Melbourne has long been known for its high property prices, a topic that has sparked much discussion for years. The city’s booming economy, growing population, and high demand for housing have all contributed to the increase in property prices, prompting the question: “Why are Melbourne house prices so high?” This situation reflects a complex interplay of economic and demographic factors driving the local real estate market.
According to a recent report by KPMG, Melbourne’s median house price could surpass $1 million by June 2025, reaching an estimated $1,024,495. This represents a significant increase from the current median house price of around $900,000.
Melbourne’s robust economy, with its flourishing finance, tech, and healthcare sectors, has attracted many job seekers, leading to population growth and increased demand for housing. The city’s geography, bordered by water, limits available land, causing a land scarcity that drives property prices up.
Despite building more high-density apartments, demand for housing still exceeds supply, keeping property prices high.
Economic Recovery and Pandemic Aftermath
The COVID-19 pandemic has had a significant impact on the housing market in Australia, and Melbourne is no exception. As the country’s second-largest city, Melbourne has seen a surge in demand for housing, which has driven up prices.
Despite the pandemic, the Australian economy has shown signs of recovery, which has boosted consumer confidence. The low-interest rates set by the Reserve Bank of Australia (RBA) have also contributed to the demand for housing. These factors have led to an increase in the number of buyers in the market, which has driven up prices.
“According to CoreLogic data, Melbourne’s median house price grew from $407,000 in 2012 to $916,000 in December 2021, a 125% increase over the decade. “
The demand for housing in Melbourne has also resulted in a shortage of supply, which has further driven up prices. This raises the question: Is it a good time to sell property in Melbourne?
The work-from-home shift has spiked interest in larger homes with yards, boosting property demand in Melbourne’s outer areas like Mornington Peninsula.
With pandemic border closures, the usual housing demand from overseas migrants dropped but was compensated by local first-time buyers, aided by government schemes like the First Home Loan Deposit Scheme and HomeBuilder.
Fewer properties on the market have intensified buyer competition, evident in the rising auction clearance rates.
“Melbourne’s auction clearance rate was 71-72% in November 2021, differing from the stated 82.1%”
In summary, the economic recovery and pandemic aftermath have contributed to the surge in demand for housing in Melbourne. Low interest rates, the shortage of supply, and the changing preferences of buyers have driven up prices. The increase in competition among buyers has also led to an increase in auction clearance rates.
Supply and Demand Imbalance
Melbourne’s housing prices are soaring due to more people wanting homes than there are homes available. The city’s population growth, low borrowing costs, and a thriving economy are causing a spike in housing demand. Additionally, investment incentives like negative gearing are heating up the competition for properties.
On the other hand, new home construction hasn’t kept pace with demand, especially where it’s needed most. High land costs, strict planning rules, and labor shortages slow down new builds. Smaller households are also increasing the need for more homes. Plus, there’s not enough investment in public housing, which tightens the property market even more.
This imbalance between supply and demand has pushed up house prices, making it harder for first-time buyers to afford a home in Melbourne.
According to recent reports, Melbourne house prices are expected to continue rising in the coming years, with predictions suggesting a 4.9% increase by June 2024 and a 12% increase by 2025. This leads to concerns about housing affordability and the long-term impact on the economy. It also prompts questions like Will house prices drop in 2024 in Melbourne?
Interest Rates and Lending Policies
Interest rates and lending policies play a significant role in the housing market, including Melbourne. The Reserve Bank of Australia (RBA) sets the official cash rate, which affects the interest rates for mortgages. Low-interest rates can make borrowing more accessible, and high-interest rates can make borrowing more challenging.
During the COVID-19 pandemic, the RBA lowered the cash rate to a record low of 0.1% to stimulate the economy. This low-interest rate environment has made borrowing more accessible and contributed to the increased demand for housing in Melbourne.
“Lending policies also affect the housing market. In 2021, the Australian Prudential Regulation Authority (APRA) removed the minimum 7% interest rate floor for mortgage serviceability assessments”
This change made it easier for borrowers to access credit and contributed to the increased demand for housing.
However, in response to rising house prices, APRA has recently reintroduced the minimum 7% interest rate floor. This change may make it more challenging for some borrowers to access credit, potentially slowing down the housing market’s growth.
Additionally, lockdowns and working from home policies have shifted the demand for housing away from the city center and towards regional Victoria. This shift in demand has increased housing prices in regional areas and decreased housing prices in the city center.
Investment and Foreign Interest
Melbourne’s property market is feeling the impact of foreign investors from China, the USA, and Southeast Asia, leading to competitive bidding and higher prices.
The city’s global appeal, strong economy, and lifestyle have attracted these overseas buyers, pushing up demand and property prices, which affects local buyers, especially those entering the market for the first time.
The Reserve Bank of Australia has raised concerns that foreign investment is contributing to higher household debt, which could be risky for the economy.
Although foreign investment has boosted Melbourne’s economy and job market, the government has implemented new taxes and buying restrictions to manage its influence on housing affordability, with mixed results.
For those interested in exploring the current housing options in Melbourne, a broad range of houses for sale in Melbourne can be found, reflecting the diverse market and investment opportunities.
Suggested reading: Gain a broader perspective on local real estate by reading What is happening to property prices in Melbourne? – your next step to becoming a Melbourne property market savant.
FAQ: Why Melbourne House Prices are So High?
Will Melbourne house prices ever go down?
Forecasts for Melbourne’s property values in 2023 vary among major banks. ANZ Bank predicts a potential decrease of 9%, CBA suggests a modest decline of 2%, and NAB foresees a more significant drop of 14.1% in property values.
Why are houses so unaffordable in Australia?
Australian house prices are significantly affected by the country’s high population growth and the scarcity of well-located residential land. This results in high demand for housing, especially in urban areas, which drives up prices, leaving many potential homebuyers unable to afford city living.
What is the most expensive suburb to buy houses and units in Australia?
The most expensive suburb for purchasing houses is Vaucluse in Greater Sydney, with a median house price of $7,943,965. For units, the highest median price is in Point Piper, NSW, at $2,895,563.
Is Australian property overpriced?
Australia’s property market is often ranked as one of the most expensive globally. Sydney and Melbourne are consistently listed among the least affordable housing markets, comparable to select cities in the US, Asia, and Canada. The household debt-to-income ratio is one indicator of this lack of affordability.
What is the average cost of living in Adelaide?
Adelaide offers a more cost-effective living compared to other major Australian cities. It is approximately 16% cheaper than Sydney and 13% less expensive than Melbourne. Students’ living costs typically range from $350 to $700 weekly, depending on lifestyle choices.
