Wait, why are house prices falling in Melbourne?

Woman holding up question dialogue because she wants to know why house prices in Melbourne are falling

Property values tend to ebb and flow with market conditions. Home loan interest rates, average incomes, and buyer confidence can all change prices. 

But while capital cities like Sydney and Brisbane have experienced remarkable price growth in the last year, Melbourne hasn’t. In fact, according to property watchdog CoreLogic, home values in Melbourne fell -0.9% in the three months to January 2024. 

What’s going on?

Rental demand overpowers home buyers in Melbourne

Just because Melbourne house prices have been weaker than other capitals, doesn’t mean there isn’t a demand for housing, says CoreLogic head of research Eliza Owen. It just depends on what type of housing you’re looking for.

Housing supply debates tend to focus on a national undersupply. Indeed, Housing Australia reports a shortfall of over 100,000 dwellings over the next four years.

However, high listings and cool buyer demand in Melbourne suggest that the southern capital city faces oversupply. So do home buyers have more power than we thought?

Yes and no. Home buyers, or owner-occupiers, have more choices in Melbourne right now – therefore, they have an easier time negotiating prices. However, renters face a steep uphill battle. 

Rental prices in Melbourne surged over +10% in 2023, and vacancy rates fell to less than 1%. Melbourne is also catching a significant chunk of incoming migrants flooding to Australia. Now, the average rent for a Melbourne house is $550, says PropTrack.

So it seems that while not everyone is in a position to buy a house, more than enough Melbournites are searching for a place to live. 

The rental market is key to becoming a home buyer

These insights into Melbourne’s strange property market support the long-held theory that a strong rental market is great for home buyers. Anyone who doesn’t want to (or can’t) buy property will naturally fall back to renting. 

In the case of Melbourne, this data just means that while purchasing demand is low, housing demand is high. Home loans may be off the table for many Australians, but they still need an affordable living situation. And with rents showing no signs of slowing, that makes housing increasingly harder to afford – whether you’re just a renter or trying to save for that crucial home loan deposit

There is a strange silver lining. Owen suggests that strong overall housing demand will be good news for the property market when interest rates come down

Australians clearly want places to live; home buyer demand is just slow because affordability has been squeezed by high mortgage rates. When interest rates drop, it could let lower-income buyers into the Melbourne property market and steady the falling prices. 

Compare low rate home loans in the table below.

Compare low rate home loans - last updated 24 February 2024

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    Owner Occupier, Principal & Interest

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    Initial monthly repayment
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    Owner Occupier, Principal & Interest, LVR <60%

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    Home Fixed Rate

    Owner Occupier, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
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    fixed 3 years
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    Enjoy the security of a competitive fixed interest rate from Up. No application, monthly, annual, redraw, or discharge fees to pay. Up to 50 free offset accounts available. Up home loans are only available to owner-occupiers buying or refinancing in major Australian cities. Up is 100% owned by Bendigo Bank. New joiners get $10 by signing up to the app using code UPHOMEMOZO. (T&Cs apply). Mozo Experts Choice award winner.

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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