Victoria currently has a two-speed housing market, and this is why

Victoria has seen the emergence of a two-speed housing market. The pandemic has encouraged homebuyers and renters alike to seek more space while eschewing share-houses and the high-density and high-rise tower blocks of Melbourne’s Central Business District.

While houses in some desirable Melbourne suburbs and especially regional locations recorded exceptional price growth over the past year, at the same time, some sectors of the unit market are struggling and have experienced falling prices and rents.

Oversupply has been an issue for some time in Melbourne’s inner-city unit market, which has been reflected in the weakness in price performance.

Strength in detached houses

House price growth has been spectacularly strong in regional housing markets over the past year, such as on the Mornington Peninsula and in Geelong. Some of Melbourne’s regions have also recorded strong price growth for detached houses, But have not performed as strongly as top-performing suburbs.

SA4 Region Property Type 12m price change 
Mornington Peninsula House 27% 
Geelong House 18% 
Melbourne – Outer East House 13% 
Melbourne – South-East House 12% 
Melbourne – North-East House 11% 
Figure 1 – Strong annual price growth. Source: RiskWise, CoreLogic

Victoria’s top-performing suburbs are dominated by detached house price growth across the Mornington region.

SA4 Region Suburb Postcode Property type 12m price change 
Mornington Somers 3927 House 46% 
Mornington Blairgowrie 3942 House 44% 
Mornington Crib Point 3919 House 43% 
Mornington Sorrento 3943 House 42% 
Mornington Rye 3941 House 40% 
Mornington Portsea 3944 House 40% 
Geelong Jan Juc 3228 House 38% 
Mornington Tootgarook 3941 House 38% 
Mornington Mount Eliza 3930 House 35% 
Mornington Baxter 3911 House 34% 
Figure 2 – Suburbs with solid price growth. Source: RiskWise, CoreLogic

Weakness in inner-city units

On the other side of the coin, the inner-city unit market in Melbourne is a different story entirely, with new unit supply continuing to hit an already flooded market. Consequently, the rental market in Melbourne has been weaker than in other parts of the country, and not only in the Central Business District and its immediate surroundings.

As measured by the uplift to the existing apartment stock, some of the most impacted locations include Footscray, Box Hill, South Melbourne, and Coburg.

SA4 Area SA2 Area New properties in the pipeline next 24m Uplift to existing stock 
Melbourne – Inner East Box Hill 1,833 26% 
Melbourne – Inner Melbourne 1,759 5% 
Melbourne – West Footscray 1,531 28% 
Melbourne – Inner North Melbourne 1,374 14% 
Melbourne – Inner South Melbourne 1,056 21% 
Melbourne – Inner Coburg 970 27% 
Melbourne – North-East Preston East 940 22% 
Melbourne – Inner Docklands 933 8% 
Melbourne – Inner Brunswick 882 12% 
Melbourne – Inner Richmond 770 7% 
Figure 3 – Unit supply in Melbourne. Source: RiskWise, CoreLogic

Unit asking rents dropped very sharply for units in the Melbourne CBD and on the city fringe, in some cases falling approximately 50 per cent before finally stabilising. Notably, rental prices have also declined significantly across a range of suburbs in the inner east of Melbourne.

SA4 region Suburb Postcode Median suburb rent 12m Change 
Melbourne – Inner Fitzroy 3065 $495/week -11% 
Melbourne – Inner-East Balwyn North 3104 $500/week -10% 
Melbourne – Inner Fitzroy North 3068 $450/week -9% 
Melbourne – Inner Cremorne 3121 $510/week -7% 
Melbourne – Inner-East Burwood East 3151 $430/week -6% 
Figure 4 – Declining rents in Melbourne. Source: RiskWise, CoreLogic

There are signs that the worst has passed for the city’s rental market. Still, even now, elevated vacancy rates persist in parts of inner Melbourne, suggesting that weakness in the rental market will continue into 2022.

SA4 Region Vacancy rate 
Melbourne Inner 6.6% 
Melbourne Inner-East 6% 
Melbourne Inner-South 5% 
Figure 4 – Elevated vacancy rates in Melbourne persist. Source: RiskWise, CoreLogic

The outlook for 2022

The dichotomy seems likely to continue for the remainder of 2021, as the Victorian economy suffers ongoing travel and lockdown restrictions while the vaccine rollout continues.

The international border is expected to reopen in the first half of 2022. The return of international students, tourists, and permanent migrants to Australia is likely to tighten rental vacancy rates in the inner city.

Counter-cyclical investors may be tempted to look at buying units in Melbourne. Still, they would be well advised to seek out the more boutique unit blocks with a higher land value-to-asset ratio, reasonable strata fees, and, where possible, a point of scarcity (such as a third bedroom, or protected views, for example).

Prospective buyers would also be well-advised to heed the unit oversupply warnings for certain parts of the city of Melbourne.

Overall, while the detached housing market across Victoria has been a strong performer this year, investors in units in Melbourne should also be prepared for the weakness in the rental market to persist into 2022.

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