Melbourne’s property values retreated in May, as the Victorian capital began to feel the sting of rising rates and the city’s market dynamics continually shifted towards softer conditions.

Melbourne’s property market matched Sydney’s sombre mood at the end of autumn, as the two biggest capital cities recorded the biggest declines in property values among their peers in May. 

According to CoreLogic, the growth seen across the majority of capital cities was not enough to offset the declines in Sydney, Melbourne and Canberra, which led to the national index falling by 0.3 per cent over the month — marking the indicator’s first decline since July 2019 and officially ending a 20-month winning streak. 

Sydney and Melbourne, which have led the great property boom throughout the pandemic, are now the “bellwethers” of a wider market correction, according to experts. 

A closer look at CoreLogic’s data showed that Sydney has recorded progressively larger monthly value declines since February, while Melbourne has fallen across four of the past six months.

Weakness in the two markets in part reflected the Reserve Bank of Australia’s (RBA) move to raise interest rates on 3 May, the central bank’s first hike in its official rate in over a decade. 

But while the RBA’s recent tightening in monetary policy had a hand in the retreat in dwelling values in the two cities, CoreLogic research director Tim Lawless stated there were a number of factors putting the brakes on an already-slowing housing market. 

“There’s been significant speculation around the impact of rising interest rates on the property market and last month’s increase to the cash rate is only one factor causing growth in housing prices to slow or reverse,” he said. 

The expert pointed out that the quarterly rate of growth in national dwelling values peaked in May 2021, shortly after a record high in consumer sentiment and a trend towards higher fixed mortgage rates. 

Mr Lawless said that “since then, housing has been getting more unaffordable, households have become increasingly sensitive to higher interest rates as debt levels increased, savings have reduced, and lending conditions have tightened”.  

“Now we are also seeing inflation and a higher cost of debt flowing through to less housing demand,” he said. 

He stated that the rate hike came at a time when housing affordability was already stretched to the limit in many locations, particularly in premium markets such as Melbourne and Sydney. 

He added that with the perfect storm of conditions that sparked the 2021 housing boom now dissipating, a correction in the market is to be expected. 

Head of Australian research at CoreLogic Eliza Owen echoed Mr Lawless’ observation, stating that it’s not just a higher interest rate that’s putting pressure on the cities’ markets. 

“Generally when we see an increase in the cash rate that has an impact on prices. There are also other factors at play — more supply is hitting the market that is giving buyers a little bit of buying power,” Ms Owen said.

Most property experts are in agreement that a detrimental mix of poor affordability in housing markets, rising mortgage rates, a glut in listings, a change in spending away from housing and a decline in home buyer confidence have chipped away at the Melbourne market’s strength, resulting in softer market conditions. 

And with the RBA expected to raise rates at a more aggressive pace in the coming months, will winter be chillier than usual for the Victorian capital’s market this year?

Or should investors take headlines heralding the property market’s eventual crash-dive with a grain of salt?

For now, let’s see how Melbourne performed in May 2022. 

Property values

CoreLogic’s data showed Melbourne’s property values took a sharp downward turn in May after flatlining in April, falling by 0.7 per cent over the month. 

Melbourne’s monthly rate of growth has continued to lose momentum since hitting an apogee in March 2021, when dwelling prices reached a monthly growth rate of 2.4 per cent — the fastest four-week increase the Victorian capital has seen in over three decades.

In another indication of tapering growth, Melbourne’s property values were down by 0.8 per cent on a quarterly basis, further weakening from the 0.1 per cent fall recorded in the previous rolling three-month period. 

Over the year, the growth median value of dwellings in the city is down 5.8 per cent, further weakening from the 8.4 per cent annual gain recorded in May. 

Despite the cooling growth in property values, Melbourne held on to its title as the second-most expensive city to buy a property in the country, trailing behind only Sydney ($1,120,836). The average cost of a dwelling in the Victorian capital stood at $806,196 at the end of May, representing a month-on-month increase of just $50 in median prices. 

