Melbourne property market: The boom. The bubble. The bust

The boom. The bubble. The bust: It’s a rare day that a Melburnian can escape a headline or a water cooler chat about property.

Whether debating who’s to blame for price inflation (boomers, foreigners, government — take your pick) or defending your position on brunch, property remains a feverish topic; forever tipped to end with some sort of disastrous crash in Australia’s biggest asset class.

Figures released last month heralded what some saw as the beginning of the end: the first signs of softening demand. Melbourne property values swung down 1.7 per cent in May, according to CoreLogic.

The suburbs with the strongest price growth were once budget suburbs.The suburbs with the strongest price growth were once budget suburbs. Photo: Pat Scala

But homeowners remained expectant, raising asking prices for houses across the city by 4.9 per cent in the same month, Domain Group’s private sales data shows.

House prices can be painted in a complex and often divergent picture. And then there’s interest rates, the apparent impending apartment market bust, unemployment and urban sprawl.

Let’s break it down:


The latest analysis of Domain Group data shows the city’s median house price rose by more than $110,000 in one year. The median cost for a house in Melbourne jumped from $732,104 to $843,674 from March to March.

In the first quarter of the year, the Australian Bureau of Statistics reported a 4.1 per cent rise in the city’s house prices. The Domain Group reported a 4 per cent rise in the same time period.

Chief economist Andrew Wilson called an increase in the soon to be released June figures “about the safest bet going around”, making it a record of more than four and a half years consecutive house price growth.

Domain Group (owned by Fairfax Media, publisher of The Age) released its figures quarterly and uses different methodology to CoreLogic (66 per cent owned by News Corporation), which releases figures monthly.

Using CoreLogic’s data, May looked like a grim month. Not only did house values head south 1.5 per cent in the month, unit values declined 3.8 per cent.

“To use CoreLogic, it looks like we’ve entered a softer period, but the complication of course is that May is often a soft month seasonally,” AMP chief economist Shane Oliver said.

May can be an odd month in the property market; autumn selling is mostly over and the winter market hasn’t yet begun. This could explain the house price dip to some extent, Dr Oliver said, but there is likely more to the unit figures.

“It’s premature to say we have entered a major downturn in the property market, but it’s quite possible we may have in the case of units, where there is a lot of supply coming on.”

That is a view shared by NAB chief economist Alan Oster. “I think it’s really early to be calling the fact the property market may have peaked,” Mr Oster said. “The Melbourne market – houses anyway – is still undersupplied, but I see apartment markets are probably weakening more.”

But there’s plenty happening to potentially calm growth further. The Australian Prudential Regulation Authority has curbed lending to investors, state government policies have deterred foreign buyers and the banks are lending less for interest only loans. ​And for the past four weeks, the Domain Group has reported an auction clearance rate slowly declining.

Mr Oster says house prices have been “temporarily restrained a bit”, while Dr Oliver calls it a loss in momentum, but far from the much talked about bubble burst.

“To get a crash, by which I mean a 20 per cent and greater fall, you’d need much higher interest rates or much higher unemployment, and at this stage, neither of those things are in prospect,” Dr Oliver added.

Regional prices

The Melbourne market does not move as a whole and different parts of the city experience different fortunes. Right now, it’s the north of the city leading the pack.

In terms of auctions, the north and north east have clearance rates above 80 per cent. In private sales, which makes up about 70 per cent of the sales in Melbourne, those two regions – and the outer east – are where sellers have hiked prices the most.

These outer-suburban areas have traditionally been budget markets and Dr Wilson believed the removal of stamp duty for first-home buyers from July 1 would continue to drive these relatively affordable markets. The quickly gentrifying inner and middle western suburbs are likely to see a bit of a push on prices, too.

“The question is just how much underlying pent-up demand we have from first-home buyers in Melbourne,” Dr Wilson said, adding that the extra activity would create a ripple effect in the market.

Well-regarded school zones continue to be major drivers of growth in the inner east and bayside but these areas, and therefore the market more broadly, tend to see a drop-off over winter.

