Property market update: Melbourne, December 2021

Amid all this, the Victorian capital managed to deliver solid growth in 2021. And while the city’s annual gain is lower than most other capitals, it is still a sizeable shift compared to the figures forecast by experts at the start of the year. 

There is no question that the 2021 property boom has been an unprecedented phenomenon for the Australian real estate market, with breathtaking growth generally observed around the country.

Earlier in 2021, data showed that there was relatively uniform growth being seen across all the capital cities. However, numbers are now telling distinctly different stories between state lines. 

Recent data revealed that a two-speed market is emerging across capital cities’ markets. According to CoreLogic, Brisbane and Adelaide have powered ahead and are seen to continue moving along the fast lane in 2022. The opposite dynamic is at play in Melbourne and Sydney, where the growth in dwelling values has continued to decline from record highs hit in March 2021. 

Tim Lawless, CoreLogic’s research director, said that several factors are currently in play that are causing the slowing trend observed in the two biggest capital cities. 

At the top of the list is the affordability pressure putting the squeeze on buyers looking to purchase a property in Sydney and Melbourne. The two cities took home the first and second spot for median dwelling values among capital cities at the end of 2021, with average prices of above $1 million in Sydney and around $800,000 in Melbourne. 

This is a stark contrast with the situation in Brisbane and Adelaide, where buyers are flocking to take advantage of the relatively lower property prices. 

Another factor hampering growth is a surge in new listings that is evening out supply and demand. 

“A surge in freshly advertised listings through December has been a key factor in taking some heat out of the Melbourne and Sydney housing markets,” Mr Lawless stated. 

These factors – along with market trends such as negative interstate migration, further tightening in lending standards and rising fixed mortgage rates – are seen to continue weighing down on Sydney and Melbourne’s growth outlook in 2022.  

CoreLogic head of research Eliza Owen said the Melbourne market was “absolutely” cooling after a slowing growth rate in the final months of the year, adding: “Dipping into this decline was somewhat inevitable for Melbourne.”

She said the pandemic has negatively affected the city’s property market in more than one way and had been particularly affected by closed borders. “There have just been unfortunately quite a few headwinds from both the nature of the pandemic leaving international borders closed, but also the extent of the spread and lockdowns seen across the city as well,” she said. 

Has Melbourne’s property market boom come full circle? Or will the Victorian capital manage to upend gloom and doom forecasts in 2022 as well? 

For now, let’s take a closer look at how Melbourne performed as the city closed the curtain on 2021. 

Property values

The latest data from CoreLogic showed Melbourne dwelling values slipped by 0.1 per cent in December, marking the end of the city’s 14-month growth streak. 

The monthly decline also comes after a 0.6 per cent increase seen in November. 

Compared to the same period last year, unit and house values in the city have risen by 15.1 per cent with a median value of $795,108. From January 2021,  property values in the city have increased by $113,183. 

Meanwhile, units managed to outperform houses during December, indicating that growth in units may be beginning to turn a corner after trailing behind its counterpart sector throughout the pandemic. 

Melbourne’s unit sector saw a rise of 0.3 per cent over the month, following a 0.5 per cent increase in November. 

The housing sector saw its first monthly decline throughout the year in December, notching a 0.2 decline in median values. In November, the sector recorded a 0.6 per cent increase.

Despite the divergence in monthly growth trends, houses are still outperforming units on an annual basis. The housing sector saw a 17.9 per cent increase over the year, with the average price of houses in Melbourne currently sitting at $997,928. Meanwhile, the unit sector saw an 8.7 per cent annual gain, with a median value of $627,047.

According to CoreLogic, the decline in the Victorian capital’s dwelling during the last month of the year can be attributed to the bigger deposit barrier that buyers need to overcome due to the higher housing prices in Melbourne, as well as low-income growth. 

It also noted that a recent surge in advertised listings and weak demographic trends had also affected demand for housing in the city. 

Supply and demand

Melbourne’s real estate market saw a seasonal slowdown in listing activity during the Christmas period, with fewer property owners deciding to put a “for sale” sign on their property in December. 

According to SQM Research, Melbourne’s residential property listings fell in December 2021 by 12.9 per cent to 34,755 from 39,880 in November. 

New listings or properties that have been on the market less than 30 days in Melbourne saw a 40.9 per cent decline over the month from 22,503 to 13,302. Over the year, new listings in the city are down by 6 per cent.  

Meanwhile, data showed that old listings or property listings over 180 days rose from 5,807 to 6,322 month-on-month. Compared to 12 months ago, old listings have fallen by 37.8 per cent. 