Melbourne’s house sector also continued to decline in May, falling by 0.8 per cent over the month. The monthly decline adds to the 0.2 per cent drop seen in April. 

Over the year, the median value of a house in the city has risen by 6.9 per cent to currently stand at $992,474 — representing an almost $8,500 drop in average price on a monthly basis and effectively kicking out Melbourne’s house market from the million-dollar club. 

Meanwhile, the unit sector also underperformed during the month, falling by 0.3 per cent in May. The latest drop reversed the 0.4 per cent increase the sector enjoyed in April. 

A typical unit in the city is now selling for $629,344, indicating a decline of $1,000 in average prices over the recent four weeks.

Compared to the same period last year, the median price of units in Melbourne has risen by 3.5 per cent. 

CoreLogic also revealed that the premium and inner-city suburbs of Sydney and Melbourne are seeing a bigger decline in values compared to other areas as market conditions become softer. 

A new report released by the property data provider showed a drop in values across 23.6 per cent of suburbs in capital cities, the majority of which are located in the two biggest cities. 

“High-end and inner-city areas are emerging as the first suburbs to experience this shift in market conditions,” Ms Owen said.

“It is likely that slightly tighter lending conditions and higher average fixed rates are hitting the very top of housing markets first.” 

She highlighted that the two cities are also seeing some of the bigger increases in advertised stock levels. “[So] as we see new demand for housing in these areas decline, buyers have more choice, more time for decision-making, and more power at the negotiating table,” Ms Owen explained. 

Supply and demand

Supply and demand dynamics continue to dictate market conditions across the country. And Sydney and Melbourne, a supply glut paired with a shift in buyer sentiment have caused market conditions to be inclined towards buyers. 

SQM Research’s data showed that residential property listings in the Victorian capital fell by 1.6 per cent month-on-month from 37,135 in April to 36,529 in May. 

Compared to May 2021, the number of available stock in the city is down by 3.7 per cent from 37,915 in the same period last year. 

New listings (or properties that have been on the market less than 30 days) in Melbourne declined by 6.7 per cent from 17,147 in April to 16,005 in May. Compared to the same period last year, new listings in the city are down by 16.1 per cent. 

Data also showed that old listings or property listings over 180 days rose by 6.2 per cent from 6,005 in April to 6,378 in May, indicating a slowdown in absorption rates.  Year on year, old housing stock in the city has fallen by just 0.5 per cent. 

Commenting on the monthly figures, managing director of SQM Research Louis Christopher said that “a number of properties which were already listed struggled to sell over the month and that pushed up the counts of old listings – a phenomenon that happens during market slowdowns”.

Nevertheless, new and total listings fell over the month of May, “due in large part to the election with many sellers and buyers waiting on the market sidelines for the outcome”.

Despite the traditionally quieter winter months ahead, the expert stated he expects listings to see an upward trend. 

“Going forward, I expect a surge in new listings for this current month, even while we have now reached the quieter winter months. SQM Research has recorded a surge in new auction listings, hence why we have this view,” he stated. 

Separate data from CoreLogic showed that the total advertised inventory in Melbourne is up 1.3 per cent from last year and 8.1 per cent above average based on the previous five years. 

Similarly, Sydney’s advertised listings are 5.1 per cent higher compared to the same period last year and 1.5 per cent higher than the five-year average. 

Mr Lawless stated that with stock levels now higher than normal across the two largest cities, buyers have returned to “the driver’s seat”. 

“A combination of higher interest rates, lower rates of household saving and a potentially more cautious lending environment is likely to reduce housing demand further just as total advertised stock levels are likely to continue rising, further empowering buyers by creating increased competition amongst vendors,” he stated.

Local experts also observed that buying sentiment in the two biggest cities has also seen major changes. The fear of missing out (FOMO) sentiment that has driven the market’s massive growth throughout the boom has been replaced by a far more measured and circumspect approach to the market, according to market observers. 

Local agents and auctioneers also report that selling is becoming tougher than last year, as buyers become more discerning and fear of missing out changes to fear of overpaying.

