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Could Melbourne’s house price boom derail its global city status?

Melbourne is the world’s “most liveable” city. If you can afford the property prices, that is. Ryan Bennett, Securities Analyst, Real Estate explores the Australian city and weighs up where it falls in Schroders Global Cities investment index.

Brighton Beach, Melbourne, at dusk

 

 

 

 

 

 

City: Melbourne, Australia

Index Ranking: 8th

Melbourne earns a position in our top 10 Global Cities due to its diverse economy and strong university system. However, home affordability is clearly an issue that needs to be addressed. Hopefully, developers can work with local municipalities, in order to incentivise new construction, in order to maintain its status.

Strengths

-Diversified economy
-Strong university system
-Good public infrastructure

Weaknesses

-Low barriers to new supply
-High cost of housing
-Risk of a slowdown in immigration driven by political reform

As we found on our recent visit, Melbourne boasts an enviable wealth of cultural offerings and quality higher education establishments. Its employment pool is diverse, driven by finance, real estate, healthcare and education. Little surprise, then, that in 2016 Melbourne was named the world’s most liveable city for the sixth year in a row by the Economist Intelligence Unit.

The attractiveness of a city is a key part of how we grade it in our own Schroders Global Cities investment index. It is one of many measures. We also examine the prospects for economic growth and the quality of a city’s universities, for example. The allure of Melbourne, which is ranked eight in our index, has resulted in one million people joining the city’s population in the past 12 years. To put that in perspective, Sydney’s population has grown by 820,000 over the same period. In response, 500,000 residential housing units have been built in Melbourne.  But it hasn’t been enough. Over the last five years, home values have increased by over 50%.

As a result, housing values in the city now account for roughly nine times that of Melbourne’s median income. A multiple of three times is a normal level of affordability. From an investment perspective, this provides an opportunity for developers such as Mirvac to grow its earnings over the next several years through the continued development of new apartments and homes.

Access the latest thinking around what’s driving real estate growth here>

Important information For professional advisers only. This material is not suitable for retail clients.  Past performance is not a guide to future performance and may not be repeated.  The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.  Schroders has expressed its own views and these may change.  The sectors, regions and companies mentioned in this article are for illustrative purposes and not a recommendation to buy or sell. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue.  Our forecasts are based on our own assumptions which may change.  We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts.  Forecasts and assumptions may be affected by external economic or other factors. Issued in February 2017 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority

 

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