Property market update: Melbourne, August 2021

CoreLogic’s research director, Tim Lawless, described the monthly growth as well-above-average but losing steam.

“The 16.1 per cent lift in national housing values over the past year is the fastest pace of annual growth since February 2004, however the monthly growth rate has been trending lower since March this year when the national index rose 2.8 per cent,” he said. 

According to experts, affordability constraints are keeping somewhat of a lid on growth and lockdowns attributed to the significant decline in listings, particularly in Sydney and Melbourne. On the flipside, buyer demand is still very strong relative to stock on the market and continues to underpin the growth in locked-down markets. 

But as Melburnians face lockdown extensions in September, market observers and participants have concerns on how the 2021 spring season – which is usually the busiest time of the year for the real estate market – will unfold. 

Before we fully discuss what lies ahead for the Victorian capital in the coming months, let’s see how Melbourne’s property market fared in August 2021. 

Property values 

According to CoreLogic’s data, dwelling values in Melbourne rose 1.2 per cent in August, easing by 0.1 percentage point from the previous month. Over the last 12 months, dwelling values in the Victorian capital have risen by 13.1 per cent, the weakest rate of annual growth among capital cities in August. 

The city’s median dwelling values stood at $769,968, which means the average prices of properties in Melbourne have increased by almost $7,900 over the month. 

The observed trend of the housing market outpacing the unit market’s growth in the previous months continued in August, but CoreLogic noted that the performance gap does appear to be narrowing.

Figures showed Melbourne house prices rose 1.4 per cent month-on-month, with the median price at $954,496, indicating an increase of $8,727 from July. Compared to the same period last year, house prices have risen by 13.3 per cent. 

Meanwhile, the unit market notched a 0.4 per cent monthly increase, bringing the median value to $612,711, almost $3,200 higher than the previous month. Unit prices have increased by 7.3 per cent from August 2020. 

According to CoreLogic, the convergence of growth in house values and unit values could be another demonstration of affordability becoming more challenging. 

Supply and demand  

While the lockdowns failed to derail the upward trajectory of prices, the impact of the extended restrictions had instead been seen more by sellers. In August, there had been a fall in advertised listings and, to a lesser extent, fewer home sales.

Across the country, advertised stock sold at a faster rate than new listings are coming in the market, as residential property listings hit their lowest level in 11 years in August. 

Data released by SQM revealed all capital cities saw listings fall month on month. The largest monthly falls in property listings in August were in Sydney, Melbourne, and Canberra as the lockdowns in these cities disrupted the market.

Listings in Melbourne fell by a staggering 13.1 per cent from 37,318 to 32,445 over the month. Compared to the same period last year, total listings in the city have fallen by 10.6 per cent. 

Louis Christopher, managing director of SQM Research said that the lockdowns were mostly responsible for the decline in the advertised stocks. “Listing counts over August were predominantly impacted by lockdowns,” he said.

He also noted that the rapid clearing of old stocks was an indication of strong absorption rates across the country.

In Melbourne, old stocks (or properties that have been on the market for more than 180 days) fell by 40.8 per cent from 10,770 in August 2020 to 6,381 in the same period this year. 

Over the past 30 days to 31 August 2021, Melbourne asking prices rose 0.2 per cent for houses and rose by 0.5 per cent for units, according to SQM. 

Due to the low number of listings, the estimated number of home sales has also been impacted, falling by 9.0 per cent nationally over the quarter ending August when compared to the previous three-month period.

Despite the decline in sales, housing market activity remains well above the five-year average levels, according to Mr Lawless. “We are still seeing a disconnect between advertised supply and housing demand, even in the cities where lockdown restrictions are active which is keeping upwards pressure on housing prices despite challenges faced by both buyers and sellers,” he said.

Eliza Owen, CoreLogic head of residential research, said that the narrowing price gap between houses units along with the low listing numbers in the face of strong buyer demand were all indicators that affordability is putting pressure on the market.

“Social distancing restrictions don’t have as much of an impact on prices as they do on transaction activity,” Ms Owen said. “It’s more tied to affordability constraints and that is evidenced in the narrowing gap of houses and units.

“There are definitely signs there that there are demands for housing, and buyers are potentially looking for more affordable pockets of the market and that includes units,” she added. 

Auction rates  

The auction market saw mixed results throughout August, as Melbourne withdrawals continued to impact the combined auction clearance rates of Australia’s capital cities, according to CoreLogic. 

The final auction clearance rate for Melbourne has averaged 53.3 per cent over the month out of 3,315 results. CoreLogic data showed that between August 5 and 22, around a third of properties set to go to auction in Melbourne were canceled and not postponed, meaning withdrawn properties are counted as a non-sale.

Ms Owen said that the withdrawals should not be taken out of the equation when assessing the market. “It is important not to dismiss the portion of auctions withdrawn as merely ‘distorting’ the clearance rate, because it does reflect a loss in demand and vendor confidence,” she said.

She pointed out that the high rate of withdrawn auctions can be partially attributed to the ban on private physical inspections. On a positive note, Ms Owen said that the clearance rates in the city will likely “normalise” as  a smaller number of properties are scheduled for sale in the coming weeks.

Rental market 

While the pace of rental growth has slowed down over recent months, the trend in rising rents continued to be strong as low vacancy rates give landlords a case for increasing asking rents. 

