Property market update: Melbourne, August 2022

CoreLogic’s latest report showed that every Australian capital city except Darwin is now in a downturn, with the country’s property values falling at a rate not seen since the 1980s.

Tim Lawless, CoreLogic’s research director, said that while the Victorian city’s prices were still comfortably above pre-pandemic levels, the equity buffer looked likely to be squeezed further as the Reserve Bank of Australia continued  on its monetary policy warpath against surging inflation. 

Mr Lawless said that it’s difficult when the market will get to the light at the end of the downturn tunnel. “It’s hard to see housing prices stabilising until interest rates find a ceiling and consumer sentiment starts to improve.” 

The central bank’s rapid-fire interest-rate hikes has elevated the country’s official cash rate over a five-month period from a historically low level in May to 2.35 per cent in September — the highest level in seven years.

Melbourne’s property market has been in the red as the multiple successive rate hikes, along with the sharp increase in the cost of living, have slashed what buyers can afford to spend on property purchases and reduced demand from buyers who are waiting on the sidelines, adding downward pressure on the city’s property values. 

At the end of August, the RBA estimated that the potential buyers’ maximum loan sizes have been cut by about 20 per cent since the cash rate started rising in May. 

With the RBA predicted to continue frontloading its monetary policy tightening to contain inflation within its 2 to 3 per cent band target, Mr Lawless forecasts that the property market will continue to be under pressure. 

“From current levels, interest rates are likely to increase by at least another 75 basis points and there is a good chance advertised stock levels will accumulate through the spring selling season, providing more choice for buyers and adding further downwards pressure on housing values,” the expert said. 

While the current picture painted by the latest data is far from positive, there is underlying optimism among market observers that finding the bottom could also happen relatively swiftly and that net capital gains Melbourne accumulated over the pandemic could still turn out to be significant.

Mr Lawless said that the significance of the correction phase “will really depend on how long this lasts, and the chances are it probably will be a fairly short but sharp downturn”.

Will Melbourne see a spring revival in the coming months? Or will it sit out the frenzy typically seen during the busy market season? 

For now, let’s see how Melbourne’s property market performed in August 2022. 

Property values 

CoreLogic’s data showed that dwelling values in Melbourne fell 1.2 per cent in August, marking the city’s sixth-month slump. 

While the figures are still in the negative territory,  it represents a slight improvement from the 1.5 per cent drop recorded in July. 

Melbourne’s quarterly declines deepened, with property values sinking by 3.8 per cent over the three-month period to August — indicating a contraction from the 3.2 per cent decline recorded in the previous rolling quarter. 

On an annual basis, property values are down by 2.1 per cent, with the average house in the Victorian capital now selling for $782,053. The figures are closer to the median price of $769,968 seen in August 2021. 

Looking deeper into the data, both the city’s house and unit sector also recorded declines on a monthly and annual basis. 

House prices in the city fell by 1.6 per cent in August. While the figures are an improvement from the 1.5 per cent decline in July, it adds another tally mark to the sector’s scoreboard of monthly declines since the start of the year. 

Compared to August 2021, house prices in the city are now down by 2.7 per cent, marking the sector’s first annual decline. 

The average house in Melbourne is now selling for $948,000, a far cry from the $1 million price point the sector hit in January and indicates a month-on-month price drop of almost $17, 000.

Melbourne’s unit prices fell 0.6 per cent over the month, a slight improvement from the 1.2 per cent drop tallied in July. 

However, the sector is now down by 0.6 per cent on an annual basis, with the average unit or apartment in the city now priced at $608,281. The figures represent a decline of $6,000 in average unit prices over the four-week period. 

On the upside, Melbourne’s current correction has a long way to go before it catches the major downturns recorded in 2017 to 2019, when prices sank by 11.1 per cent over a 19-month period.

The city is also still relatively ahead of the 1989-92 market decline, when dwelling values in the city dropped by 9.8 per cent over 21 months. 

Supply and demand

Melbourne sellers are tiptoeing into the market ahead of the spring selling season as listings fell in August — a trend that defied the seasonal listing boom observed ahead of what is considered to be the market’s busiest period. 

