How Melbourne house prices compare with the steepest property downturn in a generation

Melbourne’s property market is likely to stabilise following a gradual downturn in house prices over the past year, as buyer sentiment improves amid hopes of further interest rate cuts.

It has taken 10 months for Melbourne dwelling values to fall 3.9 per cent from their peak, CoreLogic data shows, which is a more subtle decline compared with the downturn of 2022-2023, when the market slumped by 7.9 per cent in the same period.

CoreLogic economist Kaytlin Ezzy said Melbourne’s declining property market, fuelled by a high supply of housing stock relative to other capital cities, changes to land tax and high interest rates, had experienced a more gradual downturn compared with previous years.

But following the Reserve Bank’s decision to cut interest rates to 4.1 per cent on Tuesday, Ezzy said house prices would probably stabilise in the coming months.

“It’s not as deep as the decline we saw during the rate-tightening cycle,” Ezzy said.

“What we’re expecting, from at least the most recent rate cut, is more of a stabilisation in the market ... rather than any new growth phase. I would suggest maybe we’ll see a bit of a levelling off in values.”

Ezzy said that following 14 months of sustained decline, buyers and sellers should not expect a huge rise in prices as market conditions continued leaning towards buyers.

“Melbourne has gained quite a bit of an affordability advantage [and is] quite well positioned for a next phase of growth once we start seeing a few more rate cuts and more favourable buying conditions,” she said.

CBA head of Australian economics Gareth Aird said that while Melbourne’s property market had underperformed over the past year compared with other capital cities, he expected buyer activity would pick up in the coming months in light of lower interest rates.

“In terms of the rate cut on Tuesday, that’s going to increase borrower capacity ... not by a massive amount – it was only a 25 basis point cut – but it does increase borrowing capacity at the margin, and it’s also going to boost sentiment within the housing market itself,” he said.

“And there’s an expectation that there will be some more rate cuts through this year.”

Aird said while it might take longer to see the impact of rate cuts reflected in property prices, auction activity and buyer sentiment was likely to improve more quickly and prices could move upwards.

Will Unkles, director and mortgage broker at 40 Forty Finance, has had clients calling to reassess their borrowing power now that interest rates have come down. They had been keen to move even before the rate cut, he said.

“This year, there has been a bit more urgency among our clientele, where they’re not so much interested in what’s possible, but more interested in getting ready to act,” Unkles said.

He said a rate cut would help home owners struggling to cover mortgage repayments, but probably wouldn’t make a huge difference for most buyers.

“People think that the whole world changes off one cut. It doesn’t move the needle too far, but it does free up a tiny bit more borrowing power,” he said. “Generally, we tell clients it’s … about 3 per cent of whatever they could have done previously.

“Say you could have borrowed $500,000 – you might be able to borrow $515,000 now.”

Unkles said some buyers were still holding out for further rate cuts, but warned waiting too long could result in more expensive purchases.

Tony Gooding, 46, is selling his Mentone unit so he can upsize to a three-bedroom house, but is wary of the impact interest rates could have on stagnant property prices and doesn’t want to wait too long to make an offer.

Tony Gooding lives in a unit in Mentone and is hoping to upsize into a larger home with his partner. Credit: Paul Jeffers

“My fear with the market turning is that the places that I’m looking at now in this slump will be out of reach in six to 12 months,” he said.

Gooding, a tradesman, said while a lower interest rate wouldn’t have much impact on his borrowing capacity, it would provide some financial relief in his weekly budget.

“It gives me potentially more confidence to have an amount left in my pocket at the end of allocating money for my mortgage each week,” he said.

“It’s just a case of trying to get $50 or $100 more into my everyday living situation to make life a bit more comfortable while enjoying a larger home.”

His real estate agent, Kevin Chokshi, of Ray White Bayside, agreed a lower cash rate added an extra layer of confidence for buyers and gave them more wiggle room while property prices were below their peak.

“The market has two key elements: one is cash and one is confidence,” he said. “The cash is slightly cheaper than before, and the confidence is certainly higher than what it was six months ago.”