While Melbourne's property market is experiencing a flat patch, the long term fundamentals are strong.
This creates a window of opportunity to get into the property market before the Melbourne market picks up again .
Currently there are 5.1 million people in Melbourne. By mid century Melbourne will have 8 million people Victoria will have 10 million inhabitants.
In fact, Melbourne will most likely be Australia’s largest capital city in the next decade.
Melbourne has unique lifestyle and economic benefits that will attract overseas migrants as well as plentiful jobs for highly paid knowledge workers.
Rather than time trying to time your next property purchase based on where we are in the cycle, take a long to view and if your income is secure and the time is right for you, this may be an ideal time to get a foothold in the Melbourne property market while others are sitting on the sidelines.
During the recent property boom, Melbourne's housing values did not grow as strongly as other capitals but remember...we were locked down in a Covid Cocoon for 260 days.
Melbourne housing values peaked in February this year, shortly after Sydney, but this followed a 17.3% gain in values since the pandemic.
Property values are down 3.4%, since the February peak, with house values down 4.1% and unit values falling by 2.1%.
Of course, house values recorded a much larger upswing, rising almost 21% through the growth cycle compared to a lower 10.5% gain across the unit market.
In another sign of slower conditions, the quarterly transaction volumes across Melbourne have slumped by an estimated 26% compared with the same period a year ago.
As home sales have declined, listings have risen, with Melbourne recording 10% more active listings in July than a year ago.
However, by the end of 2022, it's likely "overall" home values will be 6-8% lower than at the beginning of the year.
Moving forward, the various sectors of the Melbourne housing market will be segmented, which is a more “normal” property market.
Melbourne property values:
According to CoreLogic, Melbourne dwelling prices...
- dropped -0.3% in the last week
- dropped -1.2% over the past 28 days
- dropped -0.7% over the last 12 months
Dr. Nicola Powell, chief economist of Domain explains...
The premium price-point of Melbourne’s housing market is leading the downturn as tends to historically be the case, as the inner east recorded the most significant house price decline of 6.1% over the quarter.
Areas that have a higher purchase price and therefore greater debt place households in a vulnerable position to rising interest rates.
Interest rate hikes and strong inflation levels continue to damage borrowing capacity, already adding $726 a month to a $1 million home loan.
This will weigh on buyer sentiment, placing a brake on housing demand and price.
To date, Melbourne’s housing downturn has not gained momentum irrespective of the aggressive hikes in interest rates over recent months although the risks remain.
Currently, the total advertised supply is sitting 7% higher than last year and 18% above the five-year June average – shifting the balance of power to buyers.
At the same time, new listings have also started to track lower, indicating home owners are not rushing to sell as housing conditions cool and home loan rates rise but rather choosing to wait.
It suggests that the build-up of supply is down to a pullback in the number of sale transactions.
Selling conditions have become more challenging, auction clearance rates have weakened to an almost two-year low of 58% over the June quarter and overall properties are spending longer on the market.
This is creating a window of opportunity who homebuyers and property investors with a long-term perspective.
Sure, many discretionary buyers and sellers have left the market at present, but life will go on in the Victorian capital – people will get married, people will get divorced, families will have babies and many Melbournians are going to need to move house.
When they realise interest rates have dropped, and inflation is it coming under control they will come back into the market with a vengeance.
And with the recent opening of international borders, Melbourne will be a major recipient of new residents putting extra pressure on our property markets, particularly the rental markets
Melbourne's apartment market.
While overall apartment prices have dropped further from their price peak, recent trends could be telling of the future state of this downturn stage of the property cycle.
The stronger performance of units recently follows a period of substantial outperformance of house prices, which rose 24% from the trough to peak during the pandemic, while unit prices rose only 9%.
This stark growth difference drove a record price gap but this is now narrowing as house prices fall and unit prices rise.
Affordability constraints, reduced borrowing capacity and the perceived value units offer will help steer buyer demand to affordable options – likely to be apartments, villa units and townhouses.
Is it the right time to get into the Melbourne property market?
Anyone who buys an A-grade home or investment-grade property in Brisbane now will look back in a couple of years' time and recognise they bought a bargain, as this property cycle still has some time to run.
Of course, I know some potential buyers are asking:
How long can this last? Will the Melbourne property market crash in 2022?
They must be listening to those perma bears who have been telling anyone who is prepared to listen that the property markets are going to crash, but they have said the same year after year and have been wrong in the past and will be wrong again this time.
The following chart from Shane Oliver chief economist of AMP Capital shows that over the last century residential real estate has returned 11% per annum, and that doesn't take into account the benefits of gearing and compounding.
Sure the property markets move up and down cyclically - while the short-term trends may be flat or downwards, the long-term trend has always been up.
And with Australia's population likely to grow to 40 million people by the middle of this century and with Melbourne's population likely to grow to 8,000,000 people, the long-term capital growth of Melbourne property is assured.
