Demand slowly improving

• New apartment demand remained patchy in the quarter. Higher interest rates constrained many buyer groups, particularly first homebuyers and domestic investors. However, downsizer demand for quality projects remained robust and foreign investor demand showed steady improvement.
• While demand overall remained subdued, underlying demand for apartments is clearly being boosted by a very strong rebound in both overseas migration and international students. Indeed, Victoria’s population growth reached 2.7% over the year to June 2023 to a level that is even stronger than the pre-COVID strength experienced in the state.

Lower supply over at least the next few years

• After a decade of strong construction, Melbourne’s apartment supply pipeline has been falling for a few years and will likely be particularly low in 2024. With few new BTS or BTR projects commencing in recent quarters amid challenging development conditions, supply is likely to stay moderate for at least several more years and likely fall short of underlying demand.
• Since reaching 5.5% in late-2020 during COVID-19, Melbourne’s rental vacancy has recovered significantly to reach 1.5% in December 2023 (SQM Research). The recovery was driven by the return of migrants and foreign students.

Price growth softens

• The recovery in rents in Melbourne has lagged other markets, but asking rents for 2-bedroom apartments have still achieved double-digit annual growth and are now back to well above pre-COVID-19 levels. However, the pace of growth is now starting to slow.
• Existing apartment prices recovered somewhat through the first half of 2023, but growth has largely stalled over the second half of the year. Nevertheless, a favourable market balance and the more affordable price point of apartments than houses should supply price growth over the medium term.

Outlook: Massive population inflow must be housed

• While Melbourne apartment market conditions remain subdued at present, eventually the combination of strong underlying demand from population growth and lower levels of new supply will assert themselves on the market.
• Lower supply will mean little relief for the rental market and upward pressures on rents are likely to remain. BTR stock will eventually be some relief for Melbourne’s rental market, but the bulk of the city’s BTR pipeline is still several years from completion and will not offset the decline in BTS completions. Prices should also return to solid growth over the medium term as under-supply builds.