APPD Market Report Article
MelbourneSeptember 4, 2023
Leigh Warner, Senior Director - Residential Research, Australia
Confidence in Melbourne’s housing market improves
- Despite it still being unclear if interest rates have peaked or not, confidence in Melbourne’s broader housing market has improved somewhat. The return of high migration, coupled with minimal new stock completions, has resulted in the available housing stock shrinking and prices returning to growth.
- Apartment pre-sales remain strongest for quality owner-occupier stock, particularly from downsizers. Pre-sales of larger investor apartment projects remain more moderate, but residual unsold stock from projects completed in the last few years is quickly being absorbed.
A challenging development environment surfaces
- Few large-scale build-to-sell projects are proceeding at present, and Melbourne’s apartment supply will be much lower the next few years than it has been over the past decade. Although Melbourne is still attractive to build-to-rent (BTR) developers, the supply in this market remains moderate compared to the drop in overall apartment supply.
- As of June 2023, rental vacancy in Melbourne stood at 1.3%, which is slightly higher than recent lows. However it is still relatively low compared to the peak of over 5% observed in late-2020, during the COVID-19 pandemic.
Prices are bouncing back
- Tight vacancy has seen the strong recovery in rental levels continue. Asking rents for 2-bed apartments across Melbourne rose 15.9% over the past year and rents are now well above pre-COVID-19 levels after initially falling sharply.
- Apartment prices have also returned to growth over recent months. Prices of existing Melbourne apartments have grown four consecutive months to June 2023 and are now only 3.1% lower over the past year.
Outlook: Recovery to gain momentum
- With much of the residual stock that existed in Melbourne from previous supply cycles now gone, the recovery in sales rates for new apartment projects is likely to gain momentum, fuelled by the city’s return to strong levels of population growth.
- Moderate new supply is likely to have little effect on alleviating Melbourne’s tight rental market over the near term. Hence, upward pressure on rents is likely to persist, and the only constraints will likely be affordability and wage growth.