Property Developers Must Anticipate Future Market Directions

Melbourne house prices have risen substantially over recent years.

But property development is predominantly about future market prospects… What will these townhouses be worth once built -24 months from now??

As Real Estate Analysts, we know House Prices tend to increase in response to low and falling interest rates, and to an average Aussie Dollar. Markets respond kindly to cheap debt finance and strong demand from foreign investors (amongst other variables we monitor).

So, when purchasing a development site a couple years back, were reasonably bullish about future price growth. An important question beyond that is – How will specific market segments perform??

The most expensive, affluent suburbs generally see higher price growth in good times than other suburbs do.

To illustrate this, see below a comparison of Median $ House Price Growth in Nillumbik and Stonnington. Nillumbik houses go for about $620k whereas houses in Stonnington sell for about $1.82m. The highs during growth cycles have clearly been more dramatic in Stonnington.

In a rising market, I prefer to develop in premium suburbs so as to take full advantage of increasing house prices. A good example is one of my JV projects in Ivanhoe, where the current Median $ House Price is $1.4m (more than 2x the Melbourne Capital City Median).

My partner and I purchased in March 2015 for $925,000. According to CoreLogic figures, Median $ House Prices in Melbourne increase by 15.3% since then, which would suggest our property is worth about $140,000 more now. Houses in Ivanhoe have grown by 18.7%, putting our value at about $175,000.

By being smart, and taking maximum advantage of a rising market, we’ve gained about $35,000 in equity.

Ivanhoe is a big suburb, and being the data geek I am, I made sure we bought in the right pocket of Ivanhoe – one that was particularly due for growth (see the green portion in the above map of Ivanhoe, where prices have increased dramatically more). So ultimately, the upside in capital growth associated with smart buying is going to be much more than $35,000.

In a flat market, I prefer to develop in middle-outer suburbs because they rarely fall in value much.

The likely future direction of the market should play a major part in determining the type of property development you pursue, and where you seek to purchase.

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