Property market update: Melbourne, July 2022

CoreLogic’s research director Tim Lawless said that while markets have been losing steam even before the Reserve Bank’s monetary policy tightening started this year, the recent rate hikes have had a significant impact on property values.  

“The rate of growth in housing values was slowing well before interest rates started to rise, however, it’s abundantly clear markets have weakened quite sharply since the first rate rise on May 5,” the expert commented. 

At present, the country’s official cash rate stands at 1.85 per cent following four consecutive higher-than-normal hikes by the Reserve Bank, as the regulator looks to quell surging inflation. 

He cautioned market players that conditions would gradually worsen as interest rates continue to surge through to the end of the year.

“We’re seeing Sydney housing values now falling at the fastest rate they have since the early 1980s, and in Melbourne, nearly as quickly as what we saw during the global financial crisis,” Mr Lawless said.

The expert noted that there are indications that the latest downturn will be a more precipitous one compared to that recorded in 2008, but its length will fully depend on the interest rates’ trajectory. 

“It does look like this downturn is going to be a relatively sharp one, and maybe a short one as well, depending on what happens with interest rates. But it’s reasonable to expect that this rate of decline will probably worsen before it gets any better,” he said.

However, the expert stated that the relative changes brought on by the softening conditions would likely vary widely across capital cities. 

Mr Lawless explained that the regions where price declines are the most pronounced (such as Sydney and Melbourne) are often those that saw the sharpest gains early in the pandemic. This means that while the fall in valuations may look steep, prices are still far above where they were three years ago. 

Melbourne, for instance, had a milder upswing than other capitals, with prices up 17.3 per cent from the pandemic low point to the market peak. With such figures, Mr Lawless explained that a 10 per cent decline in Melbourne would take the city back to levels roughly the same as July 2017.  

The same 10 per cent decline, the property expert said, will have a different impact on other cities like Sydney, where the jump from the jump was 27.7 per cent, or Brisbane, where prices rose 42.7 per cent over the same period.

“So it’s quite a different scenario from city to city,” Mr Lawless surmised. 

But there may be light at the end of the property market tunnel, as analysts predict the central bank could ease its monetary policy and begin cutting rates next year — a move that is seen to put a floor on property prices once more. 

Before we examine what analysts predict for the city, let’s unravel how Melbourne performed in July 2022. 

Property values

Data from CoreLogic showed that Melbourne’s property prices fell 1.5 per cent in July, as the city’s dwelling values tanked for the fifth consecutive month. 

The city’s July figures are a step down from the 1.1 per cent decline seen in June and a further weakening from the 0.7 per cent monthly fall recorded in May. 

Melbourne’s quarterly declines also deepened in July. The property values were down by 3.2 per cent in the last three months — a significant contraction from the 2.4 per cent decline seen in the previous quarter. 

Compared to the same period last year, the median value of dwellings in Melbourne is now just up by 0.3 per cent, with the average price tag of a property in the city currently standing at $791,999. 

As the market downturn continued to gather momentum, it’s becoming more evident that units are holding their value more so than houses. Data from CoreLogic showed that in July, unit values fell by 1 per cent, while houses declined by 1.5 per cent across the country. 

“This trend is most apparent across the three largest capitals as well as Canberra, where housing affordability challenges may be deflecting more demand towards the medium to high density sector,” Mr Lawless said.

He added that the unit market’s prices are supported by the stronger interest from investors who are more inclined towards putting their money in the unit market than houses as “demand [for units] has historically been more concentrated”.

Over the month, Melbourne’s housing market recorded a 1.6 per cent drop in median values, which follows a 1.3 per cent decline in June. 

The city’s housing sector is also on the verge of entering the negative territory, as the median value of a house in the city is now just up by 0.2 per cent over the latest 12-month period. 

A house in Melbourne now has an average price tag of $964,950 — representing an almost $11,000 fall in average price on a monthly basis. 

While units are faring better than its counterpart, the sector also continued to lose steam during the month. In July, the sector’s median value fell by 1.2 per cent. The monthly drop adds to the 0.6 per cent decline seen in June. 

