Are you wondering what will happen to the Melbourne property market in 2022?

While Melbourne’s housing values have not grown as strongly as other capitals, now that Melbourne is out of the longest lockdowns experienced anywhere, the pent-up demand at a time of increasing consumer confidence, an improving economy, and abundant job creation ensures continued strong Melbourne house price growth in 2022.

Last year property values increased in almost every part of Melbourne – and that’s very unusual.

So far this year the Melbourne housing market has languished with little overall growth in the first quarter of the year, however there are still plenty of transactions occurring.

It’s a bit like having one hand in a bucket of hot water and the other in a bucket of cold water and saying “on average I’m feeing comfortable.”

The number of properties newly listed for sale is rising again but currently buyers are taking their time and contemplating their decisions.

FOMO (fear of missing out) is no more and buyers are not willing to take short cuts or compromise like they were last year.

Moving forward, there will be a flight to quality and the various sectors of the Melbourne real estate market will be segmented, which is a more “normal” property market.

There is a clear flight to quality with A Grade home and “investment grade” properties still in short supply for the prevailing strong demand, but B Grade properties are taking longer to sell and informed buyers are avoiding C Grade properties.

While Melbourne’s preliminary auction clearance rates this time last year were around 80% , they are currently holding around the high 60s, which is moving from more of a seller’s market to a buyers market.

This year property values in some locations will rise strongly, some will increase in value moderately and some locations will languish, and a few areas will experience falling property values, based on local affordability as well as supply and demand.

However, by the end of 2022 it’s likely “overall” home values will be 6- 7% higher than the beginning of the year and unit values will be 5% higher.

Moving forward, the various sectors of the Melbourne housing market will be segmented, which is a more “normal” property market.

Some locations will rise strongly, some will increase in value moderately, and some locations will languish, and a few areas will experience falling property values, based on local supply and demand.

However, by the end of the year, it’s likely “overall” home values will be 5-6% higher than at the beginning of the year, and unit values will be 3-4% higher.

Melbourne property values:

  • remained flat in the last week,
  • also flat as April starts, and
  • increased 9.8% over the last year.

Don’t worry… there is still plenty of growth left in the Melbourne housing market, as there is still strong pent-up demand from both buyers and sellers.

Fact is, it’s not all doom and gloom for Melbourne sellers.

Despite a flood of new properties coming on to the market for sale, buyer demand has increased 16% according to Domain and Melbourne’s auction clearance rate is holding up well.

And with the recent opening of international borders, Melbourne will be a major recipient of new residents putting extra pressure on our property markets, particularly the rental markets.

Sure Melbourne’s property price growth slowed down a little lately with more properties listed for sale over the last couple of months, but it’s important to remember that buyers are sellers and sellers are buyers – meaning they will have to live somewhere and many will be looking to upgrade their accommodation in 2022.

Weekly Change 04 April

Monthly Change 04 April

12 Month Change 04 April

Is it the right time to get into the Melbourne property market?

Now I know some potential buyers are asking:

How long can this last? Will the Melbourne property market crash in 2022?

They must be listening to those perma bears who have been telling anyone who is prepared to listen that the property markets are going to crash, but they have said the same year after year and have been wrong in the past and will be wrong again this time.

Recently all our major banks have updated their property price forecasts in response to the market’s resilience in the face of extended lockdowns.

Westpac sees the Melbourne property market growing 8% in 2022.

Remember the current upturn phase of this Australian property cycle only commenced in October 2020 and Melbourne was held back with stops and starts due to the lockdowns.

Normally the upturn stage of the property cycle lasts a number of years and is followed by a shorter boom phase which is eventually cut short by the RBA raising interest rates or by APRA introducing macro-prudential controls to dampen the exuberance of property investors and home buyers.Apra

However, this time around we have experienced an unprecedented rate of growth seeing our property markets perform even more strongly than anyone ever expected, with the rates of house price growth at levels not seen for a number of decades.

While a lot has been said about the 20% increase in property values many locations have enjoyed so far this year, it must be remembered that the last peak for our property markets was in 2017, and in many locations housing prices remain stagnant over a subsequent couple of years and it was really only earlier this year that new highs were reached.