Data from SQM Research showed that total residential listings in Melbourne fell by 3.2 per cent over the month from 36,927 in July to 35,744 in August. 

Compared to the same period last year, listings in the city are up by 10.2 per cent. 

New listings (or properties that have been on the market less than 30 days) in Melbourne fell by 3.3 per cent from 14,014 in July to 13,553 in August. 

Meanwhile, data showed that old listings or property listings over 180 days rose by 3.6 per cent from 6,322  in July to 6,550 in August. 

Managing director of SQM Research Louis Christopher said that the monthly drop in new listings came as a surprise. 

“Normally, August is a month when listings start to rise ahead of the spring selling season. It would suggest to me spring is going to be weaker on the activity front. Vendors are clearly cautious to sell in this environment and there is no panic selling at this stage.”

Despite the month-on-month declines in new listings, Melbourne’s property market continues to have a high level of supply when compared to the same period last year. 

Compared to August 2021, old housing stock in the Victorian capital is up by 2.6 per cent, while fresh housing stock in the city is up by 23.5 per cent. 

Separate data from CoreLogic painted the same picture in terms of supply. On a national level, data showed that freshly advertised housing stock was 13.4 per cent higher than a year ago and 6.5 per cent above the previous five-year average over the four weeks ending 28 August.

“Despite the downwards trend in new listings through the colder months, the total number of capital city homes advertised for sale held reasonably firm, and there are currently 11.3 per cent more homes available for sale compared to this time last year,” Mr Lawless commented.

The expert noted that in Sydney and Melbourne, where the downturn is more advanced,  total advertised stock has risen to above average levels. 

Mr Lawless reiterated that the spring selling season will be a test for the demand as listings increase. However, he predicts that selling activity will be more subdued this year given the current trend in supply and demand. 

“Between winter and spring, we typically see a 22 per cent rise in the number of new capital city listings based on the pre-COVID five-year average,” Mr Lawless said. 

“The flow of new listings this spring season may not be quite as active with the housing downturn dissuading some prospective vendors, but we are likely to see more listings added to the market than in winter,” he added. 

He also forecasts a slowdown in buying activity as higher interest rates and low sentiment continue to weigh on demand.  Over the three months to August, the volume of home sales in the Victorian capital fell by 16.5 per cent.

“Should this scenario play out, the net result will be an accumulation of advertised supply that could further weigh down values,” Mr Lawless stated. 

According to Domain, the weakness in home buying demand have driven Melbourne home sellers to offer the biggest house price discounts since the city’s second COVID-19 lockdown. 

The average discount, or difference in original asking price and sale price, was 5.8 per cent in July for private treaty sales, increasing from 4.8 per cent at recorded time last year and at par with levels observed in the market in October 2020.

The discount rate equated to a $62,313 price cut to Melbourne’s average house price of $1,074,369, data showed. 

Unit prices are also being discounted by an average of 6.7 per cent, representing $38,828 off Melbourne’s median unit price of $579,532.

Notably, the biggest discounts are on properties that need a renovation, or to be rebuilt, experts say, amid the rising cost of building and a lack of access to trades.

Domain pointed to the rising interest rates and problems accessing finance quickly as the main culprit behind weakening demand, as with banks taking more time to approve loans. This, in turn, also meant buyers were less willing to make the big offers they once had. 

Data showed buyer demand has taken a hit, with the number of active buyers who shortlist properties for sale or make an enquiry online down by 14.5 per cent for houses and 13.8 per cent for units over the month, compared with the three-year average for this time of year in Melbourne. 

Ray White Cheltenham agent Trevor Bowen reflected that it was taking a little longer to wrap up property purchase, as interest rates rise, and banks take extra time to approve loans.

“A lot of private sales are subject to finance, so sales are being extended by a few weeks because banks are taking longer, and it takes longer to get finance,” Mr Bowen stated.

Domain chief of research and economics Dr Nicola Powell said the successive interest rate rises since May had significantly weakened consumers’ borrowing capacity and dampened the appetite for property purchases, pushing house prices lower.

