Melbourne apartment market insights: What happened over May
Melbourne’s unit value continued to lose steam in May, as a combination of higher interest rates, rising inventory levels and lower sentiment dampened conditions. CoreLogic’s Home Value Index (HVI) showed Melbourne’s unit value hit -0.3 per cent, with all dwellings hitting -0.7 per cent, recording the most significant month-on-month fall for the city.
Melbourne’s median unit value is $629,344, and while the rise continues across the capitals, the growth was not enough to offset the depreciation in Melbourne, which pushed the combined capitals index 0.3% lower over the month.
Melbourne has fallen across four of the past six months in combined dwellings, although still above pre-covid levels. The city experienced a softer growth phase, recording a smaller peak-to-date decline of -0.8 per cent combined, with housing values now 9.8% higher compared to the pre-COVID levels and while unit values show a positive of 0.3 per cent.
CoreLogic’s Research Director Tim Lawless said despite the 0.5% rise in housing values across Australia’s combined regional areas, it was not enough to keep the national index in positive monthly territory, with the national HVI down -0.1% in May, the first monthly decline in the national index since September 2020.
“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.
“It is important to remember housing market conditions have been weakening over the past year, at least at a macro level.”
Lawless noted the quarterly rate of growth in national dwelling values peaked in May 2021, shortly after a peak in consumer sentiment and a trend towards higher fixed mortgage rates.
“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,” he said.
“Now we are also seeing high inflation and a higher cost of debt flowing through to less housing demand.”
The trend in advertised stock levels helps to explain the weaker conditions across Melbourne, with inventory across the city now higher than 12 months ago and against the five year average.
Melbourne’s advertised stock levels are up 1.3% on last year and 8.1% above average based on the previous five years.
“With stock levels now higher than normal across one of Australia’s largest cities, buyers are back in the driver’s seat,” Lawless said.
“Higher listings add to tougher selling conditions more broadly. Vendors in Melbourne have faced lower auction clearance rates since mid-April and those selling via private treaty are taking longer to sell with higher rates of discounting.”
“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.”
Unit rents are rising at a faster annual pace than house rents across the combined capital cities (where house rents increased 8.6% compared to 9.1% across units) and the combined regional areas (where house rents rose 10.7%, behind the 11.0% gain in units).
“Early in the pandemic rental demand for medium to high density dwellings fell sharply due to a preference shift towards larger homes and a demand shock from closed international borders,” Lawless said.
“As rental affordability pressures mount, demand for higher density rentals has steadily grown due to the unit sectors’ relative affordability advantage. More recently, demand has been boosted by international arrivals returning to the rental market.”
Amidst rising rents and a general easing in home value growth, yields are recording some upwards momentum, especially in Melbourne.
Melbourne gross rental yields are up from a record low of 2.74 per cent in December last year to 2.86 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,” Mr Lawless
As interest rates normalise over the next 12 to 18 months, the expectation is most of Australia’s capital cities will move into a period of decline brought about by less demand
With the housing debt to household income ratio at record highs, household balance sheets are likely to be more sensitive to rising interest rates. High inflation could be another factor contributing to softer growth conditions in the housing sector
Consumer sentiment also remains low, with Westpac and the Melbourne Institute’s monthly reading falling another 5.6% in May to its lowest level since August 2020. Historically there has been a strong correlation between consumer attitudes and housing market activity. These factors, together with stretched housing affordability and a more conservative approach from lenders, especially towards borrowers with high debt levels, are likely to contribute towards less housing demand over the medium term.
Another factor helping to contain distressed listings amidst rising interest rates is that most households are well ahead of their mortgage repayments, Lawless added.