Interest rates and unemployment

The two major causes thought to have the ability to cause a price crashare rising interest rates and worsening unemployment. Rates and jobs seem to to be in check for now.

In 2008-09 and 2011-12, much higher interest rates were what pulled Melbourne house prices down.

“I know a lot of people get excited about this bank or that bank announcing a 25 point hike for investors, but that’s nothing compared to previous interest rate cycles where the RBA would raise interest rates across multiple periods for several years, and everyone would see their rate go up,” Dr Oliver said.

It is widely expected rates will not rise any time soon. NAB has interest rates unchanged until mid-2019. “And if there’s any change any time soon, it will be a cut,” Mr Oster says. “You needs the property market to calm down a lot before the Reserve Bank would react.”

Employment is stable in Victoria too, Mr Oster says; roughly on track to stay where it is and record moderate growth in employment.


Another fundamental Melbourne has in its favour is that Victoria is Australia’s fastest growing state, and most of the newcomers move to the capital.

The population in Greater Melbourne grew by 2.4 per cent last year, a very high rate, according to population expert Glenn Capuano of .id. “And that’s showing no sign of abating at the moment,” he said.

The IVF success rate is less than 1 per cent for women aged over 45.About one-third of Victoria’s population growth comes from natural increase.

Generally, about two-thirds of Victoria’s population growth comes from migration, the other third from births. Though overseas migration has been fairly high, interstate migration has made a remarkable turnaround in Victoria. For many years, Victoria lost people to the other states, but now it is gaining more people from interstate than the rest of Australia. That hadn’t happened since 1942.

Population growth and property prices have a strong correlation, Mr Capuano said. “If you look at places that have declining populations, generally the housing prices are lower,” he said. “But population isn’t the only contributor … you could still see housing fall if there was increased interest rates, even if the population was still high.”

Investors v first-home buyers

The latest figures from the Australian Bureau of Statistics showed an easing in investor lending, suggesting the targeting of investors (by the APRA, the banks and the government) had started to work again. Interest rate cuts spurred on buyers after the previous crackdowns, but further cuts now seem less likely to reignite that market.

“There’s very early signs investor lending has waned, but we have to take into consideration the seasonal effects because April was a weaker market,” Dr Wilson said, adding that soon to be released May figures will give a better indication.

For first-home buyers, July 1 may help to level the playing field against investors slightly further. The state government’s abolition of stamp duty comes into effect for first-home buyers on properties up to $600,000, and there will be cuts on properties up to $750,000.

Many property pundits are tipping a rush to market in that price bracket, which Dr Wilson points out is often the same range investors look at. “We might see investors and first-home buyers again competing for the same product,” he adds.


The apartment oversupply, tipped in Melbourne for the past two years, is still threatening to put downward pressure on apartment prices, particularly in areas such as the CBD.

“I think the market has been holding up better than people had expected, in terms of vacancy rates and the pipeline of construction that’s been coming through,” said Angie Zigomanis of BIS Oxford Economics, which has been one of the loudest voices tipping oversupply.

“Each step up in the apartment market supply over recent years has been in met by a step up in population growth and demand … People were still buying at a greater rate than we thought common sense would suggest.”

In the next 12 to 18 months, one of the major challenges will be that some of the largest projects coming to completion, Mr Zigomanis said, while those looking to sell new apartments will also face losses.

“Some of the work we’ve done suggest that a lot of apartments that have been purchased off-the-plan in recent times, the ones that have resold, have been reselling at a loss.”

Urban sprawl

Demand for house and land packages on the fringe of the city continues to be strong, with ABS population figures showing Victoria’s largest and fastest growing suburbs — some of the largest growing in the country — are also some of the cheapest in Melbourne in which to buy a house.

Big River supplies timber and steel products to about 2700 professional builders and construction companies.Melbourne leads the country in new house and land package development. Photo: Alan Porritt

The state government announced 17 new suburbs across outer Melbournewith 100,000 new housing lots by the end of 2018.

Melbourne is the leading greenfield market country, thanks to median lot prices being a lot lower than the national average. In 2016, 22,703 lots were released, according to the Urban Development Institute of Australia, considerably more than the rest of the country.