This means that average price growth was unexceptional over the long term, averaging out at around 4 per cent per annum over the last 5 years

But recently there seems to have been a change of sentiment about our housing markets from our financial regulators and APRA has forced the banks to increase their interest rate buffers for new borrowers.

So when will this property cycle end?

I see Melbourne’s property market continuing to grow at the rate of 6 to 7% per annum throughout 2022 until eventually, affordability slowed the market down.

Remember that the current strong upturn phase of the property cycle only commenced in October 2020.

Normally the upturn stage of the property cycle lasts a number of years and is followed by a shorter boom phase which is eventually cut short by the RBA raising interest rates or by APRA introducing macro-prudential controls to dampen the exuberance of property investors and home buyers.

Scale

There is little doubt that APRA’s Macro-Prudential controls introduced in November 2022 will have a negative impact on our property markets – after all, that’s what they’re intended to do.

Whether the markets will just experience slower growth or stop dead in their tracks will depend on what measures are introduced in the future.

However, as the Melbourne property market is slowing naturally as a result of affordability constraints and greater choice for buyers, hopefully, APRA will remember its lessons from the past and stay out of the market now.

I hope they have learned from the results of previous interventions, otherwise, if history repeats itself, there will be some unintended consequences.

Watch this space.

Melbourne houses are outperforming

Currently, Melbourne’s house price growth is stronger than unit growth, and while most sectors of the market have been enjoying strong demand, the more expensive properties are now outperforming Melbourne’s less expensive properties.

Looking back the Melbourne property market has been one of the strongest and most consistent performers over the last four decades.

Over the last 40 years:

  • The median Melbourne house has increased by 7.9% per annum
  • The median Melbourne unit/apartment price has increased by 7.73%per annum

Obviously, this wasn’t the same each and every year, as the Melbourne property market worked its way through the typical property cycles.

Australia Housing Inflation April 04

Over the last few decades, Melbourne won the mantle of the world’s “most liveable city” more times than any other city in the world.

Needless to say, the Covid related lockdowns endured by Melbourne led to some challenging times, but now both buyers and sellers are back, consumer confidence has picked up strongly and property transaction numbers have increased and house, auction clearance rates are strong and prices are rising, however, Melbourne’s inner-city apartment market still looks in bad shape.

Auction clearance rates in Melbourne have remained strong despite the months of lockdowns – showing the resilience of both buyers and sellers and the acceptance of online auctions.

Some of the heat gradually came out of the Melbourne auction market at the end of the year as vendors became more confident placing a record number of properties on the market for sale by auction in December.

But as you can see from the following chart, Melbourne’s auction market started in 2022 strongly.

Melbourne Auction Clearance Trends

While there is a shortage of quality housing in popular areas across Melbourne, the lower-than-expected population growth has led to an oversupply of housing in some outer suburban new estates.

A prime example of this is Melbourne’s western suburbs where an additional 18,800 houses are expected to be built over the next 24 months.Buyers Agent

Villa units, townhouses, and family suitable apartments will be seen as affordable alternatives to houses in the highly sought-after inner eastern and south-eastern suburbs of Melbourne.

On the other hand, high-rise apartments in the many Melbourne CBD towers or close to universities are likely to underperform, remain vacant for a long time, and keep decreasing in value.

Houses in regional Victoria with easy access to the capital city are also in strong demand and should continue to increase in value.

Fast facts about Melbourne and its property market

Here’s the list of some vital points you would want to consider:

The Victorian economy is holding up well

For years the Victorian economy has been Australia’s strongest State economy creating more (and typically higher-paying) jobs than other states and once we get across the proverbial bridge the government has built for COVID-19, Victoria’s economy will surge again.

The Victorian economy has been hard by the COVID-19 pandemic due to the State’s extended lockdowns last year.

As a result, the Victorian economy contracted by -6.1% over 2020, compared to -2.8% for the national economy.

But until the most recent (6th) lockdown, it looked like the Victorian economy was rebounding in 2021 and was likely to outperform the other states this year.

Of course, economic growth will now slow down a little until we move out of our Covid cocoon.

