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The downtrend in Melbourne’s property market accelerated in June, with the Victorian capital closing out the year as one of the epicentres of declines among capital markets.
Melbourne’s property market closed out the financial year in the red, as the city felt the chill from rising interest rates, increasing supply and a cost-of-living crunch.
The city’s soft market conditions at the end of FY 2022 are a far cry from how it closed out the previous financial year.
In June 2021, Melbourne posted a solid 1.5 per cent monthly gain, defying expectations of steep declines due to COVID lockdowns.
And while the city is not unfamiliar with declining values after going through market cycles in the past, CoreLogic research director Tim Lawless noted that the current rate of decline is steeper than previous downturns.
“We’re seeing the rate of decline in housing values gathering, very clear momentum,” according to Mr Lawless. He also noted that the downward trajectory is progressing at a much sharper than the decline of growth observed in 2017.
The property expert gave a more detailed take on what factors are taking the heat out of the market.
“Housing value growth has been easing since moving through a peak in March last year when early drivers of the slowdown included rising fixed-term mortgage rates, an expiry of fiscal support, a trend towards lower consumer sentiment, affordability challenges and tighter credit conditions,” Mr Lawless explained.
He also highlighted that the slowdown in part reflects higher borrowing costs as the Reserve Bank of Australia (RBA) lifted rates in both May and June, which brought the country’s official cash rate to 0.85 per cent from 0.35 per cent.
“Since the initial cash rate hike on 5 May, most housing markets around the country have seen a sharper reduction in the rate of growth,” he said.
The official cash rate currently stands at 1.35 per cent following a 50-basis point hike by the central bank during its July board meeting, as the regulator continued its monetary policy tightening to tame inflation and keep the economy on track.
And as inflation continues to be above the central bank’s target band of 2 to 3 per cent, Mr Lawless advised market players to brace for further hikes.
“Considering inflation is likely to remain stubbornly high for some time, and interest rates are expected to rise substantially in response, it’s likely the rate of decline in housing values will continue to gather steam and become more widespread,” Mr Lawless said.
How will the city’s market fare from future interest rate hikes? For now, let’s take a closer look at how Melbourne performed in June 2022.
Melbourne’s property values fell by 1.1 per cent in June, marking its second month of decline after a 0.7 per cent drop in May.
For perspective, Melbourne’s monthly rate of growth has continued to lose momentum since hitting a peak in March 2021, when dwelling prices reached a monthly growth rate of 2.4 per cent — the fastest four-week gain the Victorian capital has seen in more than three decades.
On a quarterly basis, Melbourne’s property values are down by 1.1 per cent, further weakening from the 0.7 per cent fall seen in the previous rolling three-month period.
Compared to June 2021, the growth in the median value of dwellings in the Victorian capital is now at 3 per cent, almost half of the 5.8 per cent annual gain seen in May.
The average price of a dwelling in Melbourne stood at $798,198 at the end of June, making it the third-most expensive capital city to buy a property in. The city only trailed behind Sydney at $1,110,660 and Canberra at $937,568.
Over the month, the city’s average value has fallen by almost $8,000.
Melbourne’s house sector also continued to tumble, with the sector’s decline accelerating from a 0.8 per cent drop in May to a 1.3 per cent fall in June.
Over the year, the median value of a house in the city is now just up by 3.5 per cent, a steep drop from the 6.9 per cent gain seen in May. A house in Melbourne now has an average price tag of $975,850 — representing an almost $16,624 fall in average price on a monthly basis.
Meanwhile, the unit sector also lost momentum. In June, the sector’s median value fell by 0.6 per cent. The monthly drop adds to the 0.3 per cent decline seen in May.
A typical unit in the city is now selling for $623,249, indicating a decline of $6,000 in average prices over the four-week period.
Compared to June 2021, the median price of units in Melbourne has risen by 2.2 per cent, slowing down from the 12-month growth of 3.5 per cent recorded in May.
According to Mr Lawless, unit markets are holding their value a little better than houses across the largest capitals (Sydney and Melbourne) amid the downturn.
“Since the onset of the pandemic in March 2020, capital city unit values have risen 9.8 per cent compared to 24.7 per cent for houses, resulting in better affordability across the medium to high density sector,” the expert noted.
Sydney recorded a 3 per cent decline in house values through the June quarter compared with a 2.1 per cent fall in unit values.
Melbourne was on a similar trend, as the city tallied a smaller quarterly decline in units relative to houses at 0.5 per cent and 2.4 per cent, respectively.
“The stronger performance across the unit sector comes after house values consistently outperformed units through the upswing,” Mr Lawless said.
Supply and demand
CoreLogic noted that as housing conditions soften, the market is swinging back in favour of buyers.
The property data provider’s report highlighted that the supply and demand in each capital market continued to be a strong indicator of the future growth trajectory of markets.
Mr Lawless declared that Melbourne and Sydney were now “absolutely buyer’s markets”.
