Property market update: Melbourne, October 2021
Melbourne’s property market continued to lose momentum, recording a muted growth rate in October, despite the late-blooming of the Victorian capital city’s spring selling season.
The price growth in Melbourne’s property market continued to wane in October, sliding further from its record-high in March as the lifting of the city’s latest lockdown served as a starting pistol for vendors to return to the market.
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The trend of demand outpacing supply dominated Melbourne’s property market throughout 2021, driving up prices in the city to new record highs in March. However, market dynamics are beginning to shift, with vendors rushing back into the market after the Victorian capital’s sixth lockdown ended, flooding the market with new supply and consequently dampening demand.
In addition to rising supply levels, experts highlighted that the worsening affordability conditions in capital cities had also taken out steam from the property market boom.
According to CoreLogic’s research director, Tim Lawless, the market has become more unfriendly to first-time home buyers as wages failed to keep up with property prices. “Housing prices continue to outpace wages by a ratio of about 12:1. This is one of the reasons why first home buyers are becoming a progressively smaller component of housing demand,” he said.
He also noted that the expiration of housing-focused stimuli, such as HomeBuilder and stamp duty concessions, as well as the tightening of credit assessments by APRA, is seen to further weigh down on the property market’s growth.
With spring selling season truly and well underway, evidenced by high auction market activity and record listings, will the Victorian capital end the year strong, or will it start 2022 with a morose outlook?
For now, let’s see how Melbourne performed in October 2021.
Property values
In October, CoreLogic’s latest data revealed the property values in Melbourne rose by 1 per cent month-on-month. While the recent increase is a slight improvement from the 0.8 per cent rise recorded in September, it is significantly lower than the 2.4 per cent monthly gain recorded in March 2021.
The city’s median dwelling values stood at $780,303 at the end of October.
Over the year, Melbourne’s dwelling values have risen by 16.37 per cent, the weakest among its capital city peers in terms of annual growth.
Unit markets rose by 1 per cent on a monthly basis, up from the 0.2 per cent gain recorded in September. Currently, the average price of units in the Victorian capital now stands at $621,898.
Meanwhile, the housing market also recorded a 1 per cent monthly increase, bringing the average house value in the city to $972,659.
While the city’s unit and house market values rose at the same rate in October, house prices have risen almost two times faster than unit prices over the year. Melbourne house values rose 19.5 per cent over the year compared with a 9.2 per cent gain in unit values.
According to Mr Lawless, we may see an increased demand for units as house prices continue to rise. “With investors becoming a larger component of new housing finance, we may see more demand flowing into medium to high-density properties,” he noted.
He added that investor demand across the unit sector could also be bolstered by the reopening of overseas borders, which is likely to have a positive impact on rental demand, specifically across inner-city unit precincts.
Supply and demand
As Melbournians emerged from the latest lockdown in October, the city’s spring selling season started in earnest, and vendors piled properties onto the city’s market.
SQM’s data showed total residential listings in Melbourne rose by a staggering 25.1 per cent to 41,265 in October from 32,990 in September. While the number of advertised properties rose on a monthly basis, listings in the city are still down 6.3 per cent compared to the same period last year.
According to experts, vendors rushed back into the market as the city’s stay-at-home orders were lifted and before the higher mortgage buffer put in place by financial regulators affected demand.
SQM Research managing director Louis Christopher said October was traditionally a strong month for listings, but he also acknowledged that the increase in stocks is mainly because of cities coming out of lockdown.
However, he also argued that another impetus for the supply surge is that vendors may be looking for the exit door before the market slows down any further.
“This could be an indicator that sellers are looking to get out of the market before further macro-prudential tightening kicks in and before we get an interest rate rise,” he said.
He commented that while Aussies’ desire to own a property continues to be strong, there are signs that the FOMO sentiment is starting to cool off.
“I think buyer demand is still relatively strong, but perhaps it’s starting to come off a little, so if we were to see November recording a similar level of listings, then I would be a little bit concerned.”
He further noted that the absorption rates of the market might be tested if a similar strong listing activity is also observed in November, which may indicate a peak in the housing market.
While listings rose, total stock remains significantly below average, according to CoreLogic. The persisting imbalance between supply and demand means that FOMO will likely remain a feature of the market, according to Mr Lawless.
He further explained that the persistently low levels of housing inventory have led to an extended period of strong selling conditions, as evidenced by high auction clearance rates and minimal days on market.
However, as new listings begin to trend sharply higher throughout spring, CoreLogic said the market might begin to be more favourable towards buyers.
“More listings mean more choice for buyers and less urgency in their purchasing decisions,” he said.
He concluded that while metrics are showing that it is still a seller’s market, conditions may begin to be more in favour of buyers late in 2021 or in early 2022.
“There is a good chance that advertised supply will rise further through spring and early summer which, due to worsening housing affordability and a subtle tightening in credit availability, may not be met by a commensurate lift in demand,” Mr Lawless stated.
Ray White chief economist Nerida Conisbee reiterated this observation. She revealed that the proportion of homes their agents were authorised to sell but have not yet hit the market has also risen, indicating that the market could see a further uptick in the volume of properties for sale in the foreseeable future.
