Property market update: Melbourne, March 2021

The third month of 2021 marked several inflection points across the Australian property market.  Sydney and Melbourne, which felt the brunt of the negative impact of the lockdowns put in place to contain the COVID-19 pandemic, have staged full recoveries from earlier downturns and are now leading the pack among capital cities in terms of capital gains. 

There are several factors driving the property market boom, including government stimulus measures, positive consumer sentiment, record-low interest rates and low listings numbers relative to demand. These factors have all coalesced to push up national home values up 2.8 per cent in March alone, the fastest rate of growth since October 1988.

Experts predict that the upward trend will continue throughout the year. The latest ANZ economic insight predicted double-digit growth in capital city property prices in 2021, with Melbourne tipped to grow by 16 per cent. 

However, this strong growth is predicted by experts to slow post June as the end of government programs like JobKeeper and HomeBuilder cools the property market. 

 Let’s now take a closer look at what’s happened in the Victorian capital in March. 

Property values

After months of falling behind its capital city counterparts, Melbourne has finally regained its momentum, with annual dwelling values recovering after a prolonged period of pandemic-induced losses and ultimately breaking previous records. 

Housing values in the Victorian capital have recovered from the 11.1 decline between 2017 and 2019, and the 5.6 per cent easing in values through the worst of the COVID-related downturn, to set a new record high in March.

CoreLogic’s latest National Hedonic Home Value Index revealed Melbourne’s property values rose 2.4 per cent month-on-month. Over the first three months of the year, dwelling prices were up 4.9 per cent. This brings the median value for all dwellings to $736,478.

The Victorian capital looks to be following in Sydney’s footsteps, where property values hit an all-time high and ultimately broke the record set back in 2017.

The surge in prices has been particularly significant for detached housing. Melbourne house values increased $20,000 to $859,097. In the first quarter of 2021, Melbourne’s detached house prices increased 5.6 per cent. The unit market lagged behind, edging up 0.9 per cent to a median value of $593,121. 

Regional homes have been leading the price boom, stirring up speculation that the pandemic has triggered a long-term exodus from the capitals in favour of non-capital city areas. 

But the trend is now showing that major cities are starting to lead the pack. In the previous month, every capital city grew faster than its regional counterparts except for Melbourne, which was modestly outpaced by regional Victoria.

High-priced properties have also started to outpace cheaper homes in the cities, with the top end of town in Sydney, Melbourne and Brisbane rising faster than lower-priced properties. In Melbourne, the upper quartile (2.8 per cent) outpaced the lower quartile (1.6 per cent).

Looking ahead, CoreLogic estimates that Melbourne’s price movement will be skewed towards the upside, with low rates, improving economic conditions and consumer confidence, low supply and high consumer demand tipped to outweigh the potential headwinds.

Supply and demand 

Melbourne was one of the three capital city markets that bucked the national trend of declining supply, recording an increase in listings in March. Month-on-month, listings in the Victorian capital rose 2.9 per cent from 38,211 to 39,335. At an annual rate, listings are up 8.9 per cent. 

While listings rose in some cities, national listing numbers continue to be low as buyer demand consistently outpaced supply. CoreLogic’s executive research director, Tim Lawless, said the rapid rate of absorption is keeping overall inventory levels low and adding to a sense of FOMO among buyers.

“The ratio of sales to new listings is tracking at around 1.1, implying for every new listing added to the market, 1.1 homes are sold,” he stated. 

Auction markets 

The tight market conditions can also be seen in auction clearance rates, which have consistently held above 80 per cent in March. Overall, the success rate of auctions across capital cities was at 84.4 per cent. In the same week in 2020, a final clearance rate of just 37.3 per cent was recorded across the combined capitals as withdrawal rates jumped amid COVID-19-related restrictions.

Melbourne hosted the highest number of auctions at 1,899 with an impressive clearance rate of 83.8 per cent.  

Property research group CoreLogic’s figures showed there were 3,791 homes taken to auction in the last week of March. Overall, this was the busiest auction week since the week prior to Easter in 2018, when 3,990 capital city homes were taken to auction.

Rental market 

Throughout the country, rental conditions continue to be diverse, with significant differences between the regions and housing types.

In Melbourne, house rents rose at an annual rate of 0.9 per cent, while the unit markets fell 8.2 per cent. Despite the steep decline, CoreLogic said the Victorian capital’s unit rental market appears to be stabilising, noting that unit rents in Melbourne have held firm in the last three months.

“The improvement comes after a long-running decline; however, a material improvement in rental conditions is likely to be dependent on foreign students and visitors returning to shore up inner-city unit rental demand,” the report stated. 

As housing values grow at a faster rate than rates, gross rental yields have been trending lower. Melbourne, along with Sydney, has a much lower yield profile, with both cities seeing gross yields slide to new record lows in March. Melbourne recorded a gross yield of 2.9 per cent, falling below the 3 per cent mark for the first time on record.   

Vacancy rates

Data from Domain showed the national vacancy rate held steady in March for the third consecutive month at 1.9 per cent. 

March was another month of mixed results in capital city rental markets, according to Domain. Vacancy rates in Melbourne, Darwin, Hobart and Canberra tightened, while Sydney rose compared with the previous month.

Melbourne’s vacancy rate is more than double that a year ago at 4.6 per cent. From February to March, it fell from 4.7 per cent to 4.6 per cent. This is 2.9 percentage points higher than last year. 

This is 2.9 percentage points higher than last year. Estimated rental listings fell a marginal 0.6 per cent, with roughly 26,400 rentals vacant at the end of the month. The areas with the highest vacancy rates were Melbourne City (11.4 per cent), Stonnington - East (7.8 per cent), Stonnington - West (7.5 per cent), Whitehorse - West (7.3 per cent) and Boroonda (6.3 per cent). On one hand, Yarra Ranges (0.3 per cent), Mornington Peninsula (0.4 per cent), Cardinia (0.4 per cent), Nillumbik - Kinglake (0.7 per cent) and Maroondah (0.7 per cent) had the lowest vacancy rates. 

The areas with the biggest decline in rental listings were Melbourne City, Stonnington - West, Port Phillip, Yarra and Stonnington - East.

Domain predicts the continued weakness in Sydney and Melbourne’s rental market, as international border closures will ensure reduced demand for rentals for the foreseeable future. Until restrictions are lifted, it may take some time before both cities return to pre-COVID vacancy rates. 

Meanwhile, the latest SQM research showed the national rental vacancy rate managed to eke out a 0.1 per cent increase in March, marking the first time an increase has been recorded between February and March in 14 years. The national residential vacancy rate sat at 2.1 per cent in March 2021, bringing the total number of vacancies in Australia to 72,436 residential properties.

Melbourne recorded the highest vacancy rate at 4.4 per cent, playing host to the highest number of vacancies at 27,300 residential properties.  

SQM Research managing director Louis Christoper has flagged the rise in residential vacancies as “abnormal for March”, noting that: “It is the first time since 2007 [that] vacancy rates rose for March compared to February.”

Outlook

While Melbourne house prices are expected to continue rising throughout 2021 and well into next year, it is reasonable to expect the pace of growth will slow. As the property market reaches record-high values, speculation is building as to what will set off the next downswing phase of the cycle. 

The substantially less fiscal support for home owners and potential first-time home buyers is seen to likely contribute to a weakening of demand. The prospect of tighter credit policies, which is historically known to have an immediate dampening on housing activity, is also being raised by experts

There is also mounting speculation as to when regulators will step in to slow down an overheating market. Despite increasing house prices, the RBA did not raise rates this month. However, housing affordability constraints, particularly for those who do not own a property, are increasing.