November 11, 2022
Property Insights

The Property Forecast

News & Insights
Written by Dr Nicola Powell, Chief of Economics and Research, Domain for Marshall White.

A rise always comes after a fall.

Melbourne is renowned for its roller-coaster property price cycles. In the scheme of upswings, the 2020-21 growth phase was a stand-out compared to most others in the past.

House prices rose 24.2% from the trough in June 2020 through to the December 2021 price peak. This provided the third steepest upswing on record, only behind 2000-03 and almost mirroring 2008-10. Technically, previous upswings have seen more pronounced house price growth over a longer period of time. However, the most recent one provided one of the quickest and sharpest equity boosts Melbourne has ever experienced.

Melbourne’s housing market is now in the next stage of the property cycle – a downturn. As per historical standards, the premium price point is leading the price cycle direction. It’s clearly evident in the most expensive areas of Melbourne with the median house price falling 6.4% in the Inner South from its peak in December 2021. While this has wiped $109,500 off the median house price, it is shadowed by the $400,000 gained in the 18 months leading up to its price peak. Premium priced areas tend to lead Melbourne price cycles and while this may appear as if they are more vulnerable during a downturn, they see greater rates of price growth during the upward growth phase. This also means that, when Melbourne moves into a recovery phase, it will be evident first with premium properties.

It is important to place market performance into context, as we can learn from previous price cycles to help shape our understanding of what could lie ahead.

The last significant downturn was during 2017-19 when Melbourne house prices fell 10% from peak to trough. Interest rates weren’t rising at the time but it became harder to get a loan and less credit was available for borrowers, plus add a banking Royal Commission to weigh down sentiment."
Dr Nicola Powell Chief of Economics and Research, Domain

Over the past almost three decades, there have been only four periods of time in which Melbourne house prices have declined annually, occurring in 1995-96, 2008-09, 2011-12 and 2018-19. The instant observation from the historical performance reveals that all downturns had a peak rate of annual decline of less than 10%, which had been preceded by a higher rate of incline. Although the depth of the downturn has become greater in more recent years, the annual rate of decline peaked at 9.7% during the 2018-2019 period of negative annual growth.

Melbourne has experienced eight house price cycles since 1993, inclusive of the current one. On average, the upswings have notched 38.1% growth from trough to peak and have lasted 2.75 years, while on average the downturns have lost 4.4% from peak to trough with an average duration of just under a year.

Comparing an upswing and a subsequent downturn reveals some interesting points:

  • The duration of an upswing tends to be longer than the subsequent downturn. Downturns have roughly been one-third the duration of the preceding upswing.
  • There is a greater increase in price relative to the subsequent decline so it is unlikely we will see a return to pre-pandemic prices.
  • Historically, downturns have been shorter and less severe compared to the preceding upswing.

This time, interest rates are rising, increasing the cost of a home loan and reducing borrowing capacity at a time when living costs are soaring. The speed and scale at which Melbourne prices soften depend upon many factors, however the downturn will be somewhat shaped by how high and quickly interest rates go up and how high inflation reaches.

Although interest rates are important, they are not the only factor influencing housing prices. Tax settings, banking regulation, population and income growth and the responsiveness of new housing supply to growing demand all play their part.

Australian households are likely to be much more sensitive to rising interest rates and strong inflation levels due to the high level of debt being carried, ultimately eroding savings. However, there are a number of factors that suggest households could be resilient to rising interest rates: asset balance sheets are in a good position due to strong growth in dwelling prices, household savings are also strong and many mortgage holders are ahead of their repayments.

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