Property market update: Melbourne, July 2021

While Melbourne’s property market stayed on course and delivered stable growth during the month amid COVID lockdowns, there are now growing signs that the 2021 property boom is beginning to taper off. 

CoreLogic’s research director, Tim Lawless, said there are now indicators that the market is losing steam as the monthly growth rate has fallen below the peak in March at 2.8 per cent, suggesting a trend towards milder growth in the second half of 2021. 

Affordability constraints seem to be at the heart of the cool-down.

“With dwelling values rising more in a month than incomes are rising in a year, housing is moving out of reach for many members of the community,” Mr Lawless explained.

He also pointed to the number of pandemic-related government support schemes that have ended, making that pressure even greater, although new assistance measures are being introduced as a result of the latest outbreak and consequent lockdowns. 

But experts said that the growth in housing values in the Victorian capital is still “well above” average, and those waiting for a drop may need to wait it out until 2023.

Mr Lawless said the market is still being underpinned by the record-low mortgages and the prospect that the Reserve Bank of Australia (RBA) will keep the interest rate low for an extended period of time. Additionally, the mismatch between demand and advertised supply remains a key factor placing upwards pressure on housing prices. 

Let’s take a closer look at how Melbourne’s property market performed in July 2021. 

Property values 

Australian home values soared by 16.1 per cent in July compared to the same period in 2020, marking the fastest pace of annual growth since February 2004, new CoreLogic data has revealed. Over the month, national dwelling values rose by 1.6 per cent

In Melbourne, dwelling values rose 1.3 per cent month-on-month, easing from the 1.5 per cent gain recorded in June. 

Melbourne’s median property value for all types of dwellings stood at $762,068, with the annual growth rate now at 10.4 per cent. 

As house prices in the city continue to soar, CoreLogic’s head of research Australia Elizabeth Owen said Melbourne’s unit market was starting to show more opportunities for cash-strapped buyers.

Unit values rose just 0.4 per cent last month compared to 0.7 per cent in June, with the median value now at  $612,711. On an annual basis, unit values have increased by 5.9 per cent. 

“Unit performance across Melbourne has been more subdued throughout the year, and in a sense that does give buyers more opportunity to keep up with the unit market,” Ms Owen said.

“It’s definitely a segment of the market that has been easier to keep up with and one that might see higher demand when vaccination levels increase and we see international travel return.”

Meanwhile, house values had a more modest drop in growth, rising 1.7 per cent last month compared to 1.8 per cent a month earlier. Median value of Melbourne houses are now at $945,769, with the annual capital gains at 12.3 per cent. 

Ms Owen advised that while the unit market is an attractive option in the Melbourne market, it’s important to remember that units may not be suitable for every buyer’s lifestyle, particularly for tenants looking for more space as the Victorian capital faced the prospect of extended lockdowns. 

Domain’s House Price Report for the June quarter showed that Melbourne’s median house price jumped 16.2 per cent in a year to record $1,022,927, as ultra-low rates drove up demand and consequently house prices. 

Even units are at a record high median price of $572,793, which is 5.2 per cent higher than a year ago, although the apartment market showed weakness in some parts of the CBD area. 

Domain chief of research and economics Nicola Powell said that several factors, including cheap mortgage rates, hefty savings and government stimulus have resulted in the highest annual price increase in 11 years. She added that months of lockdown have also exposed the flaws in existing living arrangements. 

“We’ve placed a greater emphasis on our homes because we’re spending more time in them,” Dr Powell said. “It’s spurred on purchases, or it’s brought forward decisions.”

Supply and demand  

The continued mismatch between demand for and advertised supply of housing kept pushing prices higher in July. 

The number of total property listings in Melbourne rose by 3.9 per cent over the month as a result of a late surge in new listings, increasing from 35, 900 in June to 37, 318 in July.

Despite the monthly increase recorded in July, property listings in the city continue to trend downwards on an annual basis, with listings declining 10.8 per cent over the year. 

Louis Christopher, managing director of SQM Research said that Melbourne’s market appears to be more active than this time last year, despite the most recent lockdown and mixed auction clearance rates.

Meanwhile, CoreLogic said that advertised listing numbers continue to be well below the average level, despite the new number of listings added to the market trending higher than average. 

The research firm noted the volatility in new inventory levels, with the number of listings declining sharply in Melbourne and Sydney amid COVID lockdowns. 

In Melbourne, CoreLogic reported that the number of new listings added to the Melbourne market edged down 27.0 per cent between the week ending July 11th and 25th. 

As listing numbers remained 26 per cent below the five-year national average, CoreLogic said some buyers had found simply that they could not compete in the hot market. 

