Melbourne property 2022: the year the cycle turned

Melbourne entered 2022 with median dwelling values approximately 17% above their pre-pandemic level, an RBA cash rate of 0.10%, and a buyer mood that had not yet absorbed the implications of the looming rate cycle. Looking back, the market sentiment was still riding the wave of the extraordinary boom years of 2020 and 2021, where historically low interest rates and a post-lockdown surge in demand fuelled seemingly endless price rises across the city and regional areas. Buyers were still enthusiastically competing for properties, often waiving due diligence conditions and pushing auction results well beyond reserve prices. The prevailing wisdom suggested that real estate was always a safe bet, and the fear of missing out, or FOMO, was a powerful motivator. The year that followed was the most consequential single year of policy and price recalibration since 2008, dramatically shifting the landscape for buyers, sellers, and investors alike in Victoria.

The headline price story for Melbourne was one of deceleration and then significant contraction. Median dwelling values, encompassing both houses and units, closed 2022 down approximately 7.1% on the year. This broad-brush figure masks the underlying dynamics, as the bulk of this contraction was heavily concentrated in the second half of the year. From its peak in March 2022, just as the RBA began its tightening cycle, to its trough in December 2022, the peak-to-trough movement for Melbourne dwelling values was approximately 9.5%. This price correction was felt across various segments of the market, though larger, more expensive properties, particularly in inner and middle-ring suburbs like Toorak, Hawthorn, and Brighton, which often see higher debt levels, tended to experience more pronounced declines. Similarly, properties that had seen the most aggressive price growth during the pandemic, often detached houses in suburban growth corridors, also faced larger adjustments as borrowing capacity tightened.

The rate story is, without doubt, the central narrative of 2022. The RBA, having maintained its record-low cash rate for an extended period, embarked on an unprecedented series of interest rate hikes. Over the course of the year, from March to December, there were eight separate cash rate increases. This took the RBA cash rate from a historically low 0.10% to 3.10%, representing the steepest tightening pace in Australian monetary history. This aggressive monetary policy stance, designed to curb rampant inflation, had immediate and far-reaching consequences for the property market. Mortgage benchmark assessment rates, used by lenders to determine a borrower's capacity to repay, rose commensurately. These assessment rates climbed from approximately 5.25% at the beginning of the year to around 8.5% by December. This mechanical shift dramatically reduced borrowing capacity for a typical buyer by approximately 28%. For someone previously approved for a loan of say, $800,000, their capacity might have shrunk to closer to $576,000, a significant adjustment that fundamentally altered what they could afford or even qualify for. This sudden tightening of credit was the primary driver of the cooling market, squeezing out a segment of potential buyers and forcing others to recalibrate their expectations downwards.

The distortion-unwind story reflects the normalisation of patterns that were significantly disrupted during the pandemic years. Foremost among these was the flow of population. The COVID-19 lockdowns in Melbourne, which were some of the longest globally, prompted a significant exodus to regional Victoria. Areas like Geelong, Ballarat, and Bendigo saw substantial increases in demand and prices as city dwellers sought more space, a different lifestyle, and the perception of lower infection risk. However, through 2022, this regional migration surge moderated. As Melbourne reopened and life returned closer to normal, the appeal of regional living began to wane for some, and population flows from Melbourne to regional Victoria reverted closer to long-run averages. Concurrently, the inner-city apartment market, which had borne the brunt of population shifts and border closures, experienced a remarkable turnaround. During the lockdown periods of 2020 and 2021, inner-city rents in traditional student and international visitor hubs like the CBD, Southbank, and Carlton had collapsed, leading to high vacancy rates and significant rental concessions. However, as international borders reopened and migration resumed, particularly student arrivals, demand for these apartments surged. By mid-year 2022, inner-city apartment rents had not only recovered but in many cases surpassed their pre-pandemic levels, indicating a strong rebound in this specific segment of the market. This recovery underscored the structural demand for well-located, smaller dwellings once normal population movements resumed.

The behavioural shift was perhaps the most important, and often undervalued, development of 2022. The 2020-2021 period had conditioned both buyers and vendors to expect a certain market dynamic. Rapid price growth week-on-week, extremely short days-on-market for properties, and auction clearance rates consistently in the 80% to 90% range, sometimes even higher as reported by the REIV, had come to be seen as the new normal. Buyers had to act fast and aggressively, often making unconditional offers before auction to secure a property. Vendors, buoyed by this frenzied activity, often had lofty expectations for their sale prices. However, by the fourth quarter of 2022, the entire market had recalibrated to slower, more deliberate transaction rhythms. The urgency had evaporated, replaced by a cautious approach from buyers, who now had more time to conduct due diligence, attend multiple inspections, and negotiate. Auction clearance rates stabilised at more conventional ranges, often in the 50% to 60% band across metropolitan Melbourne, indicating that roughly half of properties passing under the hammer were either selling on the day or in the immediate post-auction negotiations. Crucially, the vendor side generally adapted more slowly than the buyer side. Many properties listed for sale in the latter half of 2022 were quoted by agents based on assumptions and comparable sales from the first half of the year, when the market was significantly hotter. As a result, these campaigns often underperformed, failing to meet vendor expectations, leading to more passed-in auctions, longer selling periods, and eventual price reductions. This mismatch in expectations between buyers, who were quickly absorbing the new rate environment, and vendors, who were often still anchored to past highs, was a defining characteristic of the year's end.

Going into 2023, the cycle had clearly turned, and the property market was firmly in a correction phase. The bottom, however, was not yet visible to most market participants. All eyes were on the RBA and the ongoing battle against inflation. The path through 2023 would inevitably be a function of how high the cash rate ultimately went, and perhaps more importantly for market sentiment, how quickly monetary policy makers might pivot towards rate cuts once inflation was deemed to be under control. Buyers and sellers were entering a new era of higher interest rates, tighter credit conditions, and a more discerning market, a stark departure from the exuberance of the preceding years. The market was poised for further adjustments, and the key determinants would be macroeconomic policy and consumer confidence in the face of ongoing economic uncertainty.