Property market update: Melbourne, February 2021

The continued upward trend in Melbourne’s property values indicates that the Victorian capital may have caught up from its weaker performance through 2020. CoreLogic’s research director, Tim Lawless said that the combination of record low mortgage rates, improving economic conditions, government incentives and low advertised supply levels support the conditions for a broad-based boom in Australia’s property markets. 

In a stark contrast to predictions of doom and gloom for the property market in 2020, economists are now seeing solid economic growth in 2021 following the rollout of the COVID-19 vaccine across the country. 

Westpac’s chief economist, Bill Evans, said the bank has now lifted its forecasts to double-digit growth across the nation as momentum across the capital cities continues to swell until a predicted slowdown in 2023. Melbourne is expected to surge by 8 per cent in 2021, followed by 10 per cent growth in 2022. He pointed to the high clearance rates in the city and declared that it is a  “sellers market” until new listings become available.

But there are concerns around whether Melbourne’s new found growth is sustainable, as house values continue to lag behind their earlier peaks. There is also continued weakness in the inner-city’s rental markets, which have been affected by weaker demand from negative interstate migration and, more recently, a demand shock from closed international borders. 

Property values 

Australian home values jumped 2.1 per cent higher in February, recording the biggest month-on-month increase in CoreLogic’s national home value index since 2003. 

Melbourne was one of the strongest performing markets, clocking in a 2.1 per cent increase in home values for the month to stand at a median value of  $717,767. However, the impact of the extended lockdowns in the Victorian capital still cast a shadow over the annual performance of the city, as dwelling values fell 1.3 per cent year-on-year during the month. 

While both house and unit values are rising across Melbourne, house values continue to outpace the price growth rate of units over the month. In February,  the detached housing market rose 2.4 per cent while units posted a growth of 1.2 per cent. CoreLogic highlights this as a trend that has emerged over the pandemic, with the ‘weaker performance of units relative to detached housing’.

Mr Lawless noted the solid performance of Sydney and Melbourne over the month of February, but said that there are questions about the growth’s sustainability. 

He said that  the mismatch between supply and demand is a central factor pushing prices higher. “Housing inventory is around record lows for this time of the year and buyer demand is well above average. These conditions favour sellers. Buyers are likely confronting a sense of FOMO (fear of missing out) which limits their ability to negotiate.” 

Supply and demand  

Latest data from SQM showed that residential property listings dipped in February by 2.7 per cent, declining to 257, 952 from 265,116 in January. Compared to the same period last year, listings fell by 13. 1 per cent. 

Melbourne posted the biggest 12-month increase among capital cities, with listings  in the city rising 11.8 per cent to 38,211 in February from the 34, 163 total listings in the same period last year. The Victorian capital also saw a modest monthly increase of 1.6 per cent in listings. 

In its latest report, CoreLogic noted that one of the factors driving up housing prices is the low advertised supply levels. CoreLogic’s most recent measure of total listing numbers continues to see advertised supply significantly below that of recent years. The number of properties advertised for sale nationally remained 26.2 percent  lower than 2020 levels over the 28 days ending February 21. 

New listing numbers could see a more substantial lift in March, with CoreLogic’s real estate platform data indicating agents are becoming more active. 

Towards the end of February CMA reports, which are used by real estate agents to prepare a property for listing, were up 19.5 per cent on 2020 levels. Historically there has been a strong correlation between real estate agent activity across the RP Data platform and new listings, albeit with around a two week lag.

“Although new listings are likely to track higher over coming months, if buyer demand continues to lift it’s likely overall advertised stock levels will remain low,” Mr Lawless said. “Serious buyers would be well advised to have their financing pre approved and be ready to act fast in order to secure a property under such tight supply conditions.” 

In an indication that absorption rates are increasing, SQM listings over 180 days fell declined 1.8 per cent  for the month and are down 26.7 per cent  compared to the same period in the previous year. Only Melbourne recorded a year on year increase in listings. 

Auction rates  

In another sign that life is returning to Melbourne’s real estate market, CoreLogic data showed that final auction clearing rates in the Victorian capital are improving. 

In the week ending February 28, CoreLogic reported that  1,299 homes were taken to auction with  a final auction clearance rate of 76.4 per cent. This was down on the previous week’s 77.4 per cent across a lower 1,095 auctions. However, the trend still remains positive, as the figures remain higher than the 74.8 per cent compared to the same period a year ago, when 1,612 properties went under the hammer. 

Domain data on the three-month average median for houses sold at auction was $1,010,333 in February, up from $909,100 for the same period last year, showing a similar trend.

Rental market 

The latest data revealed that Australia’s rental market is in a state of extreme imbalance. On one end, there are the extremely tight rental conditions in cities such as Perth and Darwin where both house and unit annual rental growth rose above 10 per cent. 

However, the story is different for Sydney and Melbourne. Rents in both cities have posted significant declines over the last year, with both Sydney and Melbourne down 5.3 per cent and 8.0 per cent respectively. 

