Melbourne house prices hit previous highs

It was another strong performance for property prices in Melbourne as home values surged in February. With interest rates continuing to fall, there could be more upside ahead according to the experts.

Melbourne house prices hit previous highs
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Melbourne property owners continue to lick their lips as the recent surge in prices has continued over the month of February.

According to the latest data from CoreLogic, Melbourne dwelling values jumped 1.2% in February, taking the gains over the last three months to 3.9%. Melbourne property prices are now officially back at their peak, after retaking their previous highs set in 2017.

The surge in prices has been reflective of strong competition in auction markets across the state, with the preliminary auction clearance rate sitting at 77.1% to round out the month. It has remained steadily above 70% across February.

Meanwhile, the vacancy rate is sitting at 3.0% which is down from 3.2% in late 2019.

The median value of a house in Melbourne is now $809,719, increasing 1.3% on the month while units have a median value of 583.294 and they also increased by 1.0%.

Melbourne’s inner-east is the strongest capital city area across the entire country has climbed by 18.3% in the past 12 months. While the inner and inner-south regions are both up by 13.7% and 12.9% over that same period of time.

Rate cuts to boost prices

Dr. Sam Tsiaplias, Senior Research Fellow at The University of Melbourne, believes the sharp fall in interest rates has really lifted property prices.

“The prices are no doubt driven by falling interest rates. The recent rate cuts are a response to global economic weakness and relatively weak domestic conditions. Despite weak economic conditions, rate cuts tend to push up asset prices generally, not just house prices.”

“There is also a recent tendency in Australia to over-react to lower rates, with house price growth tending to deviate from the level of growth consistent with economic fundamentals. This suggests that house prices will continue to improve in the short-term.”

The recent turnaround has been a positive for those who currently own property, but the rate of first home buyers is slowing according to Dr. Tsiaplias.

“First home buyer activity rose significantly over 2019 as house prices fell. Since then, there has been a somewhat of tapering off in FHB activity with recent survey evidence by the Melbourne Institute showing a large drop in the number of people who believe now is a good time to buy a house in Melbourne.”

“Recent activity has been driven by investors and owner-occupiers reacting to lower rates. In this respect, the Australian housing market has been known to over-react to low interest rates and this is no doubt a key factor in current activity.”

Despite the recent price rise Dr. Tsiaplias advises investors to take a cautious approach going forward.

“Notwithstanding lower interest rates, there is significant economic uncertainty associated with the coronavirus, in addition to weak consumer spending, low dwelling investment growth and weak business investment.”

“Although house prices will probably rise in the short term as a response to lower rates, investors will have to exercise caution as housing markets are not insulated from these wider economic conditions.”

Good growth to continue

Prominent researcher, John Lindeman from Property Power Partners, believes Melbourne property prices are destined to grow and ultimately outperform Sydney.

“While Melbourne’s housing market has closely followed that of Sydney’s in recent years, their rates of growth are highly likely to diverge in the future.”

“Firstly, Melbourne has our highest population growth rate, with 80,000 net overseas migrants and another 15,000 arriving from interstate each year.

"Secondly, Melbourne has many new and emerging outer suburban areas such as Casey, Melton, Wyndham and Brimbank as well as older well-established localities such as Hume, Dandenong and Frankston where house prices are still within reach of aspiring first home buyers.”

Mr. Lindeman also believes that there will not be enough supply to meet rising demand going forward.

“With an annual population growth rate of over 2.5%, housing demand in Melbourne will keep growing and the supply nearly always lags behind demand. As a result, prices in the most affordable suburbs will also keep rising.”

“The demand continuously ripples upwards as first home owners decide after a few years to move to better houses in more suitable suburbs. This upgrader effect ensures that overall price growth in Melbourne will continue for the foreseeable future.”

More upside potential

REBAA President, Cate Bakos believes Melbourne buyers are still playing catchup from last year which is helping lift prices.

“February was much like January in the Melbourne markets and the regions broadly followed suit too. As auction activity ramped up, so did prices.”

“Buyers who had either missed out in 2019 or watched on with dread as our market recovery priced them out of their desired markets came back with energy and increased borrowing capacity for the first official auction month.”

With the coronavirus making headlines around the world, Cate Bakos says the recent RBA move could signal that there is uncertainty in the air.

“Only in the final days of February did murmurs of the coronavirus start to trickle into property conversations. Speculation of market jitters, combined with possible buying opportunities have been interesting to tune in to, and the RBA’s decision to cut interest rates a further 25 basis points confirmed the RBA’s concerns about the impact of the spread of the virus in tandem with other possibly troubling economic indicators.”

Despite the worries, Cate Bakos thinks there is still room for more upside in Melbourne property markets.

“The effect of heightened borrowing capacity could spell a further market run, however fearful sentiment combined with stronger auction volumes and increased stock levels could enable some opportunistic purchases for those who are prepped and ready.”

Inner-city strength

James Nihill, Managing Director of Patrick Leo says there are a number of areas within Melbourne that continue to outperform.

“Melbourne is hot on the heels of Sydney’s rapid recovery and its prestigious inner-east has become Australia #3 best performing metropolitan market with values up by an impressive 18.3 per cent over the last year,” said Mr. Nihill.

“Inner-city Melbourne and inner-south also made the top 10 in CoreLogic’s Hedonic Home Value Index – measuring a 13. 7 per cent and 12.9 per cent annual increase in property prices respectively.”

“At this rate, just like Sydney, Melbourne will be back at peak price levels in no time. Auction clearance rates are around 71.5 per cent for last month according to Domain figures, which is more than 25 per cent better than a year ago.”

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