“Buyers are in the driver’s seat. Stock levels are above average levels,” he stated.
Data showed Sydney and Melbourne (where housing conditions are the weakest) continued to be outliers among capital markets in terms of supply.
While national advertised stock levels remain -7.4 per cent lower relative to 2021, in Sydney and Melbourne, the total advertised supply is now 7 to 8 per cent above the levels recorded a year ago and well above the five-year average.
Mr Lawless explained that the above-average level in advertised supply in the two biggest cities is mostly caused by a slow down in the rate of absorption, brought on by weaker demand.
“Estimated transactions in Sydney throughout the June quarter were -36.7 per cent lower than a year ago while Melbourne is down -18.3 per cent,” Mr Lawless stated.
He also noted that in conjunction with the decline in turnover volumes, the flow of new listings added to the market is falling as selling conditions become more challenging for vendors and listings move into a seasonal lull with the arrival of winter.
“We aren’t seeing any signs of panicked selling as housing conditions cool, in fact, the trend is the opposite, with the flow of new listings to the market slowing,” he stated.
In another sign of weakening demand, local agents are reporting that properties in Sydney and Melbourne are spending longer on the market, and clearance rates are declining.
Speaking on the average days on the market of properties in the city, Mr Lawless said: “It’s a fairly gradual trend upwards, but it’s also a very clear trend.
“As homes take longer to sell, you see discounting rates start to become larger as vendors need to negotiate more. That will also be reflected in lower auction clearance rates as well.”
A separate report from SQM Research showed that residential property listings in the Victorian capital fell by 3.7 per cent month-on-month from 36,529 in May to 35,191 in June.
Compared to June 2021, the number of available stock in the city is down by 2.1 per cent from the 35,900 properties recorded in the same period last year.
Commenting on the monthly figures, managing director of SQM Research Louis Christopher said that the decline in new listings was caused by “reduced vendor confidence in the strength of the housing market as well as seasonal factors whereby the winter period normally records a decline in residential property sales activity, particularly for Sydney and Melbourne”.
But Mr Christopher noted the increase in older listings, which the expert said indicated a slowdown in the housing market driven by lower buyer demand.
Data showed that old listings or properties that have been on the market for more than 180 days in Melbourne rose by 3.8 per cent from 6,378 in May to 6,622 in June. Compared to the same period last year, old listings in the city are up by 4.5 per cent.
Meanwhile, data also showed that new listings (or properties that have been on the market less than 30 days) rose by 14.4 per cent from 16,005 in May to 13,698 in June, indicating strong absorption rates for properties that have been on the market for an extended period of time. Year on year, old housing stock in the city has fallen by 6.1 per cent.
“Going forward we expect July to record similar trends of lacklustre activity and more rises in older listings,” he stated.
In another indication that Melbourne’s property market has lost its zing, data showed that a lower proportion of homes auctioned in the city found new owners over June.
Data from Domain showed that Melbourne’s clearance rate stood at 53.9 per cent in June, its lowest point since August 2021. The figures are 2 per cent lower than in May and 13.7 per cent down from the same period last year. It also follows four months of decline in clearance rates.
Out of the 3,707 scheduled auctions in the city throughout the month, data showed that 16 per cent was sold prior, while 12.9 per cent were withdrawn from being on the auction block.
Domain’s latest monthly report also showed that the city’s house and unit sectors recorded clearance rates of 54.1 per cent and 52.8 per cent, respectively. The figures indicate that sectors recorded a 2.2 per cent decline for houses and a 1.2 per cent fall for units in clearance rates over the month.
Domain chief of research and economics Dr Nicola Powell said Melbourne’s declining clearance rates indicated “that market jitters are swaying sellers to secure a deal before auction day or swap tactics”.
The expert added that interest rate rises over the past three months had driven the clearance rate decline, and vendors should prepare for further drops.
“We do expect to see a greater decline in clearance rates, which we have already seen since interest rates have been moving higher,” Powell said.
“It’s not the only thing causing the market to slow, there have been affordability issues and an increased number of homes for sale, but it has been fuelled or accelerated by rate rises and a more wary market sentiment from buyers.”
The median auction price for houses in the city stood at $1,130,000 at the end of June, indicating a 3.4 per cent decline over the month. Over the year, the figures are still up 5 per cent.
For units, the median auction price stood at $720,000, representing a 0.7 per cent decline month-on-month. Compared to the same period last year, the figures are up by 2.9 per cent.
Separate data from CoreLogic mirrored Domain’s results. According to CoreLogic, 3,961 properties went under the hammer in the city, with a final average clearance rate of 56.5 per cent.
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.
Melbourne’s rental market has well and truly made a recovery, as the city’s vacancy rates continued to decline in June.
Domain’s latest data showed the Victorian capital’s vacancy rate stood at 1.5 per cent at the end of the month, further tightening from the 1.6 per cent recorded in May.
At its current level, the city’s vacancy rate is only 40 basis points from the 1.1 per cent record low of 2018.
