Buy at the bottom of the market, and sell at the top.
This basic, commonsense advice you typically hear in the stock market absolutely applies to residential real estate. But, how do you know when the real estate market has bottomed out? And, how can you feel confident about the market’s future trajectory?
As far as price trends go, some areas lead the way, some follow, and others basically mirror what the broader market is doing. The Inner East is arguably Melbourne’s most affluent area, as indicated by Median $ House Prices close to $2m. Market changes here tend to be quick and dramatic, and – and this is important – the direction of the overall Melbourne market usually follows suit.
Look at this graph of long-term Median $ Price Changes for Boroondara compared to Melbourne’s collective Inner & Middle Regions. In most periods where the market started to pick up (around ’83, ’87, ’90, ’96, ’05, ’12), Boroondara led the broader market.
In other words, after prices began to rise in Boroondara, they then began rising in other areas across Melbourne.
It’s just a blip here, but look at the far right of the graph. Prices in Boroondara have been smashed recently – down about 17% since their peak – but see what’s happened in recent months? A slight uptick. Encouraging, but not conclusive.
That’s why we analyse many different metrics across many different datasets.
While the previous graph showed % price changes in Boroondara across rolling 12-month periods (e.g. last 12-months versus the previous 12-months) this following graph shows actual quarterly Median $ House Prices in Melbourne’s Inner East. After peaking at $2.01m in early 2017, prices flattened and then dropped dramatically over an 18-month period to $1.65m last quarter.
The Median $ House Price in Melbourne’s Inner East has rebounded over the last 2 months.
July and August are always low sale volume months, so the actual $ and % change in price shown in this graph needs to be viewed with caution. But, the other metric in the graph – % Auction Clearance Rates – certainly supports the underlying takeout that the Inner East and broader Melbourne markets are set to rebound.
We’ve explained the relationship between Price and Auctions in detail in a previous article. Historically, Median $ House Prices tend to move in-line with % Auction Clearance Rates, and this graph illustrates the relationship pretty clearly.
There are a lot of reasons why auctions have become more successful in recent months: interest rate drops, election results, lack of stock, bank lending policies, etc. The point to make in this article is that prices look to be rebounding, and the dramatic reversal in the % of properties sold under the hammer suggests that the upward trend in prices will be sustained and widespread.