Latest SQM data showed that over the month to 12 August 2021, asking rents for houses and units in Melbourne rose 0.5 per cent and 0.8 per cent, respectively. This equated to weekly rent of $520.1 for houses and $369.5 for units.

Mr Christopher expressed his surprise at the trend of rising rents despite border ongoing international border closures and still relatively high construction completions.

“Given the ongoing international border closures and still relatively high completions, the national rental market should be at least more balanced,” he said.  Further speaking on the topic, he said rebalancing might still happen if lockdowns persist through to summer, as lockdown fatigue may motivate many people living in Sydney and Melbourne to relocate. 

CoreLogic noted that while the pace of rental growth has slowed down over recent months, the trend in rising rents continues to be strong. Nationally, rents have increased by 8.2 per cent over the 12 months ending August, the biggest increase in rents since 2008.

In another observation of the rental market, CoreLogic said that the pace of growth of unit rents continued to lag behind house rents. Data showed that the cost of renting houses has risen by more than double the pace of unit rents over the 12 months ending August. 

The difference in the rate of growth in house rents and unit rents was more prominent in Sydney and Melbourne, where unit markets have recorded a significantly slower growth rate. 

Mr Lawless said the softer growth of unit rents in the two cities was indicative of the cities’ vulnerability to the lack of temporary overseas migrants as a source of rental tenancy, especially foreign students who would normally drive the increase in inner city rental demand. 

“The sharp drop in demand due to closed borders has been exacerbated by high supply levels as both cities come out of an unprecedented surge in inner city apartment construction,” he added.

Although Melbourne unit rents remain soft, unit rents have been rising since June, according to the research firm. 

Melbourne’s rental yields fell 3.3 per cent in August. However, it is no longer just Sydney and Melbourne where rental yields are plumbing historic lows as other cities have also seen gross rental yields fall to new record lows in August. 

Vacancy rates 

Melbourne entered its sixth lockdown in August, shifting the trajectory of the rental market. The supply of vacant rentals was previously declining, however, its trajectory took a u-turn after a two-month streak of rising vacant rentals. 

Melbourne’s vacancy rates inched up by 0.1 percent to 3.8 per cent over the month, a turnaround following four consecutive months of a falling vacancy rate. Compared to the same period last year, vacancy rates in the city are almost unchanged from 3.9 per cent, according to Domain. 

The areas with the highest vacancy rates within Melbourne include Mornington Peninsula (0.5 per cent), Macedon Ranges (0.5 per cent), Cardinia (0.5 per cent), Yarra Ranges (0.5 per cent) and Manningham – east (0.6 per cent). 

Meanwhile, the areas with the highest vacancy rates include Stonnington – east (7 per cent), Melbourne City (6.6 per cent), Whitehorse – west (5.8 per cent), Boroondara (5.5 per cent), and Stonnington – west (5.5 per cent). 

According to Domain, lockdowns have historically led to higher vacancy rates. This trend was observed last year in April across all cities, and in August 2020 in Melbourne as the city battled its second wave of COVID. 

The real estate firm said that while the current rental conditions are advantageous for tenants who are looking to negotiate cheaper rents, the lockdown will prove to be “significant barrier” for landlords to overcome heightened vacancies in the city. 

Outlook 

What lies ahead for Melbourne for the rest of 2021? 

The 2021 spring season is shaping up to be a repeat of last year for Melbourne’s real estate market. With the city staring down the barrel of spending a second spring selling season in lockdown, there are growing concerns about how the extended restrictions will affect market activity. 

Before the pandemic, Victoria had an average of $19.92 billion in property sales each spring in the five years, according to CoreLogic data. But this figure is seen to decline this year. 

At the start of September, Victorian Premier Daniel Andrews had announced that Victoria’s harsh lockdown restrictions would remain in place until 70 per cent of the state received their first COVID-19 vaccination, which is expected to be achieved by September 23.

The restrictions, which include the banning of physical home inspections and public auctions, are seen to throw a wrench in market activity during what’s usually the busiest time of year in real estate and consequently wipe billions from Victoria’s spring home market. 

So far, CoreLogic’s latest data showed that just 4,820 homes sold across Melbourne in August, compared to more than 8,000 sales in both June and July.

Ms Owen said while sales had recovered quickly after past lockdowns, they might not this time “because property prices have continued to rise”.

Real Estate Institute of Victoria vice president Adam Docking said the Melbourne market was effectively now shut down, and that by September 23, regional Victoria would be affected as well. 

“With the length of this lockdown, unless it’s under really unique circumstances, I’d be surprised if there were very many sales,” he said. He also lamented that the market is losing momentum leading into what he described as “our busiest time of year”.

But there seems to be light at the end of the proverbial tunnel. Beyond September 23, Melbourne’s property market is expected to literally “spring back” into life, as one-on-one inspections of unoccupied properties are to be allowed by the government after reaching its vaccination target. 

In terms of long-term forecasts, many experts believe that the Victorian capital will still deliver strong growth by the end of the year.  Recently ,ANZ Research bumped up price growth forecast for Melbourne in 2021 to 20.45 per cent.

ANZ senior economist Adelaide Timbrell said that while growth may be slower due to several factors and uncertainties that could affect the real estate market, the current momentum in price suggests that price growth in both 2021 and 2022 could outpace their forecasts.