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Interest Rates and Melbourne House Prices

Interest Rates and Melbourne House Prices 3685 2562 andrew stone

Rising interest rates will affect Melbourne house prices – price growth will go down because borrowing costs increase and buyers can’t spend as much. Before April 2022, the last time the Reserve Bank raised the Target Cash Rate was November 2010. It’s been a long time since the property market has dealt with a rate rise, so what should we expect?

Firstly, it’s worth noting that Melbourne house prices have increased in the past when interest rates were high.

Look at the period from 1998 to 2004 in the below graph – the RBA Target Cash Rate was +/- 5% and house prices boomed. As interest rates steadily increased from 2004, price growth dropped significantly, but the market remained in positive territory.


History suggests that the direction of interest rates is more important to house prices than the actual level of interest rates. The Melbourne property market tends to respond quickly to changes upwards or downwards – look what happened to house prices during interest rate rises in 2000, 2005, and 2011, and look what happened to prices when interest rates fell in 2001, 2010, 2013, and 2020.

Interest rates will continue to rise given inflation levels and overseas experience. Melbourne house price growth will likely cease in response.

Melbourne house price growth had flattened in recent months prior to the rate rise in April. Talk to most selling agents, and they’ll tell you the market is very different in 2022 than it was in 2021. Hot competition between 5-6 bidders quickly turned into private sales with 1-2 genuine buyers who refuse to overpay.

The market is patchy though. Quality houses in good locations on conventional blocks are still achieving great results under the hammer. But most other vendors are being brought down to earth. The market was already coming off the boil – now with interest rates set to rise, what should we expect?

Widespread drops in Melbourne house prices are likely but not necessary inevitable in coming months as interest rates rise.

Household savings are higher than ever, population growth is returning, unemployment is at record lows (and predicted to fall further), and massive construction cost escalations will lead to less new housing stock. All that said, the market was already slowing and if interest rates rise dramatically in a short space of time, we could be in for a correction.

The below graph shows how Melbourne house prices responded to a near 3% increase in the RBA Target Cash Rate over just 6 months from July 1994. In affordable areas, average areas, and expensive areas alike, the affect was similar – price drops of 6 to 10% over a year or two.


Supply and Demand will likely buffer us against serious shocks in the short-term though. New listings were already slowing due to the federal election; winter is always quieter; and a lot of vendors will likely sit on their hands to see how the wind blows. Less Supply should act to prop up prices before the busy Spring season from September onwards.

The main risk that we see in the Melbourne property market relates to property investors.

Rising interest rates will affect Melbourne house prices. As borrowing costs increase, the number of property investors will shrink. And those looking to invest will be more cost conscious than they have been in recent years.

I’m already seeing this in the market anecdotally. From late 2020 to late 2021 speculation in the market was rampant. So many people were overpaying for investment properties and development sites. The mindset was clear – why not pay a bit extra, I’ll make it back in the next few months as the market continues to rise. I went to countless auctions for small-to-medium townhouse development sites where I walked away knowing beyond a doubt that the purchaser would lose money on any project they tackled.

Every dickhead was a property developer in 2021!

Said anyone who buys or sells for a living

Now, most properties that have a few warts (older kitchens/bathrooms, warn carpets, outdated lighting, minor cracks, etc) are struggling. Trees, slope, easements, challenging overlays – too hard.

We’re in a more balanced property market than we’ve been in for years. The rollercoaster of unsustainable price growth, rare price drops, and pandemic hysteria has seen sentiment shift sharply. A sellers market turned into to a buyers market into a sellers market into a buyers market into a sellers market. Crazy.

In coming months, we’re going to focus on off-market opportunities. We’re already dealing with more vendors who have realist price expectations and are open to long settlement periods. Prospects for price growth over the next year or two are pretty slim, so smart operators will manufacture wealth through property development instead of hoping for more favourable market conditions.

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Our Services to Property Developer Buyers Explained

Our Services to Property Developer Buyers Explained 928 569 andrew stone

It’s pretty clear to us how you can best build wealth through real estate:

Purchase a property suitable for a profitable development, and complete the project with trusted consultants.

Easier said than done obviously. Successfully complete a development, and you’ll have another crack; fail, and probably not. The rewards to development are great, but the downside potential is real. Below I’ll explain how we help clients succeed.

How to find profitable property development sites in Melbourne.

Assessing project profitability is a pretty extensive process that involves studying planning schedules, construction costs, sale results, and much more. We’ve conducted hundreds and hundreds of feasibility studies, and our advice to anyone seeking to get into property development is – appoint a professional to do this work (whether it’s us or not).

A piece of wisdom that all experienced developers know… Just because you can develop a property doesn’t mean that you should.

Most uninitiated developers don’t really understand this, and it’s why so many fail to succeed. The truth is that of all the development-friendly properties on the market across Melbourne at any one time, fewer than 5% of them deliver a strong profit. No kidding. By the time you factor in stamp duty, professional fees, holding costs, council contributions, construction, selling fees, GST, etc, etc, the opportunity for +/- 20% profitability is very rare.

