Melbourne House Prices Compared to Ireland

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Ask two people what they think about Melbourne’s property prices and you’ll likely get two different answers. Since I don’t own a house, I have an interest in seeing house prices in Melbourne come down from their current levels. Specifically I’d like to see prices reduced in the areas that I’d like to live in, since isolated reductions elsewhere are irrelevant to me. On the other hand many of my friends own houses. They would prefer to continue seeing their investment rise in value.

If we were to have a decline in house prices, like the well publicised decline in Ireland that accompanied the financial crisis, how much lower would they fall? And how long would it take house prices to reach the bottom? Finally I wondered if buying in a good region protected against significant losses.

I found a record of the historical prices and rents for two regions around Dublin, before, during and after the financial crisis at different sized properties. Armed with those numbers, I calculated the decline in prices, and changes in rental yield.

The regions of Dublin

Dublin, the main city in Ireland is divided by a river through it’s center. The coastal, eastern suburbs to the north and south are more upmarket than the inner and west suburbs. Specifically the southern suburbs are where I focussed my attention. Those suburbs represent the tradition of buying an expensive house in a good location with the best schools. While the western and inner areas tended to be more for the working class.

You could draw parallels between those southern coastal suburbs to our own southeast suburbs along the river like South Yarra and Toorak. And along the coast towards Brighton.

The timeline of prices

The housing prices first started to decline around 2007. Reproduced here are prices and rents for southern coastal houses (South Co) and those in the west. Finally also calculated is the rental yield at each point.

RegionYearBedsYieldRentPurchase
($ or euro)/mo($ or euro) '000s
South Co200653.20%46521743
South Co201053.30%2484903
South Co201354.95%3282796
South Co200624.10%1436420
South Co201024.55%1163307
South Co201326.25%1349259
West200652.88%1334555
West201053.89%1623501
West201354.19%1300372
West200624.13%1114324
West201025.92%883179
West201329.20%928121
South Yarra2014house2.80%33061419
South Yarra2019house5.00%3547.5851.4
South Yarra2014unit4.01%2041611
South Yarra2019unit6.00%1833366.6
House Prices and Rents. Dublin real estate data taken from Daft.ie

  I wasn’t able to find data on specific to the number of bedrooms for South Yarra, so instead I’ve used “unit” and “house” data and assume that they are representative of two and 5 bedroom places.

On losing half the value

In the affluent South Coast, the larger five bedroom houses lost more value relative to the smaller two bedroom units. While in the west it was reversed, and the five bedroom houses retained more than the two bedrooms.

For the two bedroom units, rental yields were 4.1% in 2006 and increased to now 6.25% in 2013. With the yields so high, the market is showing signs of growth. It is interesting to note that two bedroom rental yields are now a staggering 9% in the west. I understand that the west had an oversupply of housing and that many construction sites were left empty as projects were abandoned. My guess is that many units in the west remain vacant and so earn no rent at all, and this isn’t reflected in the 9% rental yield figure. Either that, or the west has been oversold and now is a perfect time to make an investment.

Can we apply this to Melbourne?

I don’t know. Since the results confirm my biases I hope we can, however I suspect the answer is “It’s more complicated than that”.

Regardless, I’m going to take a look at the Melbourne suburb of South Yarra as a point of comparison.

Weekly two bedroom rents in the past year have increased by $20 in the last year, or 4% while purchase prices have increased 12%. Rental yields are currently at 4.0% - lower than the yields before the crisis in Dublin.

A 2 bedroom unit in South Yarra can fetch $611k right now, if over the next 5 years prices were to decline in line with that in Dublin, then in 2019 that same 2 bedroom unit would be $366k. A twenty percent deposit would cost $72k compared to $112k now.

Of course, the decline in Ireland was accompanied with a terrible recession. Many adults were unemployed. Unemployed people are unlikely to afford a deposit to purchase housing - no doubt a significant contributor to the decline.

To those waiting for their chance

First home buyers waiting for their chance to purchase may find that they are without a job and so still cannot afford the reduced house prices - if they ever eventuate.

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