2021 Forecast Economic State Growth 740x420

Source: Urban Property Australia

But remember… Melbourne is not one property market…

There are multiple markets in this diverse sprawling city.

It is divided by geography price points and type of property into many submarkets – this means you can’t just buy any property and count on the general Melbourne property market to do the heavy lifting for you over the next few years, so careful property selection will be critical. 

So to help you better understand what’s going on in Australia’s second-largest property market here is a long thing you should know if you’re considering investing in Melbourne property:

Melbourne House Prices

Over the last 4 decades, Melbourne property values have risen at the fastest pace of all capital cities.

Melbourne house prices and market activity were adversely affected by its extended lockdowns during 202 -21, but now Melbourne property is on the move again.

Housing Cycles Melbourne March 2022

MELBOURNE DWELLING PRICE TRENDS – Source: Corelogic April 2022

Mel2

Mel01

At Metropole we’re finding that on-the-ground sentiment has changed completely with strategic investors and homebuyers already starting to feel a little FOMO (fear of missing out).

However, while house prices have been resilient, Melbourne rental rates are experiencing weaker conditions due to a higher supply of rental properties, and less demand.

At the same time is more buyers being active in the market, there is currently a shortage of good quality stock on the market.

Melbourne Property

Melbourne houses are outperforming apartments

Melbourne has seen a record high in the difference between house and unit medians at 52.4% as of June.

Mlbrn PreviewMelbourne has also seen the weakest rental market performance since the onset of COVID-19, and as a large portion of rental stock are units, this has dampened demand across the segment.

This also likely explains some of the weakness in the Sydney unit market, where rental demand was similarly affected by a lack of overseas migration.

Unlike Sydney however, Melbourne has seen similar rates of disparity through the 2017 and 2018 calendar years, when the house price premium on units averaged 46.3%.

A prolonged period of high unit supply, and the development of high-density stock, kept unit values relatively low through this period.

This dynamic may shift through the remainder of 2021, as ABS data points to a fall in the construction of units, and a rise in the construction of new houses.

Furthermore, affordability constraints across the housing segment, which could be amplified by the end of HomeBuilder and temporary stamp duty discounts, may guide more first home buyers back to the unit segment of Melbourne.

Mlbrn Chart

So…is it the right time to get into Melbourne’s property market?

Melbourne property prices have been climbing at a breathtaking pace in 2021 with more growth expected as strong demand from buyers outpaces the volume of new listings coming onto the market.

This has been good news for homeowners but heartbreaking for house hunters.

At the same time, there have been mixed messages in the media about what’s ahead.

Of course, there are always the Negative Nellies wanting to tell anyone who is prepared to listen to them that the market is about to crash, but other more solid commentators are suggesting our property market is slowing down.

And I agree, I believe the pace of capital gains has peaked, but I’m not suggesting home values are about to dip, far from it.

Rather I believe we’ve moved from a peak rate of growth to a pace of capital gain that will be more sustainable and there’s plenty of life left in the Melbourne real estate market with property values likely to keep increasing throughout 2022 and into 2023.

Australia’s economy looked like it was going to experience the V shape recovery everybody had been was hoping for, but now with prolonged lockdowns in Australia’s 2 most populous states and therefore our largest economies, economic growth has slowed down.

However, as we move out of our Covid cocoons there are signs that economic growth will return led by employment growth and this financial security will underpin Melbourne’s property market moving forward.

However, some sectors of the Melbourne housing market will continue to languish this year.

The sectors of the Melbourne real estate market likely to underperform most moving forward will be:

  • Apartments in high-rise towers – in fact, this is these properties are likely to be out of favour for quite some time.
  • Off-the-plan apartments and poor quality investments stock (as opposed to investment-grade) apartments, particularly those close to universities.
  • Established homes in the outer suburban new housing estates, where young families are likely to have overextended themselves financially and many people will be out of work for a while. Currently, many first home buyers are taking advantage of the various incentive packages including HomeBuilder to buy newly constructed homes, leaving established houses in these locations languishing.

