What’s really happening in Victoria’s property market

We are coming out the other side of an extraordinary two years of pandemic conditions and with the ability to move freely once again around our cities and the globe, we are welcoming the return to a more normal lifestyle.

This return to normality has ushered in a more balanced housing market for 2022.

It is clear now that the peak of the nation’s housing market frenzy was November 2021. Since that time, we have seen a period of steady deceleration and reversion back to historical norms for the residential property market.

Affordability factors such as interest rates and inflation pressures coupled with the subsequent dampening of consumer sentiment are impacting the property market, with prices generally decreasing across the country.

As a result of these inflation pressures, due to global and domestic factors, the Reserve Bank of Australia (RBA) in June handed down the biggest rate hike in 22 years of 0.50 per cent, taking the cash rate to 0.85 per cent (Source: RBA). July witnessed yet another increase, resulting in a record three consecutive monthly rate rises off an historically low base, triggering an immediate effect on the property market.

Typically, the full influence of a rate rise is not felt in the market until six to nine months after the increase. In 2022 however, with rate rises highly anticipated, impacts were seen almost immediately – with CoreLogic reporting a 0.7 per cent decrease in Melbourne’s dwelling values for May 2022.

Auction Clearance Graph

Melbourne auction clearance rate

Auction flag 1

Whilst it is easy to be swept up in the media frenzy surrounding this news, it is important to keep in mind that these reductions are off the back of long-term growth in the residential property market, and rapid growth over the 12 months to January 2022. Similarly, whilst it was logical – and, indeed, expected – that the RBA would increase interest rates, the 11-year period without any rate rises followed by three consecutive rises in as many months has contributed to a feeling of unease.

The boom story about regional markets post-pandemic has moderated, but demand continues to outstrip supply in areas within a two-hour commute of Melbourne that also offer good amenity and lifestyle opportunities. Similarly, premium homes continue to withstand price fluctuations and perform strongly. With borders now open, international buyers and expats will further bolster demand for established homes and premium properties in coveted locations.

Whilst we are resetting from an exceptionally strong market to a more long-term balanced market, there are several opportunities to note.

First and foremost, prospects abound for investors in this market.

Whilst during the height of the pandemic, the disparity between the sales and rental markets meant a challenging period for property managers and investors, in 2022 the opposite has rung true. The continued recovery and resurgence of the rental market sees demand exceeding supply, resulting in increased competition amongst renters. The vacancy rate tightened again in Melbourne in May 2022 to 1.6 per cent, well down from a peak of 5.2 per cent in December 2020 (Source: Domain).

Further positive tailwinds include the continuing return of expats and immigration, as well as – perhaps most significantly – the issues surrounding construction and labour supply.

In previous price-rise booms, there has often been a similarly timed renovation-boom due to buyers’ decisions to stay put and extend rather than upgrade.

The property boom of the last two years has coincided with supply-chain issues and materials shortages, resulting in an unprecedented spike in construction costs. This may result in increased competition amongst buyers for existing “move-in ready” property and upgraders looking for more space.

My predictions for the property market over the next 12 months are steeped in learnings from data across several years for Melbourne’s property market – record highs will rebalance and a period of stability will prevail, just as the property cycle always does.

In the short-term, I predict that the impact of rate rises and inflation will continue to have a downward effect on property prices across our country, resulting in a quieter market throughout 2023 as consumers continue to adjust to a world of rising inflation and interest rates. I believe we will head into a new cycle in late 2023 and into 2024.

Rental Vacancy Rates

Melbourne’s residential rental vacancy rates