Why the Melbourne Residential Property Market Is Falling: A Guide

We all know Melbourne’s residential property (housing) market is falling — it’s a story we’ve been covering extensively here at Markets & Money.

Today’s article will focus specifically on the Melbourne residential property market.

To understand what is at play here, a few things are useful as background information.

Previously, we’ve covered factors specific to the property market and macroeconomic trends.

In terms of factors specific to the property market, we have explained how Chinese investment in apartments has fallen off dramatically in the last two years, auction clearance rates falling and building approvals dropping, as well.

As for macroeconomic trends, there is the issue of stagnant wage growth and household debt ratios and the prospect of further rises in interest rates by the big four banks.

With this in mind, let’s examine Melbourne’s property market as it stands today.

Melbourne could be set to suffer from a bubble bursting collapse. Harry Dent explores the major risks for the Australian property market in our free report which you can download here.

Strong Victorian economy/weak housing market

On first glance, it may seem like a mystery — Victoria continues to lead the country in economic growth.

Commercial property construction and infrastructure development remains strong, as well.

Victoria’s labour market is healthy with unemployment falling 1.5% over the last year to 4.5%.

But the residential property market in Melbourne has been left behind recently — with house prices in particular falling by over $1,000 a week.

There are both supply and demand issues that explain these falls. Much of the movement can be pinned to what’s happening with apartments.

Demand and supply issues for Melbourne residential property market

On the demand side, sales volumes of apartments have declined 12% over the last year in Inner Melbourne:

Melbourne Apartment Sales

Source: JLL Research

Driving this fall in sales is the removal of stamp duty concessions for investors in July 2017, which has had flow on effects for off-the-plan property purchases.

This has further reduced pre-sales of new apartment projects.

There is however a difference between investor demand and owner-occupier demand, as well as Inner versus Greater Melbourne.

Loans to first home buyers grew 30% year-on-year. Some banks offer lower interest rates for first time customers.

Stamp duty payments are also relevant as well as they have been removed for property purchases under $600,000 and discounted up to $750,000, which aids Greater Melbourne apartments which have an average price of $535,000.

Below is a useful heat map for Melbourne Property prices:

Melbourne Property Market

Source: Colliers Research

On the supply side, the apartment pipeline has dried up with a 41% fall compared to last year.

Some projects have even been converted into more desirable office towers or student accommodation.

This contraction will hopefully lead to a turnaround in the next 2–4 years due to population growth — assuming we don’t see a credit collapse.

Going forward, the demand could shape as the primary market mover. Particularly if interest rates continue to tighten.

Australia has after all the second highest in the household debt to GDP ratio in the world, behind only Switzerland. This amount of leverage looms as a major risk.

Regards,

Lachlann Tierney,
For Markets & Money

PS: My outlook for the property market is only half of the story. Check out our free report by Markets & Money’s Harry Dent, who believes things could get far, far worse. You can download it here.


Lachlann Tierney is a writer for Markets & Money. He has lived and studied in the US, the UK, and Australia. With an MSc from London School of Economics (LSE) he brings a strong grasp of geopolitics and world affairs to his analysis. Lachlann is always on the lookout for the news that will give you an edge in tomorrow’s markets.


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