Author:

Greville Pabst, CEO, WBP Property Group

Are property prices in Melbourne’s inner suburbs really climbing as quickly as we’re lead to believe?

According to ABS figures, established homes in Melbourne grew in value by 19.7 percent in the year to December 2009. The Real Estate Institute of Victoria supports claims of strong growth in the state’s median adding that the largest increases occurred from properties in the middle to upper price brackets, which are largely represented by inner city property.

But while there is no doubting that prices are on the up, the data upon which these figures are based fails to recognise the implications of the increasing trend of property owners in inner city areas to renovate or redevelop to add value to their property.

As property prices become increasingly unaffordable and stock levels remain low many property owners are choosing to renovate or extend rather than upgrade. Transaction costs alone are a key factor in this decision with many property owners opting to invest money back into their real estate assets rather than loose it to agent and legal fees, taxes and administrative costs. This trend is seeing property owners inject tens of thousands of dollars into their property, adding significant weight to the property’s value when they decide to sell.

ABS trend estimates show that Australians spent an estimated $528.5 million on alterations and additions to residential buildings in January 2010 alone, while local figures demonstrate that Melburnians spent more than $823 million on renovations and extension since July 2009. Interestingly, data confirms that city council areas with the largest expenditure on renovations housed those suburbs that witnessed the greatest rises in median house prices during 2009.

Topping the list, residential property in Inner Melbourne including suburbs such as St Kilda, Prahran and Richmond, saw the greatest activity, with property owners spending more than $166 million improving their properties. This was followed by Southern Melbourne suburbs including the likes of Brighton, Caulfield and Malvern and Eastern suburbs Camberwell, Hawthorn and Kew as well as Middle Melbourne suburbs Burwood, Box Hill and Surrey Hills, which spent a combined total of more than $245 million between July and January.

While historical evidence shows that inner city properties outperform outer or fringe property in terms of capital growth, the disparity between growth rates is further exacerbated by the growing movement towards renovation in our capital city. The concentration of renovation and home improvement activity in the Melbourne inner and middle ring suburbs has added further stimulation to capital growth on top of the already significant natural growth trends in residential property at present.

In essence, this renovation activity is distorting the median price in the inner suburbs creating what may be an overstated perception of the strength of the market. Unfortunately, none of the major data suppliers currently adjust for renovation or capital improvement to track natural growth in our property markets.

This article was published in the Saturday Herald Sun 17 April 2010.