Why are home values declining in Melbourne despite a housing crisis
Although Melbourne’s home values are middling, its rental values are surging. Image: Canva.
  • Australia faces housing crisis with supply dwindling despite surging demand.
  • Oversupply perception in Melbourne contrasts with rising demand for rentals.
  • Rental market signals heightened housing demand, separate from purchase values.

Australia’s housing situation has often been painted as being at crisis levels, with supply levels at critical levels despite demand continuing to march upward. To illustrate, Housing Australia approximated a supply shortage of more than 100,000 dwellings by the end of 2028.

Though housing has been scarce, some dwelling markets have notably dropped in value, a phenomenon often painted as being caused by a housing ‘oversupply’. For instance, home values in Melbourne fell by 0.9% in the three months to January.

Meanwhile, total listing numbers rose in the capital, affording prospective buyers more options and, consequently, more leverage to bargain prices down.

CoreLogic’s head of research in Australia, Eliza Owen, wrote in her latest article that this seemingly incongruent trend can be explained by understanding the distinction between the market for buying a house, and the need for a home.

The home-buying market

The elements that make up a market for home-buying include the houses for sale and the number of prospective buyers. This market is affected by factors like consumer confidence, credit conditions, capital growth prospects, income, tax settings, and rent returns.

Nevertheless, it is essential to understand that a house’s attractiveness as an asset is different from the need for housing.

Melbourne ‘oversupply’?

CoreLogic reported 81,203 dwelling sales in Melbourne last year, representing the market demand from individuals willing and able to purchase a home. New listings in the market surpassed dwelling sales in the same period, at over 90,000. From this point of view, the market was oversupplied, resulting in a slight fall in purchasing values.

Owen stressed that the perspective of people needing a home to live in is a separate issue entirely. Population growth most likely grew significantly in 2023, with the capital typically drawing in about 30% of Australia’s net overseas migration.

In November last year, rental vacancies across Melbourne stood at under 1%, well below the five-year average of 2.2%. Furthermore, rents skyrocketed by 10.7% through 2023.

According to Homes Victoria, there was a 4.7% state-wide growth in new housing applicants due to homelessness in the year to June. These cumulative factors indicate that housing demand has risen, even though the people who need homes are unable to buy.

Using the rental market to gauge housing demand

Private market rental values are a good yardstick for measuring the need for housing, as the private rental market has commonly been the fallback option for people who are unable or unwilling to buy a house.

While purchase values have varied in recent years due to shifts in policy settings, rents have risen consistently, indicating a robust demand for a place to live in.

Rolling annual change in rents versus purchase values – National, dwellings

Rolling annual change in rents versus purchase values - National, dwellings
Source: CoreLogic.

Owen clarified that that the divide between rents and purchase values was a function of buyer demand being impacted by interest rate changes, or other demand-side factors that make it easier to move from renting to owning.

For example, a fall in mortgage rates, or the serviceability assessment buffer, would raise borrowing capacities for lower-income households, lifting the amount of buyers in the market.

Thus, it is crucial to remember that the supply and demand of homes may mean different things from a market perspective and a social perspective.

Understanding this difference will help prevent one from mixing up falling dwelling prices with an easing housing crisis and help recognise that some households will never be able to buy a home. Therefore, it is imperative that the nation has a steady supply of social housing unimpacted by market fluctuations, to ensure that housing is readily available for all.

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