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.
But then, in the second half of 2021 property values increased in almost every part of Melbourne - and that’s very unusual.
So far this year the Melbourne housing market has languished with little overall growth in the first four of the year, however, there are still plenty of transactions occurring.
It's a bit like having one hand in a bucket of hot water and the other in a bucket of cold water and saying "on average I'm feeling comfortable."
The number of properties newly listed for sale is slowing and currently, buyers are taking their time and contemplating their decisions.
FOMO (fear of missing out) is no more and buyers are not willing to take shortcuts or compromise like they were last year.
Moving forward, there will be a flight to quality and the various sectors of the Melbourne real estate market will be segmented, which is a more “normal” property market.
There is a clear flight to quality with A Grade homes and "investment grade" properties still in short supply for the prevailing strong demand, but B Grade properties are taking longer to sell and informed buyers are avoiding C Grade properties.
While Melbourne’s preliminary auction clearance rates this time last year were around 80%, they are currently holding around the 60's, which is moving from more of a seller's market to a buyers' market.
This year property values in some locations will continue to rise firmly, some will increase in value moderately and some locations will languish, and a few areas will experience falling property values, based on local affordability as well as supply and demand.
However, by the end of 2022, it's likely "overall" home values will be 5% higher than at the beginning of the year and unit values will be 3-4% higher.
Moving forward, the various sectors of the Melbourne housing market will be segmented, which is a more “normal” property market.
Melbourne property values:
- dropped -0.2% in the last week
- dropped -1.2% over the last 28 days
- up 2.9% over the last 12 months
Don't worry… there is still growth left in the Melbourne housing market.
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.
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.
Sure Melbourne's property price growth slowed down a little lately with more properties listed for sale over the last couple of months, but it's important to remember that buyers are sellers and sellers are buyers – meaning they will have to live somewhere and many will be looking to upgrade their accommodation in 2022.
Is it the right time to get into the Melbourne property market?
Now 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?
I see Melbourne's property market continuing to grow slowly throughout 2022 until eventually, affordability stall the market.
Remember that the current strong upturn phase of the property cycle only commenced in October 2020.
Normally the upturn stage of the property cycle lasts a number of years and is followed by a shorter boom phase which is eventually cut short by the RBA raising interest rates or by APRA introducing macro-prudential controls to dampen the exuberance of property investors and home buyers.
Currently, we're at the beginning of the cycle of increasing interest rates, so I hope the regulators have learned from the results of previous interventions, otherwise if history repeats itself, there will be some unintended consequences.
Watch this space.
Melbourne houses are outperforming
Currently, Melbourne's house price growth is stronger than unit growth, and while most sectors of the market have been enjoying strong demand, the more expensive properties are now outperforming Melbourne's less expensive properties.
Looking back the Melbourne property market has been one of the strongest and most consistent performers over the last four decades.
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.
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.
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 June 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 investments 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
- Also read:We’re in the middle of a rental crisis | Property Insiders [Video]
- Also read:Boom to bust: What makes property prices rise and fall
- Also read:Sydney and Melbourne suburbs more likely to hold their value
- Also read:Latest property price forecasts for 2022 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:12 inflation jargons explained: Here’s everything you need to know
Victoria remains the nation’s population growth powerhouse but growth obviously came to a halt through Covid.