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From boom to bust: The crash and recovery of Melbourne’s housing market

7 mins read
melbourne house price history

Melbourne’s housing market has been through a lot in recent years, experiencing a boom followed by a bust and subsequent recovery. Home prices skyrocketed for several years, driven by low-interest rates, population growth, and foreign investment. This led many people to fear a housing bubble, and in 2017 and 2018, those fears were realized when home values sharply declined.

Despite this downturn, Melbourne’s housing market has since rebounded, with prices once again on the rise. However, many people remain skeptical about the long-term health of the market and the risks of another crash. In this article, we’ll explore the factors that led to Melbourne’s housing boom and subsequent bust, as well as the current state of the market and what the future may hold.

Factors Contributing to Melbourne’s Housing Boom

Several factors converged over the past decade to create a perfect storm of demand for housing in Melbourne. One of the key drivers was population growth, particularly from international migration. According to the Australian Bureau of Statistics, Melbourne has been the fastest-growing capital city in the country for over a decade. This influx of people created a strong demand for housing, particularly in desirable areas close to the city center.

Low-Interest Rates

Another major factor contributing to Melbourne’s housing boom was low-interest rates. The Reserve Bank of Australia, like many central banks around the world, lowered interest rates during and after the global financial crisis of 2008. This made borrowing money cheaper, which in turn made it easier for people to buy homes. Low-interest rates also encouraged investors to enter the market, looking for better returns than they could get from bank deposits or other traditional investments.

Foreign Investment

Finally, another factor that played a role in Melbourne’s housing boom was foreign investment. Australia’s economy has experienced steady growth in recent years, making it an attractive destination for international investors. This was particularly true of China, where a growing middle class sought to diversify their investments by purchasing property overseas. Many of these investors chose Melbourne due to its strong local economy and high livability ranking.

Factors Contributing to Melbourne’s Housing Bust

As with any boom, however, Melbourne’s housing market was not sustainable forever. In 2017 and 2018, home prices began to decline sharply, and many homeowners found themselves underwater on their mortgages. Several factors contributed to this downturn.

Regulatory Changes

One factor was regulatory changes by the Australian Prudential Regulation Authority (APRA), which tightened lending standards for both investors and owner-occupiers. APRA also mandated that banks limit loans to interest-only borrowers, which had been popular among property investors seeking to maximize their returns. These changes made it harder for some people to secure financing for a home purchase, causing demand to slow.

Oversupply

Another factor in Melbourne’s housing bust was oversupply. Developers had been eager to cash in on the city’s housing boom, building new apartment buildings at a breakneck pace. However, this led to a glut of available properties, which in turn put downward pressure on prices. With so many apartments available, developers were forced to offer incentives such as rent-free periods and other perks to keep their buildings occupied.

The Current State of Melbourne’s Housing Market

Since the lows of 2018, Melbourne’s housing market has once again begun to pick up steam. In fact, home values have now surpassed their pre-bust highs, indicating a full recovery. While this is good news for homeowners who saw their equity decline during the downturn, it has also reignited concerns about another housing bubble.

Low-Interest Rates

One factor that continues to drive Melbourne’s housing market is low-interest rates. The Reserve Bank of Australia has signaled that it is unlikely to raise rates anytime soon, which should continue to make borrowing money cheaper. This will likely keep home prices elevated, particularly in the short term.

Population Growth

The continued inflow of migrants to Melbourne is also helping to fuel housing demand. While the COVID-19 pandemic has slowed international migration, the long-term outlook suggests that Melbourne’s population will continue to grow. This, in turn, will support a healthy housing market as demand remains elevated.

What the Future Holds

So, what does the future hold for Melbourne’s housing market? It’s difficult to say for certain, but it seems likely that the city will continue to experience a strong demand for housing. Population growth, low-interest rates, and foreign investment will all play a role in keeping demand high. However, oversupply and changes in the regulatory environment could also put downward pressure on home values.

Tips for Buyers

With this in mind, anyone considering buying a home in Melbourne should be aware of the risks involved. It’s important to do your research and work with an experienced real estate agent who can help you navigate the market. For more tips on buying a house in Melbourne, check out this Guide to Buying a House in Melbourne.

FAQs

What caused Melbourne’s housing market to boom?

  • Population growth, particularly from international migration
  • Low-interest rates
  • Foreign investment

What caused Melbourne’s housing market to bust?

  • Regulatory changes by the Australian Prudential Regulation Authority (APRA)
  • Oversupply of apartments and other properties

Has Melbourne’s housing market recovered?

Yes, Melbourne’s housing market has fully recovered from its 2018 lows and home values have surpassed their pre-bust levels.

What factors are driving Melbourne’s housing market today?

  • Low-interest rates
  • Population growth
  • Foreign investment

What should buyers be aware of when purchasing a home in Melbourne?

Buyers should be aware of the risks involved with a volatile housing market and work with an experienced real estate agent who can help them navigate the market. For more tips on buying a house in Melbourne, check out this Guide to Buying a House in Melbourne.

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