So rather than time trying to time your next property purchase based on where we are in the cycle, take a long to view and if your income is secure and the time is right for you, this may be an ideal time to get a foothold in the Melbourne property market while others are sitting on the sidelines.
Currently there are 5.1 million people in Melbourne. By mid century Melbourne will have 8 million people Victoria will have 10 million inhabitants.
In fact, Melbourne will most likely be Australia’s largest capital city in the next decade
So when will this property cycle end?
Homebuyers and property investors are getting nervous.
They face the prospect of interest rates rising faster than expected, at a time of increasing inflation which is putting even more pressure on the Reserve Bank
Currently the RBA cash rate is still stimulating the economy at a time of high inflation and a tight job market and it’s going to be a difficult task for the RBA to find the “neutral” interest rate – you know not too low to fuel inflation and the economy and not too high to force us into recession.
But while overall our economy is performing soundly, consumer sentiment – both fear and greed – tends to drive the property markets, and at the moment both buyer and seller confidence is fragile in the face of all the negative media.
So many discretionary Melbourne home buyers and sellers are just sitting on the sidelines.
On the other hand strategic investors and home buyers with a long-term view are taking advantage of this window of opportunity which will close when purchasers realise interest rates are nearing their peak and inflation is coming under control
And the typically chilly mid-winter home auction market is slowing down as well.
I see Melbourne's property market continuing to slump for the balance of 2022 and possibly the first few months of 2023 with "overall" house prices falling around 8-10% from peak to trough until eventually, bio emotions change, and greed will overtake fear as potential purchases realise interest rates of pizza and inflation is coming under control.
In other words there is a window of opportunity available now to take advantage of the current market circumstances.
Watch this space.
Melbourne houses are outperforming
Over the last decade Melbourne's house price growth was stronger than unit growth, but that wasn't always the case....
Looking back the Melbourne property market has been one of the strongest and most consistent performers over the last four decades and over the last 40 years:
- The median Melbourne house has increased by 7.9% per annum
- The median Melbourne unit/apartment price has increased by 7.73%per annum
Obviously, this wasn't the same each and every year, as the Melbourne property market worked its way through the typical property cycles.
But now the price gap between apartments and houses is the biggest it has ever been, and with affordability constraints kicking in, it's likely that potential buyers will turn their attention to more affordable "family-friendly" apartments, vill units and townhouses which will outperform.
Over the last few decades, Melbourne won the mantle of the world’s “most liveable city” more times than any other city in the world.
Needless to say, the Covid-related lockdowns endured by Melbourne led to some challenging times, but now both buyers and sellers are back.
Prior to coronavirus Melbourne‘s population grew by around 120,000 people each year and migrants are going to come pouring back into Australia.
Melbourne has a unique lifestyle and economic benefits that will attract overseas migrants.
Sure many Australians see Melbourne as the poor cousin that caught coronavirus and was locked down for 260 days, but overseas people see Melbourne as the only World City of 5 million people that contained coronavirus.
So this creates a window of opportunity to get into the property market before Melbourne property takes off again.
Auction clearance rates give a great "in time" indication of the mood of Melbourne property buyers and sellers and as the chart below shows, some of the heat has gradually come out of the Melbourne auction market.
While there is a shortage of quality housing in popular areas across Melbourne, the lower-than-expected population growth has led to an oversupply of housing in some outer suburban new estates.
Villa units, townhouses, and family suitable apartments will be seen as affordable alternatives to houses in the highly sought-after inner eastern and south-eastern suburbs of Melbourne.
On the other hand, high-rise apartments in the many Melbourne CBD towers or close to universities are likely to underperform, remain vacant for a long time, and keep decreasing in value.
Houses in regional Victoria with easy access to the capital city are also in strong demand and should continue to increase in value.
Here is where Melbourne’s highest income earners live
Want to know Melbourne's wealthiest suburbs?
Well...Melbourne’s money is spreading from the traditionally well-heeled suburbs to regional and coastal areas just beyond the suburban fringe.
- Toorak remains the city’s wealthiest suburb, with an average annual income of almost $185,000, followed by...
- Portsea on the Mornington Peninsula, where the average is close to $165,000, according to figures from the Australian Tax Office for 2019/20.
- Albert Park and Middle Park (postcode 3206)has an average annual income pushing past $144,000.
- Brighton and North Brighton were among the wealthiest suburbs with an annual average income just shy of $140,000.
- Mount Macedon Just beyond Melbourne’s northern outskirts, now has an annual average income of $115,760, outstripping its next highest-earning neighbour, Macedon, by $37,000.
- The Red Hill postcode was also on the rich list pushing past $108,000.