Louis Christopher, managing director of SQM Research, said that although there was an observed auction frenzy during the last month of the year, listings still trended downward across the country. On an annual basis, Melbourne listings are down by 12 per cent. 

The decline in the number of monthly listings was also forecast by market observers, who expected listings to run dry after sellers flooded the market in the wake of Melbourne lockdowns and ahead of the holiday period. 

Due to the shortage in listings, Mr Christopher said that vendors are in no panic at this point and, in turn, have lifted their asking prices during the month. 

Commenting on the future direction of supply trends, he said: “Unless we have a surge in listings for the start of the property season in February it is looking like a very soft landing for the housing market in 2022.”

According to CoreLogic, Melbourne was the only city to close out the year with inventory levels above the five-year average. This is a whole different ballpark to Brisbane and Adelaide, where advertised supply stood around 35 per cent below the five-year average at the end of 2021. 

According to Mr Lawless, the number of homes available to purchase has been a key factor underlying the trend in housing values. 

“Capital cities where advertised stock levels are above average or close to normal, such as Melbourne and Sydney, have shown a more obvious slow down relative to cities with persistently low advertised supply, like Brisbane and Adelaide,” he explained. 

He added that while stock levels have been generally low, prices still rose throughout the year due to strong demand. 

CoreLogic reported that the total number of home sales during the year was approximately 40 per cent above the decade average. A total of 653,000 house and unit sales were conducted over the calendar year, the highest number of annual sales on record. 

Mr Lawless said that as stock levels normalise and affordability constraints along with tighter credit conditions pose as demand headwinds, it is “reasonable” to expect growth conditions in Melbourne will be more subdued this year. 

Auction markets

Melbourne saw one of its busiest ever months for auctions in December, a period when the real estate market is usually winding down for Christmas.

According to CoreLogic, the city recorded 2,318 properties going under the hammer during the week ending December 12, an all-time high in terms of weekly auctions volume. Throughout the month, CoreLogic reported a total of 6,391 auctions in the Victorian capital.

Despite sellers coming in droves to the auction market at the year-end to strike the property market while it’s hot, the high number of properties going under the hammer are not translating into high clearance rates. 

Data from CoreLogic showed that during the first three weeks of December, Melbourne’s final clearance rates remained near or at 60 per cent. 

According to Mr Lawless, the declining clearance rate is another indication that the city’s market could be approaching its peak. He noted that a jump in properties for sale in Melbourne in recent months has resulted in less competition for homes and has put downward pressure on auction clearance rates. 

If you want to be updated about what’s happening across auction markets in the country, make sure to follow our weekly updates on Smart Property Investment’s News section. 

Vacancy rates 

Melbourne’s vacancy rates rose to 3.2 per cent in December from 3 per cent in November, ending four consecutive months of declining vacancy rates.

But Domain assuaged landlords that the increase is typically seen during the month, as vacancy rates tend to rise with the high supply at the end of the year due to the rental changeover period in December. There were just over 16,000 estimated vacant rentals at the end of December, representing a 7.8 per cent month-on-month increase.

On an annual basis, vacancy rates in the city are significantly lower year on year, down two percentage points from the peak seen in December 2020 following the extended lockdown. However, rates still remain elevated, roughly twice as high as pre-COVID levels. 

The areas with the highest vacancy rates were Stonnington – East (6.3 per cent), Stonnington – West (5.3 per cent), Whitehorse – West (5.3 per cent), Boroondara (5 per cent) and Banyule (4.9 per cent). 

Meanwhile, the areas with the lowest vacancy rates were Mornington Peninsula (0.4 per cent), Cardinia (0.6 per cent), Yarra Ranges (0.7 per cent), Sunbury (0.7 per cent) and Frankston (0.7 per cent). 

Dr Nicola Powell, Domain’s chief of research and economics, said that the outlook for Melbourne’ rental market might be more optimistic in 2022. “Early in 2022, it’s likely we’ll see decreases in the number of vacant rental properties as strong historical rental demand in January reduces the number of vacant rental listings,” she said. 

Dr Powell added that the city’s rental market would be under further strain as borders reopen and the flow of international students, overseas migrants and expats restarts. She added that Melbourne might see greater pressure compared to other cities, as, historically, Sydney and the Victorian capital has welcomed more overseas migrants than other cities. 

Domain also noted that as all states adjust to eased restrictions, the region’s rental market could continue to become more competitive.  

Rental market

Throughout the COVID-19 pandemic, Melbourne’s unit rental market had been hit by a lack of international students and immigrants – but CoreLogic’s latest Hedonic Home Value Index indicated a shift in the demand trend. 

The property data provider noted that rental demand, rather than homebuying demand, across inner-city areas popular with students and visitors was likely to be the main beneficiary as international borders reopened.