Over the last 12-month period, the average price of a unit is now up by just 0.5 per cent, with a typical unit in Melbourne now selling for $614,351. The figures represent a decline of almost $8,900 in average unit prices over the four weeks period. 

Supply and demand

While market activity is expected to slow down over the traditionally quiet winter season, data showed that Melbourne listings have risen over the month and are expected to continue their upward trajectory in the lead-up to spring. 

Data from SQM Research showed that total residential listings in Melbourne rose 4.9 per cent over the month from 35,191 in June to 36,927 in July. 

Over the year, the number of properties for sale in the city is down by just 1 per cent from 37,318 

New listings (or properties that have been on the market less than 30 days) also rose over the month by 2.3 per cent from 13,698 in June to 14,014 in July. Compared to the same period last year, fresh housing stock in the city is down by 12.1 per cent. 

Data showed that old listings or property listings over 180 days fell by 4.5 per cent from 6,622 in June to 6,322 in July. But on an annual basis, old housing stock in the Victorian capital is up by 1.6 per cent. 

Managing director of SQM Research Louis Christopher said that vendors were finding it difficult to close sales in July.

“There is now a clear trend across all cities of rising listings which is being driven by lower buyer interest and is ultimately symptomatic of the national housing downturn,” he added. 

He also cautioned that the upcoming spring selling season would be “a very tough one” for property sellers and their agents. 

Mr Christopher advised vendors to consider making further concessions in order to seal a deal. “While asking prices have been adjusting downwards since February, there will need to be further compromise if property vendors do want to sell this spring,” he said.

CoreLogic’s listings data mirrored SQM Research’s monthly figures. According to the property data provider, total listings in Sydney and Melbourne are 8 to 10 per cent above five-year averages.

The two cities bucked the trend of low supply among capital city markets. For comparison, Brisbane, Adelaide and Perth are recording advertised supply levels that are more than 30 per cent below the five-year average. 

Commenting on the national trend of supply, Mr Lawless said: “So far, the flow of new listings has followed the normal, seasonal pattern through winter, with the flow of new listings declining relative to the warmer months across most regions.”

But while national inventory remains low, the supply and demand dynamics across the country will change through spring as new listings ramp up at a time when demand is likely to be weaker, according to Mr Lawless. 

“A more substantial flow of advertised stock against a backdrop of falling demand is great news for active buyers, who will have more choice and less urgency, but bad news for vendors, who could find selling conditions become more challenging as advertised stock levels rise,” he said.

On the demand side, CoreLogic’s estimate of sales activity in Melbourne over the latest quarter to July fell by 26.3 per cent compared to a year earlier. 

As interest rates continue to rise, Mr Lawless predicts home sale transactions to further wind down during the second half of the year and into 2023, as buyers enter the market with added caution. 

“There is a good chance the number of properties sold in the second half of this year and into 2023 will continue to trend lower as higher interest rates, a more cautious lending environment and a reduction in household confidence continue to weigh on housing demand,” he stated. 

Auction market 

In July, Melbourne’s auction market scene saw fewer homes selling under the hammer compared to last year, as a triple whammy of weaker sentiment, rate hikes, and rising inflation sap buyers’ appetite. 

Domain’s latest auction data showed that the Victorian capital’s clearance rates stood at 52 per cent at the end of the month, marking the fifth consecutive month of declines. 

Over the month, auction clearance rates in the city have fallen by 1 per cent. On an annual basis, the rates are down by 16.6 per cent. 

The recent monthly figures are also the city’s lowest clearance rates since September 2020, when the city was under strict lockdowns. 

While both houses and units’ clearance rates fell in July, houses fared better than its counterpart during the period. 

Over the month, house clearance rates are down by 0.2 per cent to 53.2 per cent, while unit clearance rates slid by 4 per cent to 49.2 per cent. 

Compared to the same period last year, the average house and unit clearance rates are down by 18.8 per cent and 11.2 per cent, respectively. 

Domain reported that the clearance rate across Australia’s capitals was 51.8 per cent in July, the lowest rate reported since May 2020.

