transition from industrial uses into a mixed-use neighborhood, providing around 3,000 dwellings, 1,000 plus jobs, and commercial uses and new open spaces in the 20 years from 2018 onward. That 3,000 dwellings sounds like a large number, especially considering the suburb now only has around 5,000 dwellings.
However, we need context. If the 3,000 dwellings will be supplied over a horizon of 20 years, in each year, the supply level would be very much measured and wouldn't be causing a serious oversupply issue. That can be proven by two things. One is the current building approval rate of the local SA2 area. It is only 0.
5%, a number representing not many new houses or new townhouses are being approved to be built. The second piece of evidence is the suburb's long-term performance in the townhouse market. Over the past decade, townhouses in Altona North have delivered very similar annualized growth rates to the detached houses. The actual number is 3. 4% per year for townhouses compared with 3.
7% for detached houses. It is very similar to what's happening in the macro region, Hobsons Bay, where townhouses delivered a 3. 5% per year growth, while detached houses delivered a 3. 6% per year capital growth. If we zoom out even a bit more, these numbers are actually very much in line with Melbourne's house market itself, which is 3.
5% per year growth over the past 10 years. If the local townhouses are facing oversupply risks, we would typically expect a much lower annualized capital growth in the observed in the townhouse market compared to houses. Hobsons Bay's house market has always been regarded as well-established. There's never oversupply led underperformance over the past decade. So when the townhouse market is tracking house market performance so closely, it is very unlikely that it experienced oversupply issues and that oversupply issues affected its performance.
That said, past performance can never predict future performance, as we always say. It is still worth monitoring over time. In the coming years, when Melbourne's housing market strengthens and development activities becomes more financially feasible, it is possible that a large amount of the planned dwellings would be developed or built in a shorter amount of time. And that might lead to a short-term oversupply issue. So for this client, we would still recommend keep a close eye because building approval rate can be an early indicator for any oversupply risks coming in the short to medium term, like one to three years.
On a side note, one reason that could have caused this client to have concerns about oversupply would be the performance of the property itself. The property was bought off the plan five years ago, and over the five years, the annualized value growth of this specific property was just 0. 2%. That is really low. It is understandable to assume that it could be caused by oversupply and this oversupply issue could happen again sometime in the future.
But this 0. 2% performance is more likely driven by market cycle positions and property-specific reasons rather than local oversupply issues. So first, market conditions. Melbourne's housing market hasn't been moving much in the past five years. Hobson's Bay's house market achieved only 2.
5% per year growth over the past five years. So even the standalone house market didn't grow really well. That is the macro backdrop. And on top of that, specifically about this property, because it's bought off the plan, it is possible that when it was bought, the price included a new property premium. And during the first five years of holding, the fast building depreciation made the total performance even worse than the local market.
To tell whether they should sell or hold this property, we first want to look at the property's short-term, medium-term, and long-term performance potential. In the short term, what we see in Altona North is that supply isn't particularly tight. Inventory is now 7. 7 months of stock, much higher than the balanced range of three to four months. Days on market is not particularly low.
It's almost 40 days. As a result, growth has been just moderate, 3. 9% per year growth in the townhouse market. Moving forward, in the short term, growth is likely to continue to be moderate, given the relatively loose market conditions. In the medium to long term, good news is, for now, we do not see oversupply risks, although we still need to monitor.
And as Melbourne's overall housing cycle strengthens, we do expect this property, together with the suburb and Hobson's Bay region, are likely to enter a relatively strong market cycle. Reasons for holding would be, one, the acceleration of growth, and potentially they can enjoy a good amount of growth in the coming growth cycle. And two, as a townhouse with a good condition, rental returns can be better than the local houses. So holding conditions can be favorable. But at the same time, in the long term, townhouses still wouldn't deliver as strong capital growth as houses on average.
So if this client would like to maximize capital growth potential on their investment properties, it can also be sensible to sell it and transition into a house because of the moderate growth expectation in the short term, making the opportunity cost much lower for this transition. So to summarize, as far as we can see now, Altona North is not expecting a oversupply issue in the medium term, although we need to continue monitoring the local building approval rate trends. Market pressure in Altona North is now moderate. Short-term growth potential could still be moderate, but in the medium term, it is likely to accelerate together with Melbourne's housing market as it gradually gains momentum. If there is a hold or sell decision to be made, it won't be based on potential oversupply risk, but rather the investor's portfolio plan.
Holding may make sense when the primary goal is to enjoy healthy cash flow and the medium-term growth amount. And then sell may make sense if the goal or the major goal is to maximize the capital growth potential in the long term. Hope you like this new format. I'm Zhong, the senior research analyst here at InvestorKit. I'll see you next time.
