Melbourne property market projected to make a comeback

• The city's price growth is much lower compared to other capital cities
• Melbourne's housing remains attractive to home buyers as it stays relatively affordable
• Price predicted to grow as migration recovers amidst low supply

New data released by CoreLogic has found that Melbourne prices have inched forward by a paltry 1.6% from the start of COVID-19 to the end of May 2023.

The growth rate pales compared to its other capital city counterparts. Other capitals have seen housing prices grow in the double digits — Sydney experienced a 16.5% gain, while Adelaide’s values soared by 45.2% over the same period.

While Melbourne property owners’ dismay at the city’s stagnant figures seems warranted, the lower growth rates make Melbourne particularly attractive for home buyers nationwide.

Comparing Melbourne with the other states

Though Sydney prices have historically been higher than Melbourne, COVID-19 has widened the gap between states. At the start of COVID-19, around March 2020, Melbourne’s houses were 19.2% cheaper than Sydney’s. However, the gap jumped to 30.3% by April 2022, the most significant difference since May 2006.

Since then, the gap has narrowed slightly, with Melbourne’s median house values being 29.6% lower than Sydney’s in May 2023 — about a $382,500 difference.

Aside from Canberra, the other capital cities have seen their housing prices catch up with Melbourne over COVID-19.

Brisbane house prices are now 15% cheaper than Melbourne compared with the 47% difference at the onset of COVID-19. Adelaide’s house values were 85% lower than Melbourne’s, but the gap has since closed to 29%. Similarly, Perth prices are now 50% less than Melbourne’s compared with the 88% gap at the start of COVID-19.

Relative stability in a volatile market

Several reasons account for Melbourne’s relatively underwhelming growth. The start of the pandemic saw Melbourne property values fall much further than in other cities. A moderate upswing followed for a period, which was promptly halted by a succession of cash rate hikes, sending the price movement into a downward spiral.

In numbers, Melbourne’s house values dropped -6.7% between March 2020 and October 2020 before leaping 20.6% through the growth cycle. Later, values declined once again by -11.2%, finding a floor this February, where it rose by 1.7% to the end of May 2023.

Median value dollar difference: Melbourne vs other capital cities— houses

Source: CoreLogic.

Melbourne’s comeback

During the pandemic, the capital city’s comparatively softer market conditions ran parallel with demographic trends. As with the value of houses, net overseas and migration rates starkly declined to record lows over the course of the pandemic. Strict lockdowns ordered by the Victorian government to curb the spread of the virus further reduced housing demand.

Victoria’s interstate migration is recovering, with the data to September 2022 showing near positive interstate migration. Moreover, the demographic data for Q4 2022, forthcoming later this week, is predicted to show that Victoria has reached positive interstate migration, ending 10 uninterrupted quarters of decline.

As the nation’s annual net overseas migration climbs to new highs and Victoria’s interstate migration finally breaks into positive territory, Melbourne’s housing demand has stabilised significantly.

With prices across the state generally marching upwards, Melbourne’s stable prices make it uniquely poised to attract home buyers in the overheated market.

Listings have been trending downwards, with the supply levels -13.4% below levels of the same time last year and -7.0% under the previous five-year average. The city’s rental vacancy rate of 0.8% in May, one of the lowest in Australia, is an additional element that may reinforce the decision to purchase.

Melbourne’s success not yet set in stone

It is unclear whether Melbourne’s high demand, low supply, and comparative affordability will negate the effects of the soaring interest rates as borrowers struggle to acquire loans. Indeed, the considerable rise in mortgage repayments over the last 13 months and the ongoing cost of living crisis may give homeowners cause to sell. An uptick in new stock could put downward pressure on house values.