Source: ABS, The Age
Fast facts about Melbourne and its property market
Here's the list of some vital points you would want to consider:
The Victorian economy is holding up well
Victoria represents only 3 per cent of Australia's total landmass, yet accounts for 22 per cent of national GDP and competes with the largest economies in South East Asia.
For more than two decades, Victoria's economy has delivered strong and consistent growth supported by a diverse economy and a long history of prosperity across many industries.
Around 3.2 million people are employed in Victoria, which is 26 per cent of all employed workers in Australia and the state economy will continue to benefit from ongoing population growth.
The Australian Bureau of Statistics forecasts Victoria's population to reach between 10 million and 12 million people by 2060. Melbourne is predicted to be Australia's largest city as early as 2030 with a population of 6.1 million.
Moving forward Melbourne‘s new rail loop which is estimated to cost $54 billion will arguably be the biggest infrastructure project in Australia and will enhance accessibility to many suburbs.
In many ways, this will be a game-changer as the loop railway line will open up access to employment hubs in Melbourne's middle-ring suburbs.
At the same time, Melbourne Airport is Australia's biggest curfew-free airport carrying a lot of freight and Melbourne has the biggest and busiest seaport in Australia.
But remember... Melbourne is not one property market...
There are multiple markets in this diverse sprawling city.
It is divided by geography price points and type of property into many submarkets - this means you can't just buy any property and count on the general Melbourne property market to do the heavy lifting for you over the next few years, so careful property selection will be critical.
So to help you better understand what's going on in Australia’s second-largest property market here is a long thing you should know if you’re considering investing in Melbourne property:
Melbourne House Prices
Over the last 4 decades, Melbourne property values have risen at the fastest pace of all capital cities.
Melbourne house prices and market activity were adversely affected by its extended lockdowns during 202 -21, but now Melbourne property is on the move again.
MELBOURNE DWELLING PRICE TRENDS - Source: Corelogic August 2022
At Metropole, we’re finding that on-the-ground sentiment has changed completely with strategic investors and homebuyers already starting to feel a little FOMO (fear of missing out).
However, while house prices have been resilient, Melbourne rental rates are experiencing weaker conditions due to a higher supply of rental properties, and less demand.
At the same time, more buyers are active in the market, and there is currently a shortage of good quality stock on the market.
Melbourne houses are outperforming apartments
Melbourne is seeing a record high in the difference between house and unit medians
Melbourne has also seen the weakest rental market performance since the onset of COVID-19, and as a large portion of rental stock are units, this has dampened demand across the segment.
This also likely explains some of the weaknesses in the Sydney unit market, where rental demand was similarly affected by a lack of overseas migration.
Unlike Sydney however, Melbourne has seen similar rates of disparity through the 2017 and 2018 calendar years, when the house price premium on units averaged 46.3%.
A prolonged period of high unit supply, and the development of high-density stock, kept unit values relatively low through this period.
This dynamic may shift through the remainder of 2021, as ABS data points to a fall in the construction of units, and a rise in the construction of new houses.
Furthermore, affordability constraints across the housing segment, which could be amplified by the end of HomeBuilder and temporary stamp duty discounts, may guide more first home buyers back to the unit segment of Melbourne.
So…is it the right time to get into Melbourne's property market?
Melbourne property prices have been climbing at a breathtaking pace in 2021 with more but much slower growth expected as demand from buyers continues to outpace the volume of A-grade homes and investment-grade properties coming onto the market.
But recently there have been mixed messages in the media about what’s ahead.
Of course, there are always the Negative Nellies wanting to tell anyone who is prepared to listen to them that the market is about to crash, but other more solid commentators are suggesting our property market is slowing down.
And I agree, I believe the pace of capital gains has peaked, but I’m not suggesting home values are about to dip, far from it.
Rather I believe we’ve moved from a peak rate of growth to a pace of capital gain that will be more sustainable and there's plenty of life left in the Melbourne real estate market with property values likely to keep increasing throughout 2022 and into 2023.
Australia's economy looked like it was going to experience a continued strong recovery and we are experiencing strong employment growth this financial security will underpin Melbourne's property market moving forward.
However, some sectors of the Melbourne housing market will continue to languish this year.
The sectors of the Melbourne real estate market likely to underperform most moving forward will be:
- Apartments in high-rise towers – in fact, this is these properties are likely to be out of favour for quite some time.
- Off-the-plan apartments and poor quality investment stock (as opposed to investment-grade) apartments, particularly those close to universities.
- Established homes in the outer suburban new housing estates, where young families are likely to have overextended themselves financially and many people will be out of work for a while. Currently, many first home buyers are taking advantage of the various incentive packages including HomeBuilder to buy newly constructed homes, leaving established houses in these locations languishing.
The list of top 10 Melbourne secondary schools catchment areas
The list of top 10 Melbourne primary school catchment areas
Long-term Melbourne property market trends
Victoria remains the nation’s population growth powerhouse but growth obviously came to a halt through Covid.