Momentum builds in Melbourne as optimism abounds

Melbourne feels like a very different place to what it was just a few months ago – in all sorts of ways.

Not long ago, some analysts were predicting 30 per cent falls in house prices. Would you believe that prices have jumped dramatically since the market opened up in October, they’re already higher than they were pre-COVID, and they’re predicted to rise further through next year?! The market is genuinely running hot right now.

The fundamentals of supply versus demand have played a big part in recent trends.

For about two months, the residential real estate market effectively froze in place. Property inspections were prohibited, and you couldn’t travel more than five kilometres from your home – very few new properties came on the market.

Demand for property built up while stock flatlined. The heat we’re seeing in the market right now is partly a hangover from this frozen period where buyers had nothing to purchase. Supply still remains frustratingly low, and competition between highly motivated buyers has become intense.

Is this ‘sellers market’ likely to continue, or is it a short-term aberration that will reverse once government support runs dry, people have to start paying their mortgages again, and more supply becomes available?

Consumer sentiment suggests that the positive momentum we’re feeling – in Melbourne and across most capital city markets – will persist.

Firstly, look how closely Melbourne’s median house price trends mirror the House Price Expectations of the general public. The last price growth cycle in Melbourne began to falter in early 2018 as price expectations began to wane. 

Prices bottomed out in the first half of 2019, but when price expectations jumped, actual prices followed suit. This relationship makes a lot sense – people are more likely to bid aggressively and stretch their budgets when they expect prices to rise (the inverse is true of course, when expectations are negative).

Secondly, look where each index was at the end of 2019 when the real estate market was starting to fly. 

House Price Expectations was around 140, Time to Buy a Dwelling around 120, and Consumer Sentiment just below 100. Look at where each index is now. After months of lockdowns and curfews, people are increasingly optimistic.

We’re living in a time of great uncertainty and change. One thing is pretty clear: the Melbourne residential real estate market has proven far more resilient than many analysts, economists and commentators predicted.