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Where is Melbourne on the Property Market Cycle?

It seems like the worst is over for the Australian residential property market, with home values back on the rebound. 

In the 3 months to October, values surged by 2.9% nationally, with top performer Melbourne rising by an astounding 5.5%. Sydney came in second at 5%, while third-placed Canberra rose 2.4%.

The country’s notoriously expensive housing market was in freefall earlier this year. Prices in Melbourne and Sydney had fallen in the double digits from their peak in 2017, and with financing more difficult to obtain after the banking royal commission, the bottom seemed nowhere in sight. 

This turnaround has thus been a welcome change for Australian property owners. House prices in Melbourne have regained more than half their losses from the recent property downturn, exhibiting its quickest recovery on record.

In terms of the property market cycle, Melbourne is leading the charge out of the downturn and bottoming phase. Showing strong positive growth, the Victorian capital has progressed to the early recovery or recovery stage of the housing cycle. The availability of some of the cheapest mortgages in Australian history is helping to release the pressure built up during the recent years of tighter lending.

A typical growth curve for the property market cycle (Source: JLL)
A typical growth curve for the property market cycle (Source: JLL)

With improved housing market conditions, buyers are returning to the market. In the 3 months to August 2019, home loans taken out rose by 11.6%. The sudden resurgence appears to be due to looser borrowing rules and an improvement in affordability, compared to when the market peaked a few years ago.

Louis Christopher, founder of research house SQM, says the post-election U-turn by the Australian Prudential Regulatory Authority (ARPA) was crucial in the recovery of the market. “With APRA, what they really did was, someone knocked on their door and said, ‘Look, you’ve gone too far, we’ve got a downturn in the economy, you’ve got to loosen the lending restrictions.’ And they did.”

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Tim Reardon, chief economist of the Housing Industry Association (HIA), says that the cuts to interest rates have more than offset the rise in home prices to improve affordability, which went up by 2.2% in the September quarter. HIA’s affordability index offsets price growth with wage growth and mortgage rates.

“Despite recent house price increases, all eight capital cities experienced an improvement in affordability,” he says. Melbourne experienced a rise of 11.6% in affordability. 

Another key factor is population growth, especially in Melbourne. Australia’s second most populated city has added another million people in just 8 years, and now stands at a grand total of 5 million people. The city’s rapid expansion is creating a large underlying accommodation requirement for its people.

In a vote of confidence, HSBC recently doubled its property price growth forecast for next year. The bank now expects prices nationwide to rise by 5%–9% in 2020, up from previously expected gains of 0%–4%. Melbourne is expected to continue to lead the way, forecasted to grow 10%–14%, with second-placed Sydney to grow by 8%–12%.

Article by Ian Choong, Edits by Vivienne Pal

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