The growth cycle appears to have finally run its course

After nearly 6 years of solid, uninterrupted growth in Median $ House Prices, the Melbourne real estate market has undoubtedly levelled.

It’s worth noting that much of the change in market conditions was by design. The RBA has been concerned for years about runaway property prices associated with record low interest rates, so a variety of initiatives have been enacted to bring the heat down (think curbs on investor lending and interest only loans, higher interest rates for investors versus owners, stricter practices around borrowing capacities, non-recognition of foreign income, higher stamp duties for overseas investors, etc).

So, where are we today? Reading a lot of what’s been in the press over recent months, you’d be forgiven for thinking the market is in a downward spiral, but the objective figures point to a much more balanced market. Nelson Alexander operates in over 75 suburbs in 8 Council Areas across Melbourne’s West, North and East – the below graph shows how Median $ House Prices have performed in this combined area, in each quarter over the last 2.5 years. Price growth peaked this time last year at over 20%, and since then, the growth rate has gradually decreased to 0% in the June 2018 quarter.

It’s true that prices in the last quarter are slightly down from the preceding March and December quarters, and it’s clear that Auction Clearance Rates across the city have fallen significantly as 4+ bidders have turned into 1-2 and often none, but that doesn’t mean that a bubble has burst or that properties aren’t selling. The reality is that, after increasing by about 70% since the end of 2012, prices simply had to come down a bit – or at least flatten.

Every suburb and region has performed differently over the last 5 years, and will perform differently over the next few years. The graph below shows how much house prices have increased across each Council Area in Melbourne. Taking 70% growth as the average, it’s clear that some areas have outperformed (and, as a result, are more susceptible to price drops in coming months), and some have underperformed (and may have a bit more growth in them).

Clearly, the highest levels of price growth have been concentrated in Melbourne’s East – areas where overseas investment has been greatest. Most areas in the West and North have seen moderate growth in comparison, fuelled less by overseas demand and more by domestic investors and owner occupiers. This flatter, organic growth suggests, greater stability in coming months for these areas.