Property market update: Perth, May 2022
Perth continued to outperform its bigger capital counterparts in May, as the city closed up the autumn season with a sol...
Melbourne rang in 2022 by hitting a major milestone in January, as house values in the city broke through the six-figure threshold for the first time.
Melbourne’s property market recuperated in January, as strong demand coupled with low listings gave the city a shot in the arm after closing in the red in December.
While January is traditionally one the slowest months of the year for home sales, the Victorian capital received a boost from large volumes of buyers who made their moves early and had to compete over the small number of listings available.
Despite the monthly rebound, experts raised their doubts that the market is fully out of the woods, as the quarterly data reflected the longer-term trend of slowing growth in the Victorian capital.
CoreLogic’s research director Tim Lawless said the January data “was a bit harder to read”, cautioning that little housing stock is traded during the start of the year and more sales results would need to come in to confirm what direction the market was taking in 2022.
“Volumes [in January] are much thinner, so I wouldn’t read too much into it, including trends,” he said, adding that it will be more fruitful to monitor the trend as transactional activity picks up in the coming months.
However, the expert doubled down on his claim last month that capital markets will move at a slower pace this year compared to 2021, as the latest data showed that the property market is beginning to face headwinds.
“The early indication is that housing markets are starting 2022 with a similar trend to what we saw through late last year. Values are still broadly rising, but nowhere near as fast as they were in early 2021,” he said.
The expert attributed the slowdown in Melbourne’s growth conditions to less government stimulus, worsening affordability, rising fixed-term mortgage rates and a slight tightening in credit conditions.
He added that the surge in listings throughout the last quarter of 2021 also took out some heat from the two biggest capital markets.
“Melbourne and Sydney have seen inventory levels normalise over recent months, taking some urgency out of the market as supply and demand become more evenly balanced,” he commented.
Looking ahead, Mr Lawless said that as the volume of sales emerges from seasonal laws, market spectators could get a “firmer reading” on how Melbourne’s market is shaping up.
“If inventory levels rise and demand reduces, we should start to see vendors and buyers becoming more evenly balanced in the market, reducing the sense of FOMO that has been a key factor in pushing up prices through the pandemic,” Mr Lawless said.
“We may already be seeing this trend evolve in markets like Melbourne where total listings have returned to above-average levels and the pace of capital gains has cooled,” he said.
For now, let’s see how Melbourne’s property market performed in January 2022.
Melbourne continued to experience easing conditions well below 1 per cent growth in January but recovered from the monthly decline seen in December 2021.
Data from CoreLogic revealed Melbourne’s dwelling values edged up by 0.2 per cent during the month, a slight improvement from the 0.1 decline in December.
Over the last three months, the city has recorded a gain of 0.8 per cent, down from the 1.5 per cent increase seen in the previous quarter.
Currently, Melbourne properties (including houses and units) have a median value of $798,881 and are up 17.7 per cent compared to the same period last year.
Meanwhile, Melbourne houses joined Sydney houses in the million-dollar club in January, surpassing the $1 million median price for the first time. Canberra was the only other city admitted to the prestigious club during the month, as house prices in the country’s capital also went beyond $1 million, CoreLogic’s data showed.
Data showed median house values in Melbourne rose 0.5 per cent over the month, recovering from the 0.2 decline in December 2021. The strong monthly gain drove up the average house value in the city to currently sit at $1,002,464; the first time houses in the city went beyond the six-figure threshold.
Over the year, house prices in the city have risen by 17.8 per cent.
Units trailed behind houses in terms of performance, recording a 0.4 per cent decline over the month. This is a reversal of the sector’s 0.3 per cent gain in December.
Melbourne units now have a median value of $624,158. Compared to January 2021, units have risen by 8.1 per cent.
According to CoreLogic, the latest data affirmed the property data provider’s observation that markets are now entering a two-speed market as the January results showed greater diversity in terms of growth rate.
The report highlighted that the slowing trend in Melbourne could be partially explained by a larger deposit hurdle caused by higher housing prices alongside low-income growth, along with higher advertised inventory levels and weaker demographic trends.
Supply and demand
Data revealed Melbourne’s new listings rolled in slowly at the start of the year, with vendors reportedly taking a wait-and-see approach due to concerns of declining property prices and as the Omicron variant loomed over the market.
New figures from SQM Research revealed that the number of total stocks in Melbourne fell by 11.5 per cent in January to 30,770 from 34,755 in December.
Compared to January 2021, the total number of properties for sale in the city was down by 18.2 per cent.
