Thursday 13 July 2017 4:12 pm Schroders Talk

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

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The latest version of the Schroders Global Cities index was published last month. The index uses a number of factors to identify the most economically vibrant cities. Melbourne was ranked 8th. This post from the Global Cities blog focuses on the city’s outlook…

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 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.

Our verdict

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.

Melbourne's Global Cities index ranking: 8th

Melbourne's strengths

  • Diversified economy
  • Strong university system
  • Good public infrastructure

Melbourne's weaknesses

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

Note: the regions and companies mentioned in this article are for illustrative purposes only and not a recommendation to buy or sell


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