She predicts that the listings will continue to strongly increase as the spring season continues on in November. She added: “I think this is good news for buyers as it could calm price growth as there are more options.”
In terms of demand, Ms Conisbee said the reopening of international travels for vaccinated Australians could shift buyer demand in the following months.
She explained that the high savings rate was one of the main drivers of price growth in recent months. However, now that people are allowed to travel, Aussies will have less savings, which in turn could affect their purchasing power and potentially impact demand.
Auction rates
Melbourne auctioneers were busy throughout October as weekly auction volumes rose as sellers sought to cash in on the pandemic-induced property boom. However, the high number of properties that went under the hammer also led to a steady decline in the clearance rate over the period.
According to experts, the auction market saw an influx of properties following the easing of restrictions in the Victorian capital that allowed property inspections to resume has opened up more choices for buyers. This, in turn, has resulted in properties being passed in rather than being sold at unrealistic prices.
However, some Melbourne-based auctioneers argue that the reason behind most properties selling is because vendors want their properties to sell at a higher price.
“I feel like the only reason things aren’t selling in this market is because of vendor expectations,” Kay & Burton South Yarra auctioneer Michael Armstrong stated. “They’re pushing harder, but they can only stretch the rubber band so far before it snaps back.”
He commented that vendors would have to get used to a shift in the market and price to compete with other properties that come up for auction.
Analysts expect the trend of declining clearance rates is likely to continue as pent-up supply continues to flow to the market and provide more options to buyers.
For more updates, expert industry insights and stories about Australia’s auction markets, follow our weekly updates in our News section.
Rental market
While rents in Melbourne continue to be weaker compared to its other capital city counterparts, the reopening of the borders and the consequent increase in demand is seen to give the city’s rental market a shot in the arm.
At an annual rate, house rents in Melbourne rose by 4.5 per cent in October, slightly higher than the 4.4 per cent recorded in September. Meanwhile, unit rents managed to bounce back from the 1.2 per cent decline seen in September, posting a 0.2 per cent annual increase in October.
Gross rental yields have continued to diminish in October as prices continued to rise, falling to a nationally record-low of 3.27 per cent. Melbourne showed one of the lowest rental returns among capital markets with 2.74 per cent, only beating out Sydney with 2.44 per cent.
To have more insight about how rental markets around the country are performing, check out our latest report on rental prices and where are the most expensive (and affordable) suburbs to rent in across Australia’s capital cities.
Vacancy rates
Melbourne’s vacancy rates declined in October, as improving economic and health outlook has prompted a rush of tenants to lease vacant rental properties.
According to Domain, the easing of lockdown in Melbourne caused a shift in the city’s rental market. Melbournians instantly reacted to the ability to conduct rental inspections, as vacancy rates fell from 3.5 per cent in September to 3.1 per cent in October, its lowest point since July 2020. The city is now just 0.4 percentage points off from its COVID-induced peak seen in April 2020.
The figures are also down from the August high of 3.6 per cent, although still elevated and indicated that the city continues to be a tenant’s city.
Despite this, the Domain rent report for the latest quarter showed house rents were stable while unit rents rose 1.4 per cent quarter on quarter. With this, Domain stated that the rental market continues to recover, and the worst may be over for Melbourne landlords.
In October, the areas with the highest vacancy rates were Stonnington – East (6.2 per cent), Melbourne City (5.8 per cent), Whitehorse – West (5.2 per cent), Stonnington – West (5.1 per cent) and Boroondara (4.7 per cent).
Meanwhile, the areas with the lowest vacancy rates in the city were Yarra Ranges (0.2 per cent), Macedon Ranges (0.2 per cent), Mornington Peninsula (0.3 per cent), Cardinia (0.3 per cent), Nillumbik – Kinglake (0.4 per cent).
What’s next for Melbourne’s property market?
Experts are in consensus that while Melbourne’s growth rate is still above average levels, the pace will likely taper off in the coming months.
Several factors, including worsening affordability, the influx of supply to the market as spring selling season progresses and the possibility of further tightening of lending standards are all predicted to weigh in on demand and, in turn, slow down growth, according to analysts.
More importantly, all eyes are now on the trajectory of interest rates, as it will be a central factor in the property market’s performance over the medium to longer term.
While the RBA has insisted in its latest quarterly statement that the cash rate will not change in 2022, forecasters are still pricing in first rate hikes to occur in late 2022 or early 2023. The said period is when analysts predict inflation will move sustainably within the central bank’s target range of 2 to 3 per cent.
Historically, higher interest rates served as an inflection point for the housing market, with a rate hike generally correlated with slowed growth in housing values or the start of a downturn in a property market cycle.
Westpac’s chief economist Bill Evans has forecasted Australia’s property prices to retract by as much as 5 per cent if a rate hike occurs. He predicts that a “correction phase” could commence in 2023, in line with the Reserve Bank of Australia’s indications of a rise in interest rates.
But in the meantime, he expects markets to remain heated for the rest of 2021 and throughout 2022.
“As for 2022, the strong momentum will continue, but the pace of gains is expected to slow, levelling out over the course of next year before moving into a correction phase in 2023,” Mr Evans predicts.
“We expect price growth to slow to 8 per cent in 2022, up from our previous forecast of 5 per cent, with most of that increase loaded into the first half of the year.
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