So much of our resources go into continually analysing project profitabilities across hundreds of Melbourne suburb.

We have a database of all properties sold across all of Melbourne, and we update this every month, and analyse it to determine the relationships between the prices of land, houses, and townhouses.

At any given time, we know the areas that deliver the strongest development profits for particular budgets and project types.

Over the last couple years we’ve purchased sites from as low as $0.9m up to $3.0m+. The types of projects we’ve attained for clients include renovations, knock-down rebuilds, dual occupancies, duplexes, multiple townhouses, and full land subdivisions. Each type of project was selected and attained based on specific client budgets and objectives.

The most common briefs we get involve purchase budgets of $1.5 – $2.0, with the objective of resale profits.

This type of budget typically lends itself to residential developments of 2-3 townhouses in affluent areas where the completed dwellings appeal to affluent 2nd/3rd homebuyers and downsizers (buyers who will pay a premium, as opposed to investors and first homebuyers who are more budget conscious).

In late 2020, a client appointed us to find a profitable 2-3 townhouse site for +/- $1.5m. The existing dwelling needed to be rentable, should they wish to sit on it for a while. And, the area needed to promise strong capital growth, should they choose to retain some or all of the completed townhouses.

We missed out on a couple suitable properties – one at auction from a bidder that wouldn’t stop, and the other because my client prevaricated through private negotiations (he kicked himself after). Having examined these properties in detail together, Chad and his brother were confident of our processes in assessing sites. At a high level:

  • determine project yield (e.g. number and size of dwellings), draft a mud map concept, and seek feedback from Council and a private Town Planner
  • estimate all costs based on similar completed projects, likely timelines, interest rates, rental yield, etc
  • quantify the cash and debt required to purchase and then complete the project
  • predict likely resale values of completed dwellings, which is arguably the most difficult part of feasibility analyses because you don’t have plans, permits, or build specifications to draw on when analysing sales and conferring with local agents
  • pinpoint current market value of the site based on nearby comparable sales, local agent advice, and project profitability scenarios

I found a ripper off-market that suited, Chad and I met the agent on-site together, and we literally signed up the $1.3m offer in the kitchen. Looking back, it was one of the best purchases we’ve made for a client – not only because it was well below market value and profitability was massive, but because we had established such a strong level of trust with our clients that they were comfortable acting upon our advice with the urgency needed.

How to complete a property development project.

Good property development consultants are bloody busy these days. Call an Architect or Town Planner or Builder out of the blue saying that you want some help developing your first property – good luck! The sad reality is that those consultants who jump at working for you are probably the least equipped to do a good job for you (why aren’t they busier?!). And the fee proposals provided will likely be much higher than what an experienced developer receives because you’re not a known quantity.

Over 15 years of developing our own projects and clients’ projects, we’ve established Director-level relationships with every consultant needed to complete a successful development.

They prioritise our work at discounted rates because we have history – they know we’re not time wasters who don’t understand the planning process and how everything fits together. We make decisions quickly, and don’t circle back to them once made.

Black and white, right or wrong decisions are pretty rare in property development.

Do you cut the tree down prior to application? Do you push for 3 back-to-back townhouses or for 2 larger side-by-side houses? Modern, contemporary, traditional? Downstairs Master or no? If yes, is a secondary Master upstairs required? Is a lift needed? What type of build spec will buyers pay for, and at what point do we reach diminishing returns? The list goes on and on.

The majority of clients appoint us to oversee the planning and design process.

Some want to be heavily involved, whereas others are happy to simply be in-the-know. The same clients usually appoint us to manage the construction tender process.

Immediately after Chad purchased the property described above, he appointed us to project manage the planning and design process.

The feasibility we conducted prior to purchase made clear the size and spec of townhouses that we wanted, so our brief to two of our preferred Architects was straightforward: three double story, semi-detached, street-facing, contemporary townhouses about 28 squares in size, each with downstairs GUEST suites and upper story MASTER suites, plus two further bedrooms and an upstairs LEISURE.

In addition to the Architect, we briefed in a Surveyor, Arborist, Town Planner, Traffic Engineer, Landscape Designer, Civil Engineer, SDA Consultant, and a few others. We attained and reviewed fee proposals, and recommended the appointments that Chad made.

All invoices went directly to Chad, and he was involved in all major decision making and design iterations throughout the planning process.

After a lot of frustrating back-and-forth with Council, we eventually attained the permit that we intended. Since Chad purchased the property, local median $ prices have increased 22%. The resale values we estimated at the time of purchase are now much higher, though cost escalations in the construction industry have amounted to about 15% over this period.

We are now working to finalise all construction documentation and will tender the build to two of our regular builders.

So, this is what we do for buyer clients looking for profitable development projects.

A lot goes into purchasing a property suitable for profitable development, and, it’s hard work completing the project with so many consultants to manage and a myriad of difficult decisions to make. But, we love our job, and we’re proud of the wealth we help clients make through real estate.

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