While the Melbourne property market is poised for further capital growth, a potential cash-flow crunch for investors, in conjunction with other headwinds, threatens to outweigh price performance, according to a new research report from Momentum Wealth, a property investment consultancy.

Entitled Property Market Spotlight: Melbourne, the report analysed the key demand and supply indicators that influence property values in Melbourne. The report found that the Victorian capital’s strong population growth, growing labour market, and acute undersupply of established property listings would continue to underpin demand for property. However, there were several headwinds on the horizon.  

Damian Collins, managing director of Momentum Wealth, said that among the biggest challenges for Melbourne property investors were the record-low rental yields, which are the lowest of any Aussie 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.”

Momentum Wealth’s report indicates that the cash-flow crunch—along with affordability constraints, tighter financial markets, and growing supply of new stock—is likely to cool the double-digit property price growth Melbourne has enjoyed in recent years.

Historically, Melbourne’s rental yields have been tighter in comparison to other Aussie capital cities for both units and houses. Currently, rental yields in Melbourne are 2.7% and 4% for houses and units respectively, which has been trending lower in recent years.

While this had led to tighter cash flows for investors, as their rental income doesn’t cover as much of their mortgage repayments, lower yields have been partially offset by record-low interest rates, meaning repayments aren’t as exorbitant.    

On the other hand, while the report makes it plain that short-term capital growth indicators remain strong, not all segments of Melbourne’s 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 speeding ahead 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.”

This is likely because demand for apartments is expected to decline following the reintroduction of stamp duty for off-the-plan purchases by investors, as well as the implementation of the new vacant property tax and tighter lending conditions. “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.  

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