Top 10 Melbourne school zones for house price growth

Education influences home buyers and property investors across a broad range of demographics and data shows that it is now influencing property prices in greater Melbourne’s popular education catchments.School Melbourne

Education is a long-term consideration and, whether you are planning a family, have children already enrolled in school, or are an investor looking to attract long-term, quality tenants, it may be beneficial to consider school catchment zones when you are determining suburbs of interest.

A well-rated school can do wonders for property value, and recent data shows that school catchment zones can actually have a significant influence over how quickly property prices grow.

In fact, Domain Group’s latest 2021 School Zones Report shows that while Melbourne’s property market has been going gangbusters this year, despite spending almost as much time in lockdown as not, house prices in some of Melbourne’s school zones have outperformed and skyrocketed by close than 40 per cent over the past 12 months as fierce competition to get into preferred school catchment areas continues to drive property price growth.

The report confirmed how public school zones can influence property decisions and impact house price movement.

In Melbourne, secondary schools appear to have a slightly bigger impact.

This trend has reversed compared to last year, suggesting that at a time of escalating house prices, household budgets have become stretched.

Group Of Multiethnic High School Classmates Walkin 2

In Melbourne house prices have risen across most school zones analysed, up in 83% of primary and 89% of secondary schools, aligning with the rising property market.

While the top school catchment zones were spread across inner, middle, and outer suburbs and across a variety of different price points, a number that topped the list favoured the lifestyle location of Mornington Peninsula.

House price growth varied between neighbouring school zones.

Interestingly house prices in the Brighton Primary School zone increased 11% annually, while the neighbouring school zone of Elsternwick Primary School dropped 15%.

Annual house price growth in 48% of the primary and 52% of secondary school zones analysed surpassed the respective suburb price growth, with most seeing up to 10% more growth compared to the suburb they are located in.

Roughly one-in-ten school zones had 10-20% additional house price growth over the suburb’s growth.

The list of top 10 Melbourne secondary schools catchment areas

school name median yoy
1 Diamond Valley College $990,000

+33.2%

View CatchmentsView
2 St Helena Secondary College $1,077,500

+25.5%

View CatchmentsView
3 Edgars Creek Secondary College $595,000

+25.3%

View CatchmentsView
4 Werribee Secondary College $587,000

+24.9%

View CatchmentsView
5 Mount Erin Secondary College $787,500

+23.0%

View CatchmentsView
6 Craigieburn Secondary College $615,000

+22.9%

View CatchmentsView
7 Cranbourne East Secondary College $600,000

+22.7%

View CatchmentsView
8 Beaumaris Secondary College $1,765,000

+21.7%

View CatchmentsView
9 Roxburgh College $614,500

+19.3%

View CatchmentsView
10 Epping Secondary College $595,000

+19.0%

View CatchmentsView

The list for top 10 Melbourne primary school catchment areas

school name median yoy
1 Richmond Primary School $1,842,500

+39.6%

View CatchmentsView
2 Heidelberg Primary School $1,510,000

+36.7%

View CatchmentsView
3 Valkstone Primary School $1,726,000

+35.4%

View CatchmentsView
4 Glen Waverley Primary School $1,881,944

+33.0%

View CatchmentsView
5 Surrey Hills Primary School $2,040,000

+29.9%

View CatchmentsView
6 Pakenham Lakeside Primary School $626,500

+29.2%

View CatchmentsView
7 Clayton South Primary School $978,100

+26.9%

View CatchmentsView
8 Williamstown North Primary School $1,525,000

+26.8%

View CatchmentsView
9 Preston Primary School $1,100,000

+25.7%

View CatchmentsView
10 Cheltenham Primary School $1,196,000

+25.6%

View CatchmentsView

Long term Melbourne property market trends


No one wants to live in a substandard apartment, regardless of how affordable it is, and there are only so many people who would find a hotel-sized apartment appropriate for full-time living.

The fact that an estimated 40 per cent of apartments in Melbourne are smaller than 50 square meters, according to the Melbourne City Council’s planning department, shows just how big this issue has become –, particularly when you consider that the minimum size of a single bedroom apartment can be in Sydney, London and Adelaide is 50m2 or above.