The weakness in the rental markets in Sydney and Melbourne relative to rising home values can be seen in the cities’ gross rental yields, with yields in both cities plunging to new record lows in February. Melbourne’s gross yields averaged at 3.0 per cent while Sydney’s yields stood at 2.9 per cent at the end of the month. In comparison, every other capital city is recording gross rental yields around the mid-4 per cent mark or higher, implying positive cash flow opportunities are more likely in these markets.

Melbourne’s  rental market has been hit hard by higher rental supply due to a recent history of investor exuberance, weaker demand from negative interstate migration and, more recently, a demand shock from closed international borders where Melbourne and Sydney were the primary recipients of migrant arrivals, according to Mr Lawless. 

But conditions appear to be improving in Melbourne, as unit rents in the city posted its first monthly increase in February after declining for nine of the previous 10 months. 

Mr Lawless has noted, however, that the improvement in unit rents in Melbourne is likely to be at least partially seasonal as demand from domestic students generally rises early in the year, but could also be attributable to more people returning to work in the inner cities as well as workers in some of the hardest-hit industries such as hospitality, food and accommodation services returning to employment.

“Until international borders reopen and migration rates return to their pre-COVID levels, a more substantial improvement in inner-city apartment rents is unlikely,” he said.                     

Vacancy rates 

Empty rental listings continue to be low across the country, with only Sydney and Melbourne posting an increase in vacancy rates in February. 

Domain's latest vacancy rate data for February 2021 revealed that the national vacancy rate held steady at 1.9 per cent  of properties over the month,  and increased modestly from 1.7 per cent a year prior. 

Melbourne’s vacancy rate jumped to 4.7 per cent from 1.6 per cent in February 2020, as the city continued to be hit hard by closed borders, lockdowns and dismal interstate and international migration. 

Domain senior research analyst Dr Nicola Powell said that the general rule of thumb that applies to Sydney and Melbourne is that the closer you get to the city, the higher the vacancy rate. 

In Melbourne, the areas with the highest vacancy rates were Melbourne City (11.7 per cent), Stonnington- East (8.7 per cent), Stonnington-West (8.0 per cent), Whitehorse-West (7.5 per cent) and Booronda (6.5 per cent). 

Additionally, the Victorian capital recorded the biggest proportion of empty rentals in Australia, followed closely by Sydney. 

“Melbourne and Sydney vacancy rates have slid from the COVID-19 induced peak, indicating the worst is behind landlords,” Domain stated.

“However, annual vacancy rates remain higher, fuelled by prolonged lockdowns and higher vacancies concentrated in inner-city apartment markets due to a lack of international students and hard national border closures.” 

“Sydney’s and Melbourne’s rental markets are far from uniform; inner-city areas or those close to universities remain tenants’ markets while outer suburban areas continue to be landlords’ markets, ”Domain noted. 

High-end hotspots

Amid the most recent recession in the country, high-end capital city markets have become real estate hotspots. 

CoreLogic’s Property Pulse has recorded a 2.7 per cent boost in value in the high tier of the market across the combined capital cities in February, up from a growth of 0.5 per cent in January.

Sydney, Melbourne and Canberra saw the highest growth across the high-tier, with increases of 4.5 per cent for Sydney and Canberra and 4.0 per cent for Melbourne.

As of February 2021, average value in the high-end of the market across Sydney stood at $1,715,901, while Melbourne recorded $1,251,377, Brisbane $834,350 and Canberra $1.004,452.

In Melbourne, the Mornington Peninsula recorded a quarterly growth of 7.9 per cent over the same quarter, while East Melbourne saw a 2.5 per cent increase over February.

CoreLogic’s head of research Eliza Owen cautioned that despite the upward trend in the high-end of the market,  investors should still consider long-term patterns before ultimately jumping on a certain segment of the market.

For instance, while high-end property markets seem more risky during downturn periods, they could also deliver higher returns in periods of upswing, as is being observed at the moment, Ms Owen pointed out.

On the other hand, the low-tier “may appear subdued while the rest of the market is booming, but holds its value relatively well during downturns”.

Outlook 

Melbourne’s prolonged lockdown challenged the local economy and, by extension, the property market. Still, some sections of the market showed signs of recovery throughout the year, according to REA Group’s chief economist, Nerida Conisbee. 

House prices increased across Victoria, with the outlying suburban areas as the strongest performers. For example, Mornington Peninsula  saw an increase of almost 10 per cent.

Moving forward, the capital city could continue facing the impact of COVID-19, including declining prices, slow growth in views per listing, increased rental listings and the slow comeback of investor activity.

“There are, however, positive signs,” according to Ms Conisbee. Among the factors that could assist Melbourne’s recovery are the jump in first home buyer activity and enquiry levels for new apartments, house and land development, as well as the strong auction activity.

Other analysts are also bullish on the capital city’s growth prospect this 2021. Corelogic estimates that price momentum looks to be skewed towards the upside, with the tailwinds of low rates, improving economic conditions and consumer confidence, low supply and high consumer demand likely to outweigh the headwinds associated with the coming wind-down of fiscal support.