Key takeaways
Melbourne house values have only increased by a mere 1.6% between March 2020 and May 2023, which is significantly lower than other capital cities in Australia.
Despite the slower growth, Melbourne's lower rate of increase in house values could present an affordability advantage for home buyers, making it a more attractive option.
The rivalry between Melbourne and Sydney extends to house prices, with Sydney historically having higher house values. The gap between the two cities widened during the pandemic, with Melbourne's median house value being 29.6% lower than Sydney's in May 2023.
Melbourne's improved value proposition, driven by lower supply levels, a low rental vacancy rate, and relative affordability, could make it more competitive in attracting participants in the housing market.
The impact of high-interest rates remains uncertain and could potentially offset Melbourne's advantages in demand, supply, and affordability. Access to credit may be challenging, and homeowners may need to sell due to increased mortgage repayments and high living costs, which could lead to a rise in new listings and downward pressure on housing prices.
Melbourne house values have increased a mere 1.6% between the onset of COVID in March 2020 and the end of May 2023.
Every other capital city has seen double-digit growth, ranging from a 16.5% gain in Sydney to a 45.2% surge in Adelaide house values during that period.
Melbourne homeowners might be disappointed at the city’s substantially lower growth rate, but the sluggish conditions could give Melbourne an attractive affordability advantage for home buyers.
Capital city price rivalry
The legendary rivalry between Melbourne and Sydney goes well beyond friendly barbecue banter dating back to the 1850s but when it comes to house prices, Sydney has always had the upper hand.
In March 2020, at the onset of COVID, Melbourne house values were 19.2% cheaper than Sydney’s.
By April 2022 the gap between Sydney and Melbourne house values had blown out to 30.3% - the biggest divergence since May 2006.
The gap has closed a little since then however Melbourne’s median house value was 29.6% behind Sydney’s in May 2023, or the dollar equivalent of roughly $382,500.
Every capital city other than Canberra – the country’s second most expensive capital for houses – has significantly closed the house value gap to Melbourne.
At the onset of COVID, Brisbane houses were 47% cheaper than in Melbourne.
That affordability gap has closed to just 15%.
Melbourne was 85% more expensive than Adelaide at the start of COVID but the gap has narrowed to just 29% and in Perth, where the gap was 88%, Melbourne house values are now 50% higher.
Less substantial swings and roundabouts
The underperformance of Melbourne house values relative to other capital cities is due to a combination of factors.
The city experienced a more substantial drop in value than other capitals through the early stages of COVID, it recorded a softer increase through the upswing and there’s been a significant decline in values through the rate hiking cycle to date.
Melbourne house values fell by -6.7% between March 2020 and October 2020, before surging 20.6% through the growth cycle.
House values subsequently fell by -11.2%, finding a floor in February this year.
Since February, Melbourne house values have risen by 1.7% to the end of May 2023.
Melbourne’s road to recovery
Melbourne’s softer housing market conditions through the pandemic cycle coincided with a sharp drop-off in demographic trends.
Both net overseas and interstate migration rates fell sharply through the pandemic, reaching record lows, detracting from housing demand amid a series of lockdowns associated with the pandemic.
Demographic data from September 2022 shows Victoria’s interstate migration is normalising and was almost back in positive territory (-484 net interstate migrants).
With demographic data for Q4 2022 to be released later this week, it’s likely Victoria will once again have reached a positive interstate migration position, ending 10 consecutive quarters of decline.
With Australia’s annual net overseas migration surging to new record highs and Victoria’s first possible rise in interstate migration since Q1 2020, Melbourne's housing demand has strengthened substantially.
Melbourne’s competitive edge
With housing affordability remaining stretched, this improvement in Melbourne’s value proposition could place Australia’s second-largest city in a more competitive position to attract a greater share of housing market participants.
The city’s advertised supply level is trending lower and is -13.4% below levels at the same time last year and -7.0% below the previous five-year average.
Melbourne’s rental vacancy rate of 0.8% in May is also one of the lowest in the country and yet another potential factor supporting purchasing demand for those with the financial capacity to enter the market.
Melbourne blinder is not guaranteed
Whether Melbourne’s strong demand, low supply and relative affordability advantage can completely offset the impact of high-interest rates remains uncertain.
Demand from overseas migration is likely to remain a feature of the market for the next few years, however, borrower’s access to credit will be challenging while interest rates are high.
Additionally, it’s possible more homeowners choose, or need, to sell due to the substantial increase in mortgage repayments over the past 13 months alongside the persistently high cost of living pressures.
Any marked rise in new listings could add downward pressure to housing prices.
