It’s the perennial questions in Melbourne’s bay side suburbs: are property prices headed for a downward spiral in Australia’s second biggest city? As if to contrast my meagre attempts at certainty, one economist who does make predictions which often, in hindsight prove correct, is Iranian born Nouriel Roubini. In Perth last week, the professor was not willing to join the chorus calling our market over-heated – or indeed say that it is about to fall off a cliff. He says there will be correction, which is underway, and, for the other capital cities, that there will be significant regional variations in price patterns depending on responses to the resources boom.

House prices dropped in all cities for the three months to the end of September, expect for Hobart, where they were flat. In Melbourne house prices fell 0.9 percent which was an improvement on the previous quarter. Unit prices however could only be described as “steady” in Melbourne. Note that the total number of active Melbourne apartment projects has fallen below 300 for the second successive quarter. However, even though apartment construction has fallen away during the September quarter from its 2010 exuberance, Melbourne remains the “Manhattan” of Australian cities, with the Victorian capital accounting for a record 44% of all Australian multi-unit approvals in 2010-11.

Melbourne has the highest vacancy rate and despite a modest fall in property prices this year, gross yields for apartments remain at 4.4 percent. Record levels of new inner city apartments are coming on to the market.

Melbourne’s median house price was $558,000 which as a reference point represented an 8.7 percent growth rate for the 10 year period to end of September. Prices have declined 2.1 percent for the quarter while rents have risen 2.7 percent for the year ending September 2011. Sales of houses were active when compared to the same quarter of 2010, up 7.1 percent. These figures supplied by Residex indicate that a surge in properties for sale is keeping a lid on prices.

Melbourne, having achieved a higher growth rate than Sydney in recent years, has taken a turn in sentiment with discounting now rife and agents reporting a dearth of buyers in the higher value suburbs such as Brighton. Victoria which has had a sustained period of population growth from both interstate and international migration has seen construction home and apartments building outstrip demand, putting a lid on price growth. Migration rates have fallen back to levels not seen for five years. This is attributable to less migration from Sydney where affordability factors were rife and a pause in international migration – a factor which is affecting to a degree all major cities with the possible expectation of Perth.