Domain noted that if the downward trend continued, Melbourne could “reclaim its throne” of being a tighter rental market than Sydney, as it was historically pre-pandemic.
The number of vacant rental listings in the city also fell for the sixth consecutive month, with less than half the stock on the market now compared to the same time last year.
The areas with the highest vacancy rates were Boroondara (2.4 per cent), Whitehorse – West (2.4 per cent), Stonnington – West (2.3 per cent), Banyule (2.3 per cent) and Stonnington – East (2.3 per cent).
According to Domain, the return of overseas migrants and international students as COVID restrictions around the world continue to ease will continue to place demand pressure, considering most rent upon arrival.
But it also forecast that with new first home buyer incentives rolled out and cooler purchasing conditions, more tenants may choose to transition to being home owners and therefore take away an element of the rental demand.
To read more on the latest trends in the rental markets, check out our recent article: How Australia’s rental market fared at end FY22.
Data from CoreLogic’s Quarterly Rental Review for the second quarter of 2022 showed that Melbourne replaced Adelaide as Australia’s most affordable house rental market, with the median rent in the city standing at $480 per week.
Melbourne’s dwelling rents rose 2.3 per cent over the latest three-month period and only 0.8 per cent over the month. Over the year, rents in the city are up by 7.5 per cent.
Compared to June 2021, house rents in Melbourne have risen by 5.2 per cent, while unit rents have increased by 10.9 per cent. This brought house and unit rents to stand at $506 and $455, respectively.
“Such strong rental conditions through the current cycle have occurred largely in the absence of overseas migration, although the reopening of international borders is likely now adding further upwards pressure on rental demand,” Mr Lawless said.
CoreLogic also noted that the trend in unit rents had made a recovery over the past year after falling sharply in some cities early in the pandemic.
Sydney and Melbourne unit rents are now rising significantly faster than house rents, with tenants taking advantage of the more affordable medium- to high-density rental options.
Melbourne’s gross rental yield stood unchanged over the month at 2.9 per cent.
“With rental markets expected to remain tight, it’s likely rents will continue to outpace growth in housing values, driving a rapid recovery in rental yields,” CoreLogic’s report stated.
With most experts in consensus that the market has entered the downturn phase of the property market cycle, much of the conversation now centres around how much and how long prices in Melbourne will fall.
With more rate hikes to come as the RBA tries to quell inflation, experts predict property prices in Melbourne will decline within ballpark figures of 15 and 20 per cent over the next 12 months.
Mr Lawless said the market was in the “fairly early stages” of a decline, with the extent of falls depending partly on how rapidly the Reserve Bank lifts its interest rate to combat inflation.
“There’s still probably another potentially 12 months ahead of us in this downturn,” he said.
“Australia’s housing market outlook is becoming increasingly skewed to the downside, with the trajectory of housing values heavily dependent on the path interest rates take.”
Some economists also updated forecasts after the RBA revised its inflation forecasts up from its estimate of 5.1 per cent in the March quarter to 7 per cent.
The Commonwealth Bank is forecasting both Sydney and Melbourne house prices to fall as much as 18 per cent by the end of next year.
Meanwhile, chief economist at AMP Shane Oliver said Sydney and Melbourne are already seeing “sharp falls” in property prices.
After revising his forecast for the peak in the cash rate to 2.5 per cent, from 2 per cent, the economist expects property price declines in Sydney, Melbourne and Canberra of up to 20 per cent over the next 12-month period.
ANZ and NAB also updated their forecasts for the two biggest cities in the wake of RBA’s cash rate trajectory in June.
NAB forecast prices in Sydney and Melbourne homes could fall by 20 per cent or more by the end of next year. Specifically, the lender predicts a 7.7 per cent decline in 2022 before sliding by 14.1 per cent in 2023 for Melbourne.
ANZ now expects the cash rate to hit 2.35 per cent by November and 3 per cent in late 2023 or early 2024, which led to the lender updating its forecasts for Melbourne. The major bank now expects prices in the Victorian city to fall by as much as 15 per cent in 2023.
Amid talks of steep declines, Mr Lawless explained that a fall as deep as 20 per cent would not be as detrimental to the housing market as most market analysts paint it to be.
He said that a 10 per cent decline in the market (a figure which is becoming more widely accepted across the various private sector forecasts) would take national housing values back to levels seen in July 2021.
Meanwhile, a 15 per cent decline would take the market back to April 2021 levels.
As for the gloomiest market decline forecast of a 20 per cent decline, the national index would still be at January 2021 levels and only marginally above where home values were in late 2017, he explained.
Another factor that will keep the floor under the housing market is that many borrowers have buffers against rising mortgage interest rates, as they have been making repayments above required minimums.
“[This means] most households have a significant safety net if temporarily faced with a change in circumstances,” Mr Lawless stated.
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Property refers to either a tangible or intangible item that an individual or business has legal rights or ownership of, such as houses, cars, stocks or bond certificates.