Domain chief of research and economics Dr Nicola Powell commented that rising interest rates “have further accelerated downward pressure on prices, affecting buyers’ borrowing power and adding further strain to mortgage affordability”.

“This is weighing on buyer sentiment and confidence and impacting clearance rates,” Dr Powell said.

She added that Domain also reported a higher rate of withdrawn auctions, “which indicates weakening market conditions as sellers are pulling their homes from auction and possibly looking at other sales methods instead”.

Local agents in Melbourne have also reported that some vendors are withdrawing their properties from the auction block and are choosing to rent them out, as rental prices rise in step with declining vacancy rates. 

Out of the 3,139 scheduled auctions in the Victorian capital throughout the month, data showed that 14.4 per cent were sold prior to being on an auctioneer’s slate, while 12.7 per cent didn’t even get to go under the auction block. 

The median auction price for houses in the city stood at $990,000 at the end of July, representing an 11.6 per cent decline in average house price tags over the month and a drop of 6.6 per cent over the last 12-month period. 

It also marks the first time the city’s average house auction price has fallen below $1 million since April 2021.  

For units, the median auction price stood at $680,000, representing a 5.6 per cent decline month on month. Compared to the same period last year, the figures are also down 4.9 per cent. 

Separate data from CoreLogic showed that 3,475 properties went under the hammer in the city throughout July, with a final average clearance rate of 54.46 per cent. 

Last month, 3,961 properties were auctioned in Melbourne, 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.   

Vacancy rates 

Melbourne’s vacancy rate fell for the seventh consecutive month in July, as the city’s rental market sits firmly in favour of landlords.

Domain’s data showed Melbourne’s vacancy rate has fallen by 10 basis points over the month to 1.4 per cent, the lowest point since March 2019. 

The figures also indicated that the city’s rental market continued its remarkable recovery from the 5.2 per cent peak recorded in December 2020.

With the current clearance rates are 0.3 percentage points off the 2018 record low of 1.1 per cent, Melbourne now has the potential to overtake this record (and a tighter rental market than Sydney, as it was pre-pandemic) if the downward trend continues, according to Domain. 

Data also showed that the number of vacant rental listings in Melbourne fell more than in any other capital over the month. 

The number of untenanted rental properties in the city stood at 7,043 at the end of July, indicating a 10.7 per cent drop over the month and a staggering 59.2 per cent compared to the same period last year. 

The areas with the highest vacancy rates across Melbourne were Whitehorse – west (2.2 per cent), Boroondara (2 per cent), Hobsons Bay (2 per cent), Banyule (1.9 per cent), and Maribyrnong (1.8 per cent). 

Meanwhile, the areas with the lowest vacancy rates were Cardinia (0.3 per cent), Yarra Ranges (0.4 per cent), Nillumbik – Kinglake (0.4 per cent), Frankston (0.5 per cent) and Sunbury (0.5 per cent). 

Dr Powell said vacancy rates had been steadily decreasing for the past 12 months. “Nationally, vacant rental listings are 45 per cent lower over the year and have fallen across most of the capital cities,” she said. 

“The rental market remains firmly in favour of landlords’ across every capital city, with a shortage in rental supply driving up asking rents and further escalating competition between tenants.” 

But she said that while times are tough for tenants, there are signs that finding a vacancy will be easier in the coming months. 

“While vacancy rates have fallen in July, we could see rental conditions stabilise in the coming months with the rise of investment activity helping to alleviate tightening conditions,” she said.

Rental market 

While Melbourne’s property prices are pulling back at a quick pace, rental prices in the city are not moving in step, as the latest data showed tenants in the city are facing rapidly increasing housing costs. 

In its latest rental report, Domain noted that Melbourne is firmly operating as a landlord’s market, as a shortage in supply and availability of vacant rentals drive up asking rents and further heat up competition between tenants.  

Over the June quarter, house rents in the city jumped by 2.2 per cent to a new record high of $460 a week. Compared to the same period last year, rents are up by 7.1 per cent.

Despite the rise, Domain noted that Melbourne remains the most affordable capital city to rent a house, with the value gap widening from the other capital cities.

Data showed that unit rents are rising faster than house rents over the quarter and year as affordability makes units an attractive option.