Melbourne’s new listings (or properties that have been on the market less than 30 days) saw a 29.3 per cent drop over the month from 13,302 to 9,398. Year on year, new listings in the city are down by 12.8 per cent.
Meanwhile, data showed that old listings or property listings over 180 days edged up by 2 per cent from 6,322 in December to 6,446 in January. On an annual basis, old listings have fallen by 36.8 per cent.
SQM Research founder Louis Christopher said that despite the great expectations of higher listings in January, vendors were in no hurry to return to the market to sell out of fear prices may fall this year.
“We were expecting a lot more listings coming through,” Mr Christopher said. “But these numbers tell me that vendors are not panicking and selling – they’re either holding back or they’re sticking to their guns and withdrawing their house from sale to get their asking prices.”
Commenting on the monthly figures, the expert said: “Available properties on the market remain tight. At just under 201,000 properties available for sale, we are currently having the mildest of slowdowns in the national housing market.”
Mr Christopher further stated that while home values are still on track to slow sharply in the next 12 months, the pace of growth could re-accelerate in the near term after a steep drop in listings in January.
“I think the risks have moved to the upside that prices will rise by more than expected during the March quarter.”
“Arguably, this could just be temporary, but I think the stronger market performance during the first quarter will force APRA’s hand in the second quarter and trigger price falls in the second half, even without a rate hike,” he stated.
In conclusion, he forecast that while auction markets will have their hands full in February, he is not expecting a massive surge in new listings.
Meanwhile, CoreLogic’s also reported that while new listings are higher relative to the same period last year, freshly advertised supply remains below average at a national level.
In Melbourne, data showed new listings were below 0.1 per cent its five-year median level in January. It’s generally expected that January will bring the biggest lull in sales for the year as people slowly re-emerge from the holiday period, CoreLogic noted.
Despite below-average new listings, sale transactions surged in January, with home sales in the first month of the year clocking in well above average levels.
According to CoreLogic, sales activity across Australia was estimated to be 15.1 per cent higher than January last year and 39.4 per cent above the previous five-year average.
While listings remain low, Melbourne’s auction market got off to a busier start than usual.
CoreLogic noted that compared to the previous years, more vendors were hitting the market over the traditionally quieter summer holiday period this year in a bid to get ahead of the competition before an increase in listings gives buyers more options and dampens the FOMO sentiment.
The property data provider reported that during the last two weeks of January, a total of 534 properties went under the hammer in the Victorian capital, with a final clearance rate of almost 64 per cent.
According to Mr Lawless, the auction market’s early jumpstart was a carry-over of the momentum from last year, when a post-lockdown surge in homes hitting the market led to record auction volumes in the December quarter.
While the estimated pent-up supply had probably worked its way through, more sellers were looking to take advantage of still generally strong selling conditions, he added.
“Also at the back of people’s minds is the growing outlook that the market will probably be softer this year and that, potentially, selling conditions could become more challenging as more stock comes onto the market … and [we see] a rebalance away from sellers back towards buyers,” he said.
Despite the thin number of auctions, Mr Lawless said that the market’s condition could be considered as a “bit of scene-setting” for what to expect in the coming weeks.
Most market observers are expecting higher auction volumes in February as market activity continues to ramp up.
Mr Christopher is also forecasting a stronger number for auctions in the coming months.
“Going forward, we are recording a move towards more auction listings over February with scheduled auctions up by about 15 per cent compared to this time last year,” he said.
If you want to be in the loop about what’s happening across auction markets in the country, follow our weekly updates in our News section.
While the quarterly pace of growth in the majority of capital market rents has been easing since moving through a peak in March last year, Melbourne’s rental market has been tracking the opposite direction.
According to CoreLogic, this growth is more evident in the city’s unit sector, which has seen increased demand as house rents in the city become more unaffordable.
Data showed that on an annual basis, both house and unit rents in Melbourne rose by 5 per cent and 4 per cent, respectively.
Gross rental yields have continued to diminish during the month, falling to a record low nationally of 3.21 per cent, down from 3.69 per cent a year ago.
While rents have been rising at an above-average pace through the pandemic, property values have risen more significantly, driving yields in most cities to the lowest level on record, according to CoreLogic.
Sydney and Melbourne remained the only capitals where gross yields are averaging below 3 per cent. Melbourne showed a rental return of 2.8 per cent, one of the lowest among capital cities due to lower rental growth relative to a high rate of capital gain.
Melbourne’s rental market continued to improve in January, with Domain reporting that the city’s vacancy rate slid by 0.8 percentage points over the month to 2.4 per cent.