Domain chief of research and economics Dr Nicola Powell said buyers became more selective in their property search as more options open up to them. 

“Buyers become more mindful of what they’re purchasing. They don’t want to compromise, particularly not on space,” the expert stated. 

This weakness in demand is translating into significantly lower sales activity, according to CoreLogic. Data showed Melbourne recorded a 21.3 per cent in turnovers in the three months to May compared to the same period in 2021.  

Ms Owen predicts that as the housing market enters a downturn phase, the number of sales and listings that take place nationally are tipped to fall from recent highs.

“Transaction activity is another facet of the housing market that slows amid higher interest rates,” she stated. 

She also observed: “In recent weeks, new listings have been rising, and auction numbers spiked at the end of May, following volatility amid the federal election. But listings volumes may also eventually ease, as vendors become reluctant to sell in a falling market.” 

Auction markets

Melbourne property sellers brace for making difficult decisions in the coming months, according to Domain, as auction clearance rates in the city fell below 60 per cent in May. 

The city’s clearance rates fell to 59.1 per cent out of 4,184 auctions scheduled throughout the month, according to Domain.

After seeing stronger rates in the first few months of 2022, this is the city’s lowest clearance rate this year (bar January due to lower volumes). 

Dr Powell explained that clearance rates are an indicator of whether the property market is rising, falling or remaining steady, with rates above 70 per cent pointing to an annual house price rise of at least 10 per cent.

Meanwhile, anything below 60 per cent broadly points to a fall in prices and a weakening market.

“Clearance rates have fallen below 70 per cent in all capital cities this month as a result of more homes on the market but reduced competition among buyers, highlighting the overall slowdown in the property market,” Dr Powell said.

She added: “The gradual shift to a buyers’ market could see a continual run of softening clearance rates, reduced choice among buyers and a change in seller price expectations.” 

House clearance rates in the city continue to outperform units for the 22nd consecutive month, with data showing that the house and unit sectors recorded clearance rates of 59.7 per cent and 56.8 per cent, respectively. 

However, this gap is narrowing, with only 2.9 percentage points separating the two in May.

Meanwhile, house and unit median prices are the highest May averages seen in Melbourne since Domain records began, but the rate of price growth is subsiding. 

Melbourne’s median auction house price was slightly higher over the month, rising 2.2 per cent. On an annual basis, the average property price in the city continues to be up by 3.9 per cent to $1.18 million. 

For units, the median price is steady monthly and up 2.1 per cent annually at $730,000. 

Westpac senior economist Matthew Hassan said the RBA’s decision in May was a “clear jolt to the market”. 

“It’s really due to the rate move and the wider expectations that the cost of living is rising and there are more rate rises to come,” he stated. 

“From a seller’s perspective, they are facing a quandary: do they take the hit and sell, or wait possibly for the next two to three years for things to improve?” the economist stated.

Meanwhile, AMP Capital chief economist Shane Oliver also gave his forecast for the auction market. The economist warned home sellers and buyers could expect clearance rates to bottom out about 40 per cent over the next 12 to 18 months, citing previous market downturns.

But he stated that while clearance rates would fall further, it would not be as far as they had during pandemic lockdowns, where some had fallen as low as the 20 per cent range.

“I think we will go down to the low forties and spend time bouncing around the bottom until recovery starts,” he said. However, he also warned that “We’ve still got a bit more damage to come.”

With the Reserve Bank predicted to be more hawkish in the coming months in tightening monetary policy, the economist added that potential borrowing power could take a further hit.

“The rise in interest rates is having an impact on the market a lot earlier than in the past,” Oliver said. “That’s because around 45 per cent of new lending is through fixed-rate loans, where interest rates rose before the RBA’s official hike in May.”

As of writing, the RBA has aggressively moved to lift the cash rate from its current rate of 0.35 per cent to 0.85 per cent during its June meeting. 

