The Golden CoastAn ideal mix of every factor imaginable puts Melbourne at the head of the class

At the end of August, the Economist Intelligence Unit released its annual Liveability Report. Much remains unchanged — Osaka is still tops in Asia, Hong Kong could perform much better — but after years of the same old same old, Vancouver was usurped at the top of the list by Melbourne.

Those kinds of lists vary from researcher to researcher, from publication to publication, but very rarely is a negative word uttered about Australia’s second largest city, and most beautiful according to many. The port city of just over four million is easily Australia’s most cultural, with vibrant art scenes in almost every discipline imaginable, it’s home to the country’s largest film production house, and credits itself as the birthplace of the singular Australian Rules Football. Melbourne hosted the Summer Olympics almost 40 years before Sydney did, many of Australia’s largest corporations are headquartered there and it rivals New York, Toronto and London for diversity. As an added bonus, the Yarra Valley, just up the road, produces some of the country’s best wine. What’s not to love?

Australian banking giant Westpac’s property outlook for Melbourne between 2010-2012 is generally strong despite some glitches. Immigration to Victoria, one of the residential market’s main drivers, is level, and as long as government policy doesn’t change, it should remain constant. The vast majority (80 percent according to the bank) move to Melbourne, and though job growth slowed slightly in 2010, its remains in the black. Tim Storey, Colliers International Managing Director, Residential Victoria in Melbourne, agrees. “One of the biggest influences on population growth and consequently the demand for new dwellings nationally has been the level of net overseas migration inflows,” he says, adding that the next year or so will be influenced by interest rates, supply, rents, consumer confidence the city’s position as being just past the top of its cycle.

“While current dwelling construction in the pipeline has increased significantly and will result in further increases in completions in 2011, the rise will still not be sufficient to fully erode the substantial deficiency of dwellings already in place. The increasing shortfall of dwelling stock since 2006 has been reflected in tighter rental vacancy rates, as the lack of new supply has pushed more people into rental,” Storey sums up. Music to the ears of anyone looking for a rental investment assuming you can find a property to purchase.

And as far as investment goes, Victoria is very much a desirable location. “Investors surged in the Victorian market during the first half of [2010]. Growth of 20 percent in nominal terms but also 18 percent in price adjusted (as values stabilised) suggested the investor was attracted by the strong price growth of 2009, as expected. Although below the peak of mid-2007 the price adjusted investor confirms solid activity in this market, despite interest rate increase,” Westpac’s report stated. The short story is that Melbourne remains a wise purchase. “Price growth in Melbourne is expected to be more moderate over the next two to three years. Affordability is anticipated to remain strained,” Storey begins. “However, upward pressure on prices will continue to be applied from the shortfall of dwelling stock, as well as rising employment and income growth as economic conditions continue to accelerate. This should push through rises in prices going forward.”

Of course, Westpac’s report was issued before one major event: the Australian dollar becoming a global power currency. Despite the exchange rate currently being agony for Hongkongers travelling to Australia (and Aussie dollar costs over $8, up from under $6 just a few years ago) Storey bluntly states that hasn’t been too much of an issue for Melbourne. Put simply, “Offshore investment in the inner city residential market continues to remain strong.” The luxury sector is partially defined by a limited supply of new, well-located and designed flats in the CBD despite what Storey and Colliers see as strong demand. But Melbourne is a combination of investors and owner-occupiers with strong fundamentals underlying the property market: youthful migration, tight lending practices with room for rates to fall, high equity in the residential sector, undersupply of affordable housing, low unemployment and a miniscule number of mortgage defaults (fewer than 1 percent). Clearly the EIU was right this year.