“In Melbourne, where unit rents fell by 8.5 per cent between March 2020 and May 2021, higher density rental markets are now recording a faster rate of growth than houses, with Melbourne unit rents recording a 1.6 per cent quarterly increase compared to the 0.9 per cent rise seen in house rents,” Mr Lawless said. 

At an annual rate, CoreLogic data showed that rents in Melbourne houses and units rose by 4.8 per cent and 3 per cent, respectively. 

Melbourne’s gross rental yields continued to fall below capital city averages, showing the lowest rental returns of 2.7 per cent due to lower rental growth relative to a high rate of capital gain.

Meanwhile, Domain’s latest report on the rental market showed that Melbourne’s house rents jumped by 3.5 per cent, or $15 per week, over the December quarter  to a weekly average of $445, eclipsing the former record hit in December 2018 of $440.

Unit rents also rose by a more modest 1.4 per cent over the same period, or $5 per week, to a $375-per week median, figures that are $55 lower than the record set right before the full negative impacts of COVID were felt by the city’s rental market. 

While house rents are at a record high in the city, Domain noted that Melbourne’s rental houses were still the cheapest of the capitals around the country, with other cities – including Adelaide – outstripping the increase.

Dr Powell, who has named Melbourne as one of the two cities in Australia that are not operating as landlords’ markets, said that an increase in investors selling their homes to owner-occupiers, the revival of short-term travel and a shift in tenants’ preference to more affordable inner-city rentals had seen the rental conditions tighten across the city.

“There are a number of dynamics going on. We have seen a shift in tenants becoming fiercely competitive in areas that tend to be in the outer regions. People have been able to get a larger rental that they couldn’t afford before,” she said. 

The strongest performing regions across the city were on the Mornington Peninsula, in the inner south, the outer east, and the north-west, where house rents rose over the quarter and the year.

Commenting on the data, Westpac senior economist Matthew Hassan said the rise in rents was “surprising”. However, he noted that the supply and demand for rentals in the city were becoming more balanced as excess stock was snapped up by more people moving out of the home.

“The rental market in Melbourne still has an overhang of stock, but that’s very likely to be in particular parts of the city. The rise in rents would be more in the middle or outer suburbs – areas where you can work from home in beautiful surroundings or go to the office in the city if you need to,” Mr Hassan said. 

Domain expects Melbourne’s rental market to further tighten and see competition escalate in the coming months. 

What lies ahead for Melbourne in 2022?

Property experts see Melbourne’s hot property market further losing steam in 2022, with Victoria’s housing market conditions expected to swing back in buyers’ favour.

CoreLogic points out a number of headwinds that could continue to curb price growth in the city. 

Affordability remains one of the core drivers of the slowdown in Melbourne. That won’t be helped by the potential for much-speculated interest rate rises as early as late 2022, and there is still the possibility of further tightening to housing credit policies by financial regulatory bodies. 

The four big banks (Commonwealth Bank of Australia, Westpac, ANZ, and NAB) have predicted more modest price gains for Melbourne homes in 2022, ranging from 5-8 per cent as economists of the institutions forecast that the city will be hitting the brakes on rapid price gains this year. 

Meanwhile, SQM’s founder, Mr Christopher, expects prices would land between a 3 per cent fall and a 2 per cent increase by year’s end.

He also anticipates APRA would act further to cool the property market in 2022 after it raised the serviceability buffer for new bank customers last year.

“(Melbourne and Sydney) are most sensitive to even minor intervention by the banking regulator,” Mr Christopher said.

Real Estate Institute of Victoria president Adam Docking has called attention to the upcoming federal election and potential interest rate hikes that could trigger caution among market participants in the near term. But he noted that the political event would be temporary, and he does not expect a cash rate increase to occur until “deep into the year” or 2023.

CoreLogic’s Ms Owen predicted the “downswing phase of the cycle” would occur as 2022 progressed – but she said this didn’t “have to be a disaster” for those who invested in Melbourne’s real estate during the market’s peak if they see their purchase as a long-term investment.

“A decline in property prices will lower the barrier to entry for potential first-home buyers, but … mortgage repayments may be higher by that stage,” she said.

Market observers are also keeping a close eye on the recent outbreak of the Omicron variant, which could cause the city to return to restrictive policies that would result in a new phase of temporary disruption to market transaction activity. 

To read more in-depth forecasts on what’s in the cards for the property market this year, check out our seven property predictions for 2022.  

Are you on a mission to kickstart your property investment journey this year? If you’re a first-time buyer looking to enter the real estate market, check out Smart Property Investment’s brand-new white paper, Why 2022 is the right year to invest for beginners.  

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