Melbourne's pendulum swings from rent to buy

As rentals in Melbourne become scarcer and property prices level out after a year of solid growth, the pendulum may have swung to make buying more enticing than renting in the Victorian capital.

Despite Melbourne prices not moving in February, affordability remains an issue and rents are outpacing property price growth.

Buyers of the median-priced dwelling in Melbourne would get $250 change from their $800,000 outlay, or $1,600 left over from their million-dollar median-priced house purchase.

The latest CoreLogic data released Tuesday (1 March) showed that despite precisely zero change in Melbourne’s property prices in February, rents shot up by 4.3 per cent in just a month.

But with home values still having risen almost ten times faster than wages last year, the incentive to buy for renters is mounting.

Louis Christopher, Managing Director of SQM Research, said times were only getting tougher for renters.

“We were expecting a drop in rental vacancies over January due to seasonality, however, the drops were larger than expected and, worse for tenants, the weekly rental listings in February to date have fallen further in Melbourne,” he said.

“The shortage has already been translating into large surges in weekly rents.

“It is now very likely market rents will rise by over ten per cent this year, or indeed, it could be much more than this.”

Stephen Fitzsimon, Head of Growth at Melbourne Real Estate, said every suburb is expected to experience rent increases.

“Now that rent reviews are being undertaken by agents in Melbourne, it will shift back to an owner’s market and tenants will see increased rental prices over the next 12 months. Every suburb will grow.”

There is a far greater supply of apartments and, therefore, buyers have more choice.

- Talisa Paris

Talisa Paris, Residential Sales Executive at Melbourne Real Estate, was unequivocal.

“It is inevitable interest rates and prices are going to increase,” Ms Paris said.

“The time to buy is now.”

She said renters looking to get on the property ladder should consider apartments.

“Houses generate more competition among buyers as there is less stock on the market, whereas there is a far greater supply of apartments and, therefore, buyers have more choice.”

“The impact of the pandemic has largely evaporated throughout the first few months of 2022 and we have seen a strong rental enquiry, eventuating in significant conversion rates.”

Rent yields in Melbourne and Sydney are lower than other markets in Australia but this is due to their high property prices – actual rents are still high.

CoreLogic’s Director of Research, Tim Lawless, said Sydney (2.4 per cent) and Melbourne (2.8 per cent) have the lowest yield profiles but recorded a slight strengthening in gross yields this month, as rental growth nudges higher than growth in housing values.

“After several years of yield compression where gross rental yields reached historic lows across most of Australia’s capital cities, we are finally seeing early evidence of yield repair.

He said if rents continue to rise faster than housing values, which is a strong possibility in Sydney and Melbourne, yields will continue to improve.

Affordable housing options

The first round of lockdowns that ended in late 2020 were only a short setback for Melbourne, with house prices increasing 12.5 per cent over the past year.

With a highly competitive and pricey property market, many Australians are looking for affordable suburbs in which to buy homes.

According to the Property Investor Special Report 2021/2 released by BuyersBuyers, Hastings, Cranbourne North and Lara were among the top ten most affordable suburbs in Australia.

All three suburbs are more than 40 kilometres from the Melbourne CBD.

According to BuyersBuyers, property aspirants in Melbourne should look through the short-term noise.

“With borders reopening, rental markets will be very tight for houses in 2022, and rising rents tend to shift the buy versus rent equation towards purchases.”

The CoreLogic data released on 1 March revealed that in Melbourne advertised stock levels are now above average, tracking 5.5 per cent higher than a year ago and 4.7 per cent above the previous five-year average.

Mr Lawless said more choice translates to less urgency for buyers and some empowerment at the negotiation table.

What’s next? 

According to the latest NAB Residential Property Index, on average, house prices in Victoria are predicted to grow by 4 per cent over the next 12 months.

The Index also showed that foreign buying in the state rose to 7.1 per cent of total buyers, from 5.6 per cent in quarter three of 2021.

Mr Fitzsimon at Melbourne Real Estate said the influx of new arrivals would have an impact.

“The CBD apartments are skyrocketing, particularly furnished apartments, with a 30-40 per cent increase in leases since mid-December,” he said.

“Any properties within university-centric locations, including the CBD, Southbank and Carlton, are going to continue to grow as more and more overseas students return to our city.”

According to Herron Todd White Property’s February 2022 Month in Review, property values are likely to increase moderately in 2022.

NAB has forecast a 4.9 per cent increase in property values.