Warrnambool's house prices experienced one of the biggest falls in regional areas over the past quarter but researchers say it's not surprising.
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Prices slipped back 2.3 per cent across the south-west region but that wasn't as much as Bendigo which had the largest drop of 3.7 per cent.
Port Fairy alone recorded a 3.4 per cent fall - down on average $87,750 in the three months to the end of July - eight per cent below its record high in June 2022.
But values in Port Fairy remain 30.5 per cent above March 2020 levels.
CoreLogic research director Tim Lawless said Warrnambool and the south-west region had recorded "the most significant gains" during the earlier upswing in values, rising by 44.1 per cent between the onset of COVID-19 and the market peak in June 2022.
"In the context of such a significant capital gain, the seven per cent decline from the market peak to end of July isn't all that surprising," he said.
"Clearly the earlier growth phase, where housing values increased by just over 44 per cent in less than 18 months, was an unsustainable trajectory.
"Since peaking, the market is down seven per cent to the end of July, with values remaining 34 per cent or roughly $128,000 higher than they were at the onset of COVID in March 2020."
Mr Lawless said high interest rates were only part of the story driving a slowdown in housing trends.
"Regional migration has normalised back to pre-COVID levels, which has seen a reduction of net demand for regional housing, but also affordability constraints following such a large rise in prices will be another factor," he said.
But despite values being down 2.3 per cent over the quarter, Mr Lawless said there had been a few months where local values had edged higher.
"Looking through this volatility it looks as though the market is stabilising," he said.
The only market to avoid a drop in values over the past three months has been Hamilton, which remained unchanged.
Mr Lawless said demand across the region had slowed with the number of homes advertised for sale gradually rising - albeit from record lows.
"Advertised listings moved through a record low two years ago when there were only 568 homes advertised for sale across the region," he said.
"The number of listings has trended higher since that time, recorded at 831 homes advertised for sale in July 2023.
"Inventory levels are still well below the decade average of 1536, but the rise in available stock implies less urgency and more bargaining power for buyers."
Mr Lawless said with stock levels remaining well below average, and a recent history pointing to a stabilisation in prices, it was likely the local market would hold relatively firm through the second half of the year.
"Once interest rates come down we could see a pick-up in demand, however that is likely to be some way off," he said.
A trend was also emerging where a larger proportion of new listings coming to market were investor owned.
Nationally, one third of all new listings are investors but in the south-west it was about 22 per cent - up 18 per cent from a year ago.
While rents have risen by about $86 a month over the past year, interest repayments on a $500,000 mortgage have typically increased by more than $1000 per month.
Rents in the region are still rising, up one per cent in July and 2.2 per cent higher over the past three months.
But the annual rental growth has reduced from 10.8 per cent over the 12 months ending September 2022 to 4.8 per cent over the 12 months ending July 2023.
"In line with the easing in rental pressures, vacancy rates have also trended higher, from a recent low of just 0.5 per cent in early 2022 to 1.1 per cent in July - still remarkably low relative to the decade average of three per cent," Mr Lawless said.
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