Is the Melbourne property market melting down?

According to the latest results from the REIV, the Melbourne median house price for the March quarter dropped 6% to $565,000 over the last quarter.

This is already causing quite a stir in the media with headlines like "The Bubble Bursts" and property investors are asking "is the Melbourne market in meltdown?"

REIV CEO Enzo Raimondo has an explanation for the latest figures saying: "it is evident that the current residential market in Melbourne and Victoria has entered into a different phase of lower transaction numbers and reduced price growth. This is due mainly to affordability constraints, affected by the seven rate rises since December 2009 and particularly following the November interest rate increase. It must also be noted that most years the median price does reduce in the March quarter due to the lower activity in January.”

"These results show that prices in most suburbs in Melbourne have plateaued and this will be welcome news for those buyers looking to buy this year.”

"Melbourne remains the second-least-affordable city in which to buy a home and buyers are being more cautious, as highlighted by the overall number of transactions falling by 18 per cent compared to this quarter last year. There are also about 37 per cent fewer first home buyers active in the market than this time last year” said Raimondo.

Well what do these figures really show us? Are house prices about to plummet?

I didn’t believe the REIV statistics for the last year when they suggested the median price in Melbourne increased by 20% and I don’t believe their stats now.

The REIV figures are different to those produced by other research organizations because they only look at metropolitan house prices but let’s see what others said happened to Melbourne median prices in 2010.

Residex: median price – $593,000 - growth last 12 months + 10.05%

RPData – median price- $483,000 - growth last 12 months + 3.6%

APM – median price $574,850 - growth last 12 months +14%

Why are they so different? Who’s right? Isn’t the median price easy to calculate.

There can only be one true median price as it is a strict mathematical definition - it is the middle or 50th percentile observation. The median of a sample of homes sales is therefore the middle sales transaction if you lined up all those sales from low to high.

So why are they all different? According to Christopher Joye of Rismark the differences come from

1) The data they collect;

2) The data they actually use; and

3) The accuracy and complexity of the index methodology they rely on

He explains this in a great blog post here

When you dig deeper into the REIV figures you’ll find the median price in some suburbs increased up to 20% in the quarter and that of other suburbs dropped – some by up to 20%.

Take Caulfield North for example – according to the REIV the median house price in this suburb (that I know well) plummeted 40% in the last year from a peak of $1,802, 500 in the March quarter last year to $932,500 now.

Does this mean the value of every house in this suburb dropped by 40%?

Clearly not. Many houses in this suburb (and other suburbs of Melbourne) are selling for a similar price or even more than they did last year.

What the median price shows is the composition of the sales data during the last year and that fewer high priced homes sold over that period which means that the middle sales figure (the median price) was lower than 12 months ago.

Median prices for a city, or in fact a suburb, are a poor indication of what an individual property has increased or decreased in value.

Clearly our markets have entered the next stage of the property cycle, a time when the values of some property fall, others rise and some stay stagnant.

Median prices for a city, or in fact a suburb, are a poor indication of what an individual property has increased or decreased in value. Yet they are frequently quoted in the media and used for explaining what’s happening in the market.

The problem is we don’t have a market! We have lots of property markets even in the one city. Our capital city property markets are segmented by price point and by geography. Even in the one suburb some areas can perform much better than others.

But is the market in meltdown – definitely not!

There's no sugar coating it...we are at that stage of the property cycle when there are more properties for sale than there are buyers. This means we are in a buyers' market. But there are no desperate sellers giving away their properties at 20, 30 or 40 percent less than last year.

Of course it's only a buyer's market if you take advantage of the opportunities and buy. If you're trading up to a new house this could be a great time. If you're an investor it's a good time to take a long term perspective and buy selectively.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. Subscribe to his e-magazine at www.propertyupdate.com.au. For more information about Michael visit www.metropole.com.au.