Unit rents surged by 5.1 per cent over the latest three-month period to $410 a week, the second steepest quarterly rise on record. The figures also represent the sharpest annual increase since 2008, at 10.8 per cent. 

Inner Melbourne units are at the front of the sector’s recovery, with rents in the area surging by $45 over the latest quarter.  

So far, the decline in property prices has not translated into a slowdown in rental costs, but Dr Powell said there are signs that the tide is turning. 

“[Rental] yields are also rising across every capital city for houses and most for units — this suggests purchasing prices are fairing weaker than rents and boosting yields, so it is a good time for investors to get into the market,” she stated.

Dr Powell enumerated the factors that could help the rental market get some breathing room in the coming months. “We need to continue to see an increase in investor activity, address the supply of social housing and ensure we have the right government incentives for first home buyers. This will no doubt have a positive impact on easing rental conditions,” she said.

Separate data from CoreLogic showed rents continued to trend higher through July. In Melbourne, house and unit rents rose by 5.6 per cent and 12.1 per cent, respectively, on an annual basis. 

Amidst rising rents and a general easing in home value growth, Melbourne’s rental yield growth continued to stage a strong recovery. The city’s gross rental yield stood at 3 per cent in July, edging up from 2.9 per cent in the previous month. 

“Such tight rental markets, improving yields and stronger buying conditions should help to keep a floor under investment demand,” Mr Lawless said.

What’s next for Melbourne’s property market? 

Property prices across the country are forecast to dive over the coming months — but it’s not all bad news for investors. 

When it comes to estimates on how far property values will decline, the four big banks’ estimates range dwelling prices will fall by around 10 to 15 per cent (depending on which analyst you ask).

Those estimates become grimmer when it comes to Sydney and Melbourne, with some analysts calculating that the two biggest cities are tipped to drop by as much as 20 per cent. 

The trajectory of the cities’ markets will mostly be determined by how far the Reserve Bank will tighten its monetary policy in the coming months. Most market analysts forecast there’s some way to go before rates hit their peak, with estimates varying from the mid-range 2 per cent up to the 3 per cent. 

CoreLogic noted that even the best-case interest rate scenario indicated that variable mortgage rates would roughly double from their current level.  

“As borrowing power is eroded by higher interest rates, and rising household expenses due to inflation, it’s reasonable to expect a further loss of momentum in housing demand,” Mr Lawless explained.

But it’s not all doom and gloom for the market.  A growing number of economists and experts are the RBA may begin unwinding its monetary policy and start cutting rates again later next year, which would help the market settle at its bottom sooner. 

“When interest rates start to stabilise, or potentially reduce next year, this could be the cue for housing values to find a floor,” Mr Lawless stated.  

Adding another ray of optimism amid doom-and-gloom headlines, historical data shows that massive market corrections (or a market crash) have never happened in Australia’s recent history. 

PropTrack’s data revealed that, over the last 32 years, the five times a year has ended in negative growth has only resulted in relatively small corrections. 

Michael Yardney, the director of Metropole Property Strategists, has also stated to the media that while a market correction was inevitable, “there is no property crash in sight”.

“I agree, the RBA is going to have to ramp up interest rates and this will further stunt consumer confidence because, of course, that’s what it is intended to do,” he stated.

“And yes, property values will fall, but I can’t see falls of -15 or -20 per cent. The fact is property price falls of that magnitude have never happened before.”

And as the market gears up for the spring selling season, experts predict that total listings on the market may finally return to average levels and will serve as a true test of buyer demand levels in the market. 

“By late spring or early summer, we could be seeing advertised stock levels trend higher than normal. Vendors are likely to be more competitive across a smaller pool of active buyers, which would drive clearance rates lower across auction markets, and could result in longer selling times and larger discounting rates for private treaty sales,” Mr Lawless said.

For more industry expert insights on the property market, check out our amazing podcasts. For starters, you can listen to the Property Nerds give their data-backed insights as to Why the property market won’t crash in 2022. 

Also, make sure to check our News section for the latest property market reports, insights, news and useful tips and strategies for investors. 

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