APPD Market Report Article

Melbourne

August 26, 2022

Leigh Warner, Senior Director - Residential Research, Australia

1.2%

AUD 430

Rents
Rising

Apartment demand remains mixed

  • There remains strong demand for off-the plan apartments in Melbourne and for quality owner-occupier stock in premium locations. However, sales of higher-density investor stock remain limited.
  • The broader Melbourne housing market is slowing sharply as interest rates rise and apartment sales (new and existing) volumes have also slowed. Nevertheless, affordable pricing should support apartment demand, relative to houses, as borrowing capacity is curtailed.

Melbourne supply pipeline continues to contract

  • The Inner Melbourne apartment supply pipeline has been falling for some time and 2022 completions will likely be lower than 3,500, which is less than half of 2021’s. Residual unsold stock from recent years is also starting to disappear quickly as completions drop.
  • Rental vacancy has continued to fall over the quarter, with the greater Melbourne area recording a vacancy rate of 1.7%. This figure compares to a peak of 4.7% recorded in December 2020. As migrants and students return and little new supply completes, this is likely to get even lower in coming months.

Price growth drops as rents rebound

  • Rising interest rates have seen existing Melbourne unit prices fall in recent months, but they are still 0.5% higher over the year-to-July. The fall has also not been as great as for detached houses, but neither was the post-COVID rebound in prices.
  • As price growth slows, rents have accelerated as vacancy has tightened and rents now exceed or are close to pre-COVID rents. The gross yield for the Melbourne apartment market was 3.7% in May 2022 (CoreLogic), but this is likely to rise now that rents are growing and prices are falling.

Outlook: No relief for renters

  • Apartment demand will be supported by increased numbers of migrants and foreign students returning to Melbourne, but it will be met with limited levels of new supply over the next few years.
  • Rental vacancy is likely to fall further as a result of the limited new supply, and strong rental growth is likely to continue for some time yet.

Note: Melbourne Residential refers to Inner Melbourne apartments. Inner Melbourne data: Supply from JLL, rents from Department of Human Services Victoria, and vacancy from REIV. Greater Melbourne data: Price, sales volume and yields from CoreLogic.

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