“I think the data shows that buyers are willing to put in a lower offer than before because buyer depth isn’t as great as it was, and lower offers are now being accepted by vendors,” Dr Powell said.

The expert further predicted that the portion of property vendors slashing prices to secure a sale were likely to increase, as market conditions continue to soften. 

But Dr Powell also pointed out that the current level of discounts was still below the 7.8 per cent seen in May 2019, when sellers scurried away from the market due to Labor’s now-ditched federal election policies of changes to negative gearing and capital gains tax concessions.

Echoing Mr Lawless’ forecast, Dr Powell predicts that “spring will really test pricing and buyer depth because we’re likely to see more listings and more competition from vendors.”

Auction market 

Following five months of declining clearance rates, Melbourne saw the biggest monthly jump in August — indicating that life may be returning to the city’s auction market. 

The city’s clearance rate stood at 56.5 per cent in August, up by 5.4 per cent from the previous month. 

On an annual basis, the figures are also up by 4.2 per cent. However, Dr Powell pointed out that during the same period last year, strict COVID-related restrictions and a lockdown were in place which hindered market activity. 

The portion of houses sold under the hammer in Melbourne was higher than units, indicating that buyers in the city are preferring houses over apartments. However, the report noted that financial limitations and affordability issues could put pressure on the performance of the sector’s clearance rate in the future. 

Over the month, house clearance rates rose by 6.4 percentage points to 58.4 per cent, while units rose by 1.7 percentage points to 49.3 per cent.  

Melbourne was the only city to see an uptick annually for both houses and units, but Domain reiterated that clearance rates during the same period last year were also affected by the city being in and out of lockdowns.

Over the 12-month period to August, house clearance rates rose by 3.9 per cent while unit clearance rates rose by 4.3 per cent.  

Out of the 2,694 scheduled auctions in the city throughout the month, data showed that 14.7  per cent were sold prior to being on the slate while 11.2 per cent were withdrawn from auction. 

Melbourne recorded an increase in both median house and unit auction prices in August, the first monthly gain since March 2022.

The median auction price for houses in the city stood at $1,090,750 at the end of August, representing an 11.3 per cent rise in average house price tags over the month. However, the figures are down by 7.6 per cent compared to the same period last year. 

The average price of a unit that sold in an auction in the city stood at $725,500 at the end of the month, representing a monthly increase of 6.7 per cent in median values. Over the year, the figures are down by 0.2 per cent. 

While the overall sentiment surrounding the auction markets continue to be gloomy, Domain pointed out that auction volumes picked up in Melbourne over the last month and the proportion of homes sold hit a 12-week-high in mid-August, indicating that the spring selling season may be just heating up. 

“[Conditions] will be a little different in spring 2022 compared to the previous two, it will be interesting to see how the auction market performs in the warmer months of the year,” Domain noted in its report. 

Separate data from CoreLogic showed that out of 2,870 properties auctioned in Melbourne throughout the month, there's an average clearance rate of 59.2 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 

Domain’s data showed that Melbourne’s rental market continued to recover in August, as the city’s vacancy rate declined for the eight consecutive month. 

The city’s vacancy rate fell by 10 basis points over the month to stand at 1.3 per cent — the lowest point since March 2019 and a significant recovery from the 5.2 per cent peak seen in December 2020. 

Vacancy rates in the Victorian capital are now only 0.2 percentage points off the 2018 record low, with the potential to overtake this record becoming increasingly likely with the consecutive run of falling rates, Domain noted. 

At its current trajectory, Domain raised the possibility of Melbourne becoming a tighter rental market than Sydney, as it was historically pre-pandemic with the gap between the two continuing to narrow. 

The increasingly tightening market is also highlighted by the number of vacant rental listings in Melbourne. Over the month, the number of available listings across the city fell by 7.8 per cent to 6,783. 

Among the capital cities, Melbourne also saw the biggest drop in listings at an annual rate, down 61.5 per cent. 

The areas with the highest vacancy rates across the city were Boroondara (2 per cent), Banyule (1.9 per cent), Whitehorse – West (1.8 per cent), Hobsons Bay (1.8 per cent) and Keilor (1.8 per cent).

