Are Melbourne’s property prices finally starting to dip?

Inflation, rate rises, increased demand and housing unaffordability may finally be putting the breaks on Australia’s runaway property market.

Over the 2021 calendar year, the mean price of residential dwellings in Melbourne grew by as much as 20 per cent. The rise was even more significant in other parts of the country, particularly for Brisbane, Hobart and our regional areas which saw growth of a staggering 25 per cent and up.

Median house prices in Melbourne reached upwards of $1.1 million during the December quarter, whilst the median unit price sat around $593,000.

Incredibly, house prices have grown by seven times more than unit prices over the last year. Median house prices now sit at a 89 per cent above median unit prices; a record gap for Melbourne.

But now we are seeing the first few signs that the market has started to head in the opposite direction.

Since the new year, the numbers have shown us that the market has stopped growing at the absurd levels seen in 2021.

Data from the latest Domain House Price Report shows that Melbourne house prices fell by 0.7 per cent over the March quarter, with unit prices dropping an even sharper 2.2 per cent. This is the steepest decline for unit prices in five years and the first time they’ve slid since mid-2020.

These declines have slowed the annual growth rate to 11.3 per cent which is the lowest it’s been for over a year.

With rate rises on the horizon, buyers are becoming fearful of overpaying as they anticipate a potential dip in property prices over the coming months.

The pent up frustration and ‘FOMO’ which fuelled demand throughout the pandemic has steadily dissipated since the start of the year. Now, uncertainty around borrowing costs has lead to a market where sellers are more keen to sell than the buyers are to buy.

Unlike the buying frenzy we experienced in 2021, buyers can now afford to be pickier and are able to take their time with property decisions.

This is reflected by a gradual decline in Melbourne’s auction clearance numbers over the past 12 months. Data from Domain also shows auction clearance rates dropped to around 65 per cent in the month of April, down from around 80 per cent this time last year.

So far the downward trend has not been echoed outside of Australia’s biggest two capitals. Brisbane, Adelaide, Perth and Hobart have all continued strongly into 2022 as each city continues to reach record price levels.

But, even in Australia’s strongest performing markets, there are signs that things are changing.

In Brisbane’s booming property market. house prices slowed to 0.22 per cent growth in the month of April, more than halving its rate of growth from March.

Historically, the direction of the Sydney and Melbourne markets drag the rest of the country along with them. It’s likely that if the two biggest cities do enter a downward swing, we will soon see the other capitals follow.

With an official raise to the cash rate almost certain to be announced this week, a negative reaction in the property market now seems inevitable. The unsustainable property growth that we’ve witnessed over the last 18 months appears set for a correction; the question now is by how much.

The RBA has estimated that if interest rates rise two per cent by the end of the year, we will see property prices fall by as much as 15 per cent. In Melbourne, a drop of this size could take housing values back to similar levels in May 2017.

Even without an increase to the cash rate target, there are a number of other factors putting downward pressure on property prices. Housing affordability, increased supply, a rise in fixed mortgage rates and consumer sentiment have all had a negative impact on the property prices.

What we will likely see is various scenarios playing out across the capital cities as each market reacts differently.

Initial data also tells us that higher-end properties, which performed the best during the pandemic, are leading the decline in dwelling values.

However, it’s not all doom and gloom for the property market. Improving economic conditions alongside recovering immigration levels should begin to counteract housing demand over the coming years.

The long-term outlook for the market is still strong and property prices are expected to soon overcome whatever instability lies ahead.

If looking back at the last few years has taught us anything, it is how unpredictable the property market can be. Those who delay buying property in the hope of timing the market often end up missing the boat completely.

Our advice is to buy when you can afford to and seek advice from a trusted professional before making your property decision.