Not only are the apartments lacking in breathing room – literally – they’re also flawed in a number of other ways, with kitchens placed in hallways, a lack of ventilation and natural light, and poor storage.

All of these design faults make these types of developments less attractive to potential tenants, which reduces the desirability of these properties.

Investors would be well advised to steer clear of apartments that don’t tick all the boxes.

Shoebox-sized living spaces, alongside common design flaws in the building itself, should raise some serious red flags for buyers.

The problem is that many overseas buyers are purchasing these properties which will become the slums of the future.

2. Look for Melbourne’s best properties in the inner and middle-ring suburbslocation map house suburb area find

Studies – and time – have shown that properties close to the city’s CBD (but not in it) and in bayside suburbs close to the water will increase in value more quickly than other properties and suburbs.

The demand for property is higher in these regions, as there is no land available for release, but the areas remain close to employment or desired locations.

Not only are properties closer to the CBD closer have better access to amenities and more employment opportunities, but transport costs are often lower and, as a result, people are willing to pay a premium to live there.

The end result for property investors in Melbourne is that the inner and middle-ring suburbs will (generally) out-perform the averages for suburbs located further from the city.

3. Be mindful of a Melbourne inner-city apartment oversupply

Melbourne’s property market has been typified by strong population growth and to keep up with surging housing demand, there have been a huge number of new developments – mostly in the form of high-rise apartment buildings, in and around the CBD – that have been approved.

While the population growth, Mainly from overseas migrants, was soaking up much of this new dwelling stock, the CBD is now over-supplied with too many new apartments.

With too many development projects either completed, begun, or approved in recent years, the risk for property investors in Melbourne is that there is currently an oversupply of properties in and around Melbourne’s CBD.

And until our international borders are open, and tourists and in particular students return, it is likely that this oversupply will be soaked up meaning there will be no capital growth and sluggish rental growth on your investment – so avoid Melbourne CBD and near CBD properties.

4. Make the most of Melbourne properties through negative gearing

While most investors understand the concept of negative gearing, just in case you’re not up to speed, here’s a quick refresher:

Negative gearingA property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs, and depreciation – exceed the income it produces.

Since the costs of producing an income are generally deductible against the taxpayer’s other income, property investors can effectively offset some of the interest expense against their wages.

Why would anyone go into a business deal to make a loss?

Generally, it’s because property investors in Melbourne hope that their income losses will be more than offset by their capital gains when they eventually sell (or refinance) their property.

And in Australia capital gain is not taxed unless you sell your property, and then it is concessionally taxed; again evoking the argument that it favours wealthy landlords.

Of course, negative gearing is more favourable for taxpayers who earn high incomes, and just to make things clear…
Negative gearing is not an investment strategy – it’s just the way a property is financed at a particular point in time.

A strategic approach to choosing an investment property in Melbourne

We believe that 80% of your property’s performance is related to its location (one that outperforms the averages ) and 20% or so is related to buying the right property in that location.

Here are some of the factors to look for when selecting an investment-grade property:

1. Buy a property below its intrinsic value

I’m a big believer in buying property below its intrinsic value – that’s why I avoid new and off-the-plan properties, which generally attract a premium price tag.

I also look for properties with a high Land to Asset ratio – but remember apartments have an attributable land value underneath them

2. Buy a property in a location that outperforms the averages house property

In other words in an area that has a long, proven history of strong capital growth and one that is likely to continue to outperform the averages, this is large because of the demographics in the area and the future economic prospects for the area.

These suburbs tend to be those where a large number of owner-occupier’s desire to live in the area, because of the lifestyle choices they offer.

I look for suburbs where wages (and therefore disposable income) are increasing above average.

This translates to being an area where locals are able to and prepared to pay a premium price to live there, putting a financial floor under your investment property.

3. Buy a property with a twist

An investment must have something unique, special, different or scarce – some ‘X-factor’ that makes it stand out from its neighbours – in order to land on my shortlist.

4. Buy a property where you can manufacture capital growth

An ideal investment is one in which you can manufacture capital growth through refurbishment, renovations or redevelopment.

About Michael Yardney
Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He’s once again been voted Australia’s leading property investment adviser and one of Australia’s 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au




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