Separate data from CoreLogic showed that 4,771 auctions went under the hammer in the city, with a final average clearance rate of 61.7 per cent. The monthly average is down from the 64 per cent clearance rate recorded in April. 

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 

The recovery of Melbourne’s rental market continued in May, as the city’s vacancy rate continued to decline for the sixth straight month. 

Domain’s latest report showed that vacancy rates in the city stood at 1.6 per cent at the end of the month, down from the 1.7 per cent seen in April and just 0.5 percentage points off the record low seen in 2018.

In a further sign that the city’s rental market is tightening, Melbourne’s vacant rental listings fell 8.5 per cent over the month to just above 8,200. The figures are also lower compared to March 2020, highlighting the significant recovery post-lockdowns.

The areas with the highest vacancy rates were Stonnington – East (3 per cent), Whitehorse – West (2.7 per cent), Stonnington – West (2.5 per cent), Maribyrnong (2.4 per cent), and Banyule (2.4 per cent). 

Meanwhile, the areas where tenants will find it difficult to find a rental in Melbourne are Yarra Ranges (0.2 per cent), Cardinia (0.3 per cent), Casey – South (0.4 per cent), Nillumbik – Kinglake (0.4 per cent), and Knox (0.5 per cent). 

Rental market

While housing value growth has slowed, rents continue to rise swiftly, according to CoreLogic.

In Melbourne, house and unit rents rose annually by 5.1 per cent and 9.8 per cent, respectively. 

Amidst rising rents and a general easing in home value growth, yields are also recording some upwards momentum, especially in Sydney and Melbourne.

Data showed that Melbourne’s gross rental yields are up from a record low of 2.74 per cent in December to 2.88 per cent in May. 

Meanwhile, Sydney’s yields have increased from a record low of 2.42 per cent in December last year to 2.59 per cent. 

“Despite the upwards trajectory, yields remain remarkably low in both cities, but a recovery back to average levels may be relatively quick if housing values continue to fall while rents maintain this growth trajectory,” said Mr Lawless.

According to Dr Powell, the record-high asking rents and reduced choice in rentals resulted in tightening conditions that continued to favour landlords. These conditions will also increase the likelihood of rental price rises after the reduction in rental prices seen during COVID, the expert said. 

She further forecast: “The rise in investor activity, the arrival of overseas migrants, and the return of international students will see rental demand remain elevated, worsening conditions for tenants.” 

Outlook for Melbourne’s market 

For most property experts, the general decline in property values in May has signalled the start of a property correction. 

Furthermore, the RBA’s statement that “it’s not unreasonable to expect that interest rates would get back to 2.5 per cent” had resulted in market experts predicting a sharp drop in buyer demand over the next 12 months, which in turn will push down price growth across the country. 

Economists are mostly in consensus that it will be the biggest capitals to feel the brunt of RBA’s rate decisions in the coming months. 

“Sydney, Melbourne and Canberra are likely to be hardest hit, Brisbane and Adelaide may hold up for a few months longer and Perth and Darwin may hold up better as Perth is only just above its 2014 high and Darwin is still below,” Mr Oliver stated. 

In his most recent forecast, Mr Oliver expects house prices in the Victorian to tumble by as much as $135,500 in just 18 months. 

Despite heightened talks of deep declines in property values, Mr Lawless pointed out that there are also some positive economic factors to note, including ultra-low unemployment, which is putting upward pressure on wages growth. 

“As income growth outpaces housing values, the home deposit hurdle will gradually lessen, reducing one of the key barriers to entry for home buyers,” he said.

“With the RBA set to steadily raise the cash rate through the rest of the year and into 2023, we are likely to see falls in housing values become more widespread as mortgage rates trend higher,” he added. 

Previously, Mr Lawless has also stated that while property values are to be expected to decline as the interest rate rises, the declines will be mostly gradual and will not be as drastic as most market observers expect. 

Meanwhile, Mr Christopher said that SQM’s overall outlook remains on the modest side, stating: “[We] expect price falls of up to 8 per cent this year for Melbourne and Sydney and low net single-digit growth for the other cities.”

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