Meanwhile, the areas with the lowest vacancy rates were Cardinia (0.3 per cent), Yarra Ranges (0.4 per cent), Sunbury (0.5 per cent), Knox (0.5 per cent), and Frankston (0.6 per cent) 

SQM Research’s latest report also showed that the city’s rental market further tightened over the month, as low supply levels cause vacancy rates to dive and rents to rise across most suburbs and property types.

The city’s vacancy rate fell from 1.6 per cent in July to 1.4 per cent in August, bringing the number of available rental listings in the city down to 9,356. Over the year, the city’s vacancy rate is down from 3.5 per cent. 

Mr Christopher said the results in August serves as proof of the  rental market’s deterioration to “unprecedented levels”. 

“Rental listings thus far recorded in September would suggest another fall in rental vacancy rates for the current month,” he said.

“I note the recent alerts and warnings issued by the various housing bodies as to what is happening on the ground and our data would concur with such concerning reports,” Mr Christopher stated. 

Rental market 

The latest data showed that the shrinking pool of available rental properties and rising demand from international students and returning workers has caused rental prices in Melbourne to rise. 

In the 30 days to 13 September, SQM’s data showed that the average weekly rental price for a dwelling in Sydney stood at $500, representing a 1.8 per cent gain over the month and a staggering 19.7 per cent annual increase. 

As rental supply in the city continues to decline, Mr Christopher warned that asking rents could also continue rising. 

“Asking rents continue to rise across the country at a red-hot pace. All capital cities are recording double digit percentage rental increases over the past 12 months,” Mr Christopher said.

Domain made the same observation in its latest report, noting that the lack of rentals is driving up rents and escalating competition, highlighting the need to address the rental crisis many tenants are experiencing. 

Separate data from CoreLogic showed rents continued to trend higher through August.  In Melbourne, house and unit rents rose by 5.7 per cent and 11.6 per cent respectively, on an annual basis.

With rents consistently rising while housing values broadly trend lower, the property data provider noted that gross rental yields are firmly in recovery mode. In August, Melbourne’s gross rental yield stood at 3.0 per cent. 

While capital city yields are still well below the pre-COVID decade average of 4.0 per cent, CoreLogic predicts that rental yields could return to around average levels over the next year when factoring in the outlook for lower housing values and higher rents in the coming months. 

What’s next for Melbourne’s property market? 

Most experts are in agreement that the spring selling season is unlikely to deliver a rebound for Melbourne’s property market, as rate rises, along with the FOOP sentiment among buyers, are expected to spoil a spring property frenzy. 

Dr Powell commented that because it would be the first spring since 2019 that was not hampered by COVID-19 restrictions, sellers and buyers would be able to take their time before testing the market waters. 

“It’s going to be a spring to provide better opportunities for buyers out there and activity levels are obviously going to increase, but could be lower in comparison to other years,” Dr Powell said. “We’re not going to see a sudden rebound in prices because this spring will be in a downturn market.”

PRD chief economist Dr Diaswati Mardiasmo’s views aligns with that of Dr Powell, stating that potential buyers who have a mortgage pre-approved are on the qui vive that interest rates might rise before they settle, affecting how much money they can borrow.

“There is a lot of uncertainty in the market,” she said. “Whatever happens to the cash rate will impact their borrowing power. We are seeing more people taking the more cautious, I-will-wait approach,” she stated.  

Mr Lawless noted that sellers, in particular, would be facing a “tough selling season” as more listings come into the market amid falling demand.

“Spring could see additional downwards pressure on housing prices as advertised stock levels rise amidst the normal seasonal rise in fresh listings at a time when housing demand is likely to be lower due to higher interest rates and low sentiment,” Mr Lawless said.

“Vendors will probably become more flexible in their pricing expectations and more willing to negotiate,” he added. 

While the spring season is not expected to offer a reprieve for the Victorian capital’s struggling market, analysts are expecting that the RBA will scale back its monetary policy tightening in the coming months as the central bank signalled in its latest statement that the possibility of a 25-basis point hike in October is on the table. 

Economists are also expecting a cut to interest rates later next year, which indicates that the downturn could be a relatively limited period. 

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