The figures are now lower than the 2.7 per cent COVID-induced rate observed in April 2020 and continuing the downward trend of decreasing rates after a spike during the pandemic.
The city’s vacancy rates are also lower compared to the 4.4 per cent seen in the same period last year. Melbourne recorded the biggest annual decline among capital cities in January, according to Domain.
Despite the monthly decline, the figures are yet to hit the pre-pandemic levels, which hovered around 1.6 per cent in 2019.
The tightening of the city’s rental market in January was expected, following a boost in supply in December and with the end of the year seeing the end of leases and a better choice overall, according to Domain.
The report added that the revitalised demand in January resulted in a reduction in vacant rental listings over the month.
Data showed that rental listings in the city have fallen by 23.1 per cent compared to the previous month, with just under 12,500 vacant rentals at the end of January. Over the year, rental stocks in the city fell by 41.8 per cent.
The areas with the highest vacancy rates in Melbourne were Stonnington – east (5.4 per cent), Whitehorse – west (4.4 per cent), Stonnington – west (4 per cent), Boroondara (3.8 per cent), and Banyule (3.7 per cent).
Commenting on the record-low number of vacant properties for rent, Domain chief of research and economics Dr Nicola Powell said that “the tightening rental market nationally was driven by a monthly decline in the number of vacant rentals across all cities”.
She added: “All cities are firmly in a landlords market, apart from Melbourne, however if this continues to drop it could join the other cities very shortly. If conditions carry on in the same direction we’re likely to see competition and weekly asking rents continue to rise.”
Outlook for Melbourne’s market
While Melbourne’s market is still emerging from the traditional festive period slowdown, early indicators reveal that the housing market conditions are kicking off the year at the point where they left off in 2021.
Although property prices are still generally increasing in capital markets, they will be at a significantly slower rate than they were at the peak of the boom last year, according to CoreLogic.
Mr Lawless reiterated that two-speed market dynamics are at play across the capitals, with Sydney and Melbourne seeing a significant reduction in the pace of growth.
“A softening in growth conditions has been influenced by less government stimulus, worsening affordability, rising fixed term mortgage rates and, more recently, a slight tightening in credit conditions, and a surge in new listings through the final quarter of last year,” he explained.
Worsening affordability also comes to the fore for the two biggest capital markets, where the hurdle to save a deposit has become increasingly difficult for home buyers while wage growth remains relatively low.
And while new listings are likely to trend higher early this year, it is uncertain whether demand will keep pace.
CoreLogic explained that there are a number of factors that could affect demand, such as tighter credit availability, rising interest rates and potentially an increasing level of caution amongst buyers wary of buying close to a market peak.
Additionally, market analysts are now zeroing in on the trajectory of inflation and interest rates, which are forecast to be the biggest game changer for housing market trends.
AMP Capital chief economist Shane Oliver said the potential for interest rate hikes would impact every capital market, but Sydney and Melbourne are seen to get the shortest end of the stick.
Speaking on its potential effect on the Victorian capital, he said: “Melbourne is the most exposed because of the large supply overhang, and it has a more fragile economy given the damage done by multiple long lockdowns.”
While the Reserve Bank of Australia (RBA) kept the cash rate at a record low 0.1 per cent in January, its decision to upgrade its inflation forecast to 3.25 per cent this year has caused some experts to re-evaluate their predictions on the rate hike timing.
Dr Oliver predicted the RBA could start raising interest rates as early as June, following the higher-than-expected inflation reading last month.
“I think we’re likely to see higher variable rates in the second half of the year, so consequently, we expect prices to peak earlier than expected,” he said.
“Sydney and Melbourne could hit the peak by the middle of the year and nationally sometime in the September quarter.”
Dr Oliver has lowered his forecast for growth in Melbourne to two this year, down from his previous forecast of 5 per cent. Nationally, he now expects property values to rise 3 per cent, down from a previous estimate of 5 per cent.
Mr Lawless also highlighted the two biggest cities’ heightened vulnerability to rate hikes due to the high level of household debt that comes with skyrocketing prices.
“Sydney and Melbourne have much higher median house prices, now both over a million dollars, so arguably household debt levels would be higher as well,” he said.
“Sydney is around 10 times debt to income ratio, while Melbourne is approaching nine times, so arguably households would have stretched their budgets a bit more thinly. They could be the markets that are a little bit more at risk.”
For more information, check out our related articles, such as NAB tips house price turning point in late 2022 and Brace for ‘developing headwinds’ in 2022, investors warned.
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