Melbourne mid-2022: the cycle is turning

By mid-2022, the inflection in Melbourne's property cycle was clearly visible in the leading data, but slower to register in vendor-side pricing expectations. The Reserve Bank of Australia had initiated a series of cash rate increases, moving swiftly from a historic low of 0.10% in early May to 1.35% by early July. This rapid movement, the first sustained tightening cycle in over a decade, sent immediate tremors through the mortgage market. Major bank economists were universally forecasting further increases, signalling an end to the era of ultra-cheap money that had fuelled much of the property boom. The impact on auction clearance rates was stark and immediate. From robust figures in the high 70s, even touching 80% in February, clearance rates had dropped precipitously to roughly 60% by early July, according to figures tracked by the Real Estate Institute of Victoria. This indicated a significant cooling of buyer demand, with fewer properties selling under the hammer. New loan commitments for investor borrowers, a key indicator of market sentiment and future supply, were also down by roughly 17% on the year, suggesting a retreat from the speculative end of the market as borrowing costs rose.

Vendor expectations, however, adapted slowly to this new reality. Many property campaigns launched in July 2022 were still underpinned by price guides formulated during conversations held with agents in March or April. At that earlier point, while some headwinds were discernible, the sheer pace and magnitude of the impending cash rate hikes were not yet fully appreciated by a broad swathe of the market. This lag created a widening gap between what vendors expected to achieve and what buyers, increasingly constrained by higher interest rates and tighter lending conditions, were prepared to pay. This disconnect would persist for another two to four quarters, leading to frustration for sellers and opportunities for astute buyers. The prevailing market psychology, honed by years of strong growth and fierce competition, was difficult to shift quickly.

For buyers navigating the Melbourne property market in the mid-2022 window, the strategic implication was profound and immediate. The period of frenzied competitive bidding, where properties routinely sold well above their advertised ranges, was rapidly giving way to a market dominated by negotiated outcomes. Properties were increasingly passing in at auction, particularly in desirable inner and middle-ring suburbs like Richmond, Brunswick, or even Camberwell, which had previously been red-hot. The post-auction negotiation, once a rarity, became the standard pathway to purchase. Critically, these discussions were reliably producing transactions at meaningful discounts to the published agent guide price. Buyers who were psychologically locked into the framework of 2021, a year when everything seemed to sell at auction, when competition pushed prices relentlessly upwards, and when finance contingencies were often seen as a sign of weakness, were poorly served by that mental model in mid-2022. Those who adapted quickly, understanding the shift in power dynamics, were able to secure properties at prices that would have been unimaginable just months prior. They showed up to auctions ready to bid but with a clear top price, and if the property passed in, they were prepared to engage in patient, strategic negotiation.

Another significant dynamic emerging in mid-2022 was the rental yield reset. For years, particularly in the later half of the 2010s, Melbourne's reputation as an investment city had been somewhat challenged by compressed rental yields. While capital growth had been strong, rental returns often struggled to keep pace. However, by mid-2022, a confluence of factors began to shift this equation. Rents across metropolitan Melbourne were rising at an annualised rate of between 7% and 9%, thanks to a combination of suppressed new supply during the pandemic, a return of international students and migrants, and a general tightening of the rental vacancy rate. Simultaneously, capital values for many property types were either flattening or beginning to experience modest declines. This twin effect meant that gross rental yields were expanding for the first time in several years. By mid-2022, anecdotal evidence and early data suggested that several middle-ring Melbourne suburbs, including parts of Preston, Maidstone, and Dandenong, were offering gross yields above 4% for apartments and even some houses. This was a notable milestone, as 4% had been a benchmark many investors aimed for but rarely achieved in the years leading up to the pandemic. This increase in yield began to restore meaningful investor interest in segments of the market that had been considered 'investor-thin' through much of the late 2010s, injecting a new source of demand, albeit one driven by cash flow rather than pure capital appreciation.

The immediate implications for various market participants were clear. For first-home buyers, the increased difficulty in securing finance due to higher serviceability buffers imposed by APRA, alongside rising interest rates, meant borrowing capacity was notably constrained. What one could borrow in 2021 was significantly more than in mid-2022, even if headline prices had not yet fully adjusted. Upgraders, especially those relying on the sale of their existing property, faced a two-edged sword: their current home might fetch less than anticipated, but theoretically, their next purchase could also be at a more favourable price. However, the psychological hurdle of selling for less than one 'could have' was a powerful deterrent for many. Developers and builders, too, felt the pinch. Rising construction costs, labour shortages, and now softening buyer demand meant many projects that were financially viable in 2021 were suddenly becoming marginal, leading to project delays and cancellations.

The State Revenue Office Victoria also saw shifts. While stamp duty thresholds remained, the lower transactional volume and potentially lower average sale prices would eventually impact state coffers. Anecdotally, agents frequently reported properties passing in with no bids, a stark contrast to the previous year where multiple bidders were the norm. Private sales, once overshadowed by the auction frenzy, began to gain prominence as a more discreet and often more effective way to transact when buyer confidence was fragile. Days-on-market figures, tracked by organisations like the REIV, began to trend upwards, moving from tightly compressed periods to more extended sales campaigns, another clear indicator of weakening demand.

The broader economic context underpinned these shifts. Inflation was becoming a significant concern for the RBA, driving their decisive cash rate responses. Global supply chain issues, geopolitical tensions, and strong domestic demand were all contributing to price pressures. The RBA's mandate to quell inflation meant that further rate rises were a near certainty, impacting mortgage holders and prospective buyers alike. For those on fixed-rate mortgages, often secured at historically low rates during 2020 and 2021, the looming 'fixed rate cliff' represented another element of uncertainty for the market in the medium term, as those borrowers would eventually roll onto significantly higher variable rates.

The lesson from the mid-2022 inflection point is invaluable for anyone engaged with the property market. Cycle turns are unequivocally visible in the leading data well before they are fully reflected in reported median transaction prices. This is because vendor pricing expectations, heavily influenced by recent historical performance and confirmation bias, lag the actual shift in market dynamics by a considerable margin, typically between two and four quarters. Buyers and sellers who solely rely on median price prints, which are by their nature lagging indicators, will always be behind the curve. Those who pay close attention to more current and forward-looking metrics, such as auction clearance rates, tracking them week-on-week, monitoring how many properties pass in or are withdrawn, observing changes in days-on-market data, and assessing new listings volumes and the depth of buyer enquiry, are far better positioned to identify cycle inflections earlier. These are the indicators that whisper about the future before the median price shouts about the past. Understanding these nuanced signals provides a crucial informational advantage, empowering buyers to act decisively when opportunities arise and sellers to adjust their expectations realistically to avoid protracted sales campaigns. It underscores that the Melbourne property market, while resilient, is not static and requires constant vigilance and an informed perspective to navigate successfully.