Melbourne residential outlook for 2024: five working assumptions

Forecasting Melbourne's median dwelling value 12 months ahead has a track record so poor that the better question is not "what will the median be in December 2024" but "what working assumptions should a buyer or seller operate on while the year unfolds." It is a practice I have seen lead more people astray than guide them well. The aggregate number, while useful for understanding broad historical trajectories, completely obscures the varied dynamics at play across our sprawling city. From the leafy eastern suburbs to the evolving western corridors, the market narrative is far from monolithic. Focusing on a single, all-encompassing prediction for price movements, particularly given current economic volatility, is akin to planning a road trip across Victoria with only a single, overall weather forecast for the state. You will get soaked in Ballarat while sweltering in Mildura. Five propositions, however, look defensible from the January 2024 vantage point, offering a more granular and actionable framework for navigating the year ahead. These are the conversations we are having with our clients, tailored to their individual circumstances but grounded in these broader currents.

One: the interest rate cycle is at or near its peak. This is perhaps the most critical assumption for prospective buyers to internalise right now. Major Australian bank economists, including those from the big four, are increasingly converging on the view that the Reserve Bank of Australia’s tightening phase is complete. After a relentless series of hikes that began in May 2022, pushing the cash rate from a historic low of 0.10% to its current 4.35%, the consensus is that we have reached, or are very close to, the apex. The narrative for 2024 has shifted from "how many more hikes" to "when will the first cut come." While the RBA remains data-dependent and cautious in its forward guidance, the weight of economic indicators, particularly inflation figures that are showing signs of moderating, supports this outlook. We anticipate that 2024 will indeed see the first rate cuts, most likely commencing from the mid-year point. Buyers, however, should not expect a single, dramatic move that instantly transforms affordability. History and current RBA communication suggest a more gradual approach. We are looking at 25 basis point steps, spaced out over several months, rather than an aggressive slashing of rates. This measured approach is designed to avoid reigniting inflationary pressures and to allow the economy to slowly absorb the changes. For anyone considering a purchase in 2024, operating with the understanding that the worst of the rate cycle is behind us, but significant immediate relief is not on the cards, is prudent.

Two: borrowing capacity expansion, while welcome, will likely be modest. Directly related to the rate outlook, this is another point where careful calibration of expectations is essential. The serviceability assessment rate, that buffer banks apply to your actual loan interest rate to ensure you can still manage repayments if rates rise further, is a crucial determinant of how much you can borrow. Currently, this buffer is generally set at 3% above the loan rate. For example, if your loan rate is 6.5%, the bank assesses your capacity at 9.5%. Despite ongoing industry lobbying and some commentary suggesting a relaxation of this buffer, particularly as the rate cycle nears its peak, it is highly unlikely to be eased in 2024. APRA, the prudential regulator, has consistently maintained that this buffer is a vital safeguard against financial instability. Even if we see, say, three 25 basis point cuts to the cash rate over 2024, reducing a typical variable mortgage rate by 0.75%, the expansion in a typical buyer's borrowing capacity will be approximately in the 8% to 12% range. To put this into perspective, for someone borrowing $600,000, an 8% increase means an extra $48,000 in borrowing power, taking them to $648,000. While this is certainly beneficial, it is not the dramatic 25% or more expansion that some more optimistic commentary might imply. Buyers should calibrate their property search according to these realistic parameters. Do not expect to suddenly qualify for a property far outside your current pre-approval range due to rate cuts alone. It helps, but it is not a panacea.

Three: net migration to Victoria will moderate from the 2023 record but will still remain significantly positive. This is a crucial structural underpinning for Melbourne’s dwelling demand. Victoria as a state, and Melbourne as its capital, has long been a magnet for both permanent and temporary migrants, attracted by employment opportunities, education, and lifestyle. The post-COVID bounce-back in 2023 saw record net overseas migration figures, contributing significantly to population growth across Australia, with Victoria receiving a substantial share. While the federal government has indicated intentions to moderate these high levels, partly through changes to international student visa rules and a slight rebalancing of skilled migration, the fundamental attractiveness of Melbourne remains. We expect the numbers to cool from their 2023 peaks, which were exceptional, but do not foresee aกลับ to pre-pandemic low levels. The structural demand for housing in Melbourne is therefore firmly supported. This ongoing influx of people, whether they are renters or ultimately looking to buy, ensures a constant baseline demand across all property types. This demographic pressure is one of the key factors that makes significant, sustained price falls across the board in Melbourne very unlikely, even in the face of affordability challenges. It is a long-term constant that anchors the market.

Four: builder insolvency risk is past its peak, but it is by no means over. The past two years have seen a tumultuous period for the construction industry, marked by soaring material costs, labour shortages, and fixed-price contracts signed during a period of rapidly escalating input prices. This perfect storm led to a rash of insolvencies amongst prominent builders, leaving many property owners in limbo with unfinished homes and significant financial stress. We believe the absolute peak of this crisis has likely passed, thanks to some moderation in material cost inflation and builders having adjusted their pricing models to better reflect current realities. However, the risk has certainly not evaporated. The pipeline of work from the boom period is still being worked through, and some smaller or less capitalised builders remain vulnerable to unexpected cost blowouts, adverse weather events, or liquidity challenges. Thus, for anyone considering new off-the-plan apartment purchases or entering into new project-home contracts in 2024, the caveat remains the same: size your commitment to your capacity to absorb a worst-case scenario. We are talking about potential delays of six to nine months, and the associated costs of temporary accommodation or continuing to pay rent while mortgage repayments begin. It is not about avoiding new builds entirely, but about conducting even more thorough due diligence on your chosen builder, their financial health, and their track record. Ensure you have contingency funds set aside for unforeseen circumstances, and review contract clauses diligently, particularly concerning delay penalties and cost escalation. Protection is paramount here.

Five: the divergence across Melbourne's sub-markets will continue rather than narrow. This is perhaps the most critical insight for any prospective buyer in 2024. The notion of a singular "Melbourne property market" is increasingly anachronistic. Our city is a patchwork of micro-markets, each with its own unique supply-demand dynamics, demographic profiles, and price points. What influences prices in Brighton might have little bearing on developments in Reservoir, and the drivers for an apartment in Southbank will differ significantly from a detached house in Warrandyte. Forecasting a generic "Melbourne median" can be deeply misleading because it averages out these disparate movements. For example, while the overall median might show modest growth, prime, blue-chip locations in the inner east like Camberwell or Canterbury, where supply remains constrained and demand from affluent buyers is consistently high, might experience stronger price appreciation, perhaps in the 4% to 7% range. Conversely, some outer fringe areas that saw significant growth during the pandemic, or areas saturated with new apartment supply, might see more subdued performance or even minor corrections. The demand for family homes with backyard space in established middle suburbs like Bentleigh or Glen Waverley, particularly those close to good schools, will likely remain robust, supported by owner-occupier buyers. Investors, conversely, might find better yields in more affordable, higher-density areas with good transport links, like parts of Brunswick or Preston. Therefore, a 2024 buyer brief should be meticulously specific to the segment being targeted. Generic "Melbourne forecasts" that conflate very different micro-markets will offer little practical guidance. This is precisely where the value of expert, localised advice becomes invaluable. Understanding the nuances of vacancy rates, buyer sentiment, infrastructure projects, and pending supply pipelines in your specific target postcode is far more constructive than dwelling on city-wide averages. This year, more than ever, success in the Melbourne property market will hinge on hyper-localised knowledge and a strategic, segment-specific approach.