“With buyer demand so strong and active listings well below average, prospective buyers are likely to be feeling a sense of urgency due to the level of competition in the market. However, with affordability constraints starting to impact purchasing capacity, it’s possible market activity could reduce through the second half of the year, helping to rebalance the market and take some heat out of the rate of house price growth,” Mr Lawless said. 

Auction rates 

The latest string of localised lockdowns across the country failed to derail auction market activity in July,  data from CoreLogic showed. 

In the week ending 1 August 2021, 656 Melbourne homes went under the hammer, down on the 772 the previous week and the 357 one year ago.

Out of the 653 auction results collected by CoreLogic for the period, a clearance rate of 77.2  per cent was recorded in the city. The figures were an improvement from last week’s final results of 70.8 per cent and a significant improvement from the 55.1 per cent clearance rate recorded in the same period last year. 

Despite the lockdowns, Melbourne’s clearance rates remained relatively steady in July, clocking in at or above the 70 per cent mark throughout the month. 

Rental market 

Despite climbing to record highs, rent values continued to be outstripped by dwelling prices, resulting in a significant decline in rental yields. 

The latest data from CoreLogic showed that Australian rent values increased 7.5 per cent in the year to July – the fastest annual appreciation since December 2008.

Sydney and Melbourne continue to lag behind the pack of capital cities in terms of rental yields. 

Sydney saw the highest yield compression with 2.5 per cent, followed closely by Melbourne with a 2.8 per cent. In comparison, every other capital city clocked in a gross yield at 4 per cent or higher.

While Sydney and Melbourne’s rental conditions are substantially looser than the smaller capitals, Mr Lawless expects them to stabilise soon “following a substantial reduction in rents due to high vacancy rates attributable to stalled overseas migration and a preference shift away from high density living during the pandemic”.

“Considering yields outside of Sydney and Melbourne are high relative to mortgage rates and housing values are expected to rise further, we are likely to see investment activity continue to lift.” Mr Lawless said.

Vacancy rates 

Over the month, rental vacancies rose in Melbourne – bucking the trend of vacancies stabilising or declining in other capital cities and often to critical shortage levels.

Domain’s latest data showed that around 3.7 per cent of rental properties in the Victorian capital are now sitting empty, edging up from 3.6 per cent in June. 

The areas with the highest rental vacancy levels in Melbourne include the inner city at 4.9 per cent, the inner east at 4.8 per cent, the inner south at 3.3 per cent and the west at 3.2 per cent.

The increase in the city’s vacancy rates is seen as a short-term outcome of the lockdowns imposed to combat the new outbreak of COVID-19. It could also indicate the movement of tenants to areas that have seen significant drops in asking rents. 

Areas with the highest vacancy rate are Stonnington – East (6.9 per cent), Melbourne City (6.8 per cent), Whitehorse – West (5.7 per cent), Boroondara (5.3 per cent), Stonnington – West (5.3 per cent). Meanwhile, areas with the lowest vacancy rate are Yarra Ranges (0.4 per cent), Macedon Ranges (0.5 per cent), Nillumbik – Kinglake (0.5 per cent), Cardinia (0.5 per cent), Mornington Peninsula (0.5 per cent). 

Emily Sim, chief executive of property management with the Ray White Group, also sees that net loss of people from Melbourne is causing the number of rental vacancies to rise.

“We’re now seeing a lot of people leaving Melbourne to go to places like Daylesford, the Mornington Peninsula and Mount Macedon, or leaving Victoria completely to go to Queensland, the Gold Coast, the Sunshine Coast and Byron Bay,” she said. “That’s bound to have an effect on the property market in Melbourne.

Ms Sim also said that ‘lockdown fatigue’ is the main motivator behind the shift. 

“Melburnians spent half of their year in lockdown, more than any other state. So, people are just fatigued with it all. It feels like they were just walking on eggshells, ready for the next lockdown, and some decided to leave while they could.”

Outlook 

The outlook for Melbourne’s performance for the rest of 2021 remains stable despite the different headwinds the city's property market faces in the coming months. 

Ms Owen said the city could even be on track for a busier spring selling season as more homeowners put their plans to sell in motion after holding off during lockdown.

However, analysts have also flagged factors that may cause growth to further slow down in the near future. 

The growing housing affordability challenges, along with less fiscal support have affected the pace of  capital gain since April, according to CoreLogic. The research firm’s latest report stated that the recent COVID outbreaks and associated lockdowns have also contributed to the loss of momentum in the city’s market property. 

The possibility of tighter credit policies and an earlier than expected lift in interest rates are also seen to take some steam out of the property market boom. 

Meanwhile, Domain’s Ms Powell sees Melbourne’s house prices continuing its upward trajectory, although not at the same “frantic” pace as affordability bites and more supply came onto the market when sellers were enticed by record prices.