Q2 2023 - Residential Market and Economic Review

RPM Group is Victoria’s most successful residential development sales, marketing and advisory agency. We specialise in sales within master-planned communities, medium and high-density developments, greenfield and infill development sites.

We advise our clients on all aspects of the sales process from site due diligence, acquisition, planning and risk mitigation through to product mix, pricing, launch, sales and settlement. Our research-backed strategies deliver higher revenues and sales rates, and better returns for our clients.

Welcome

Welcome to our latest Market Update. This report dives into Australia’s economy and property sector performance, within the context of Victoria’s land and housing market.

Following a post-pandemic recovery surge, economic growth has stalled somewhat, with GDP still growing, but at a much slower pace. Rate rises in May and June following a reprieve in April have shaken already fragile consumer sentiment, and affordability concerns remain conspicuous.

Household finances are under significant strain, and with the household income ratio now higher than what is traditionally considered an ‘affordable’ level across all of Melbourne’s growth areas, even the city’s more attainable property is moving out of reach for many.

Subsequently, with more buyers priced out of the market by reduced borrowing power and high mortgage repayment levels, rental vacancy rates remain extremely tight, sitting well below the two-year average, driving rents up. Strong international migration is also influencing this intensifying rental demand.

Long-term undersupply issues are underpinning the rental market imbalance, particularly in the apartments market, where lagging construction is still impacting the sector and approvals are sitting at long-term lows.

The FY24 Federal Budget has provided some hope in terms of plugging gaps in the residential construction backlog, with a commitment to prioritise some major projects and delay others to take some resourcing pressure off the construction sector.

High inflation remains a core issue for the RBA; which means weighing up the long-term impacts of sustained inflation against immediate household finance strain, and the possibility of an extended period of higher rates for longer in 2024.

Property prices rebounding rather than simply stabilising is serving as light at the end of a challenging economic tunnel; indicating longer-term market resilience.

We welcome any questions about specific market segments, or any topics covered in this report. Please reach out to our highly respected Research, Data & Insights Division for more information. Enjoy the read.

Michael Staedler Group Manager Research, Data & Insights m.steadler@rpmgrp.com.au

Lead Indicators

The key numbers driving the market; the cash rate pause indicates it has neared the peak, Victoria’s population booms.

Economic Overview

While the GDP rose by 0.36%, it was only half of what was recorded last year, caused by rising interest rates and the escalating cost of living.

Victorian Population

Victoria’s population marked its highest quarterly post-pandemic increase; the boom is largely attributed to net overseas migration.

Melbourne Residential Market

The raised interest rate and subsequent impact on borrowing capacity has forced many to re-evaluate their purchasing decisions.

Apartments & Townhomes

Supply stalls despite the growing need for apartments and townhomes.

Residential Investment

Q2 market shifts have been driven by rising interest rates, a return of high migration levels, and competitive market conditions.

A data driven, holistic approach to property

RPM’s Research, Data & Insights division provides in-depth analysis on current local and overseas economic and property market conditions.

The team consists of economists, property experts and GIS analysts that provide real-time market intelligence and analytical and strategic advice.

Our knowledge and expertise are an invaluable resource for RPM’s developer clients, empowering them to make intelligent, informed, and strategic decisions when evaluating residential developments and investment opportunities.

Our data and analysis help clients maximise their marketing efforts and achieve sales targets on their estates. Each month we collect extensive data on approximately 350 land estates in Victoria, providing our clients a comprehensive understanding of the market dynamics. This also underpins the core strategic decision-making of our own business.

Over the 12 months to June 2023, approximately 8,085 lots were sold across Melbourne growth corridors. We profile every lot including lot size, price, orientation, sqm rate and title status, monitoring through to final sale.

This rich data helps our team and clients better understand:

Volume of lots sold or allocated by lot size, frontage, price point, developer, land estate type and location

Dollar per SQM rates

Stock release levels

Volume of cancellations on a monthly basis by estate

Distribution of new land products by estate

Performance and distribution of lots of a particular frontage and depth

Distribution of price points across a product range

Percentage of new land sold within set price ranges

Level of activity across a product type, project, market, developer and region

Stock level and fluctuations by product type, land estate, developer and market

Age of stock, how long has it been advertised, and subsequent price movements based on time on market

we always start with in-depth

At RPM,

research and data-driven insights. When we are guided by data, analysis and key findings, we maximise success.

Michael Staedler Group Manager Research, Data & Insights

Economic Indicators

Economic growth has moderated through FY23.

June 2023

Cash rate remained unchanged at the RBA’s last three monthly meetings.

September 2023

4.9% 0.8%

CPI has continued to ease since peaking at 8.4% in December 2022.

July 2023

3.7%

Steady over August after increase during previous month.

August 2023

Annual rate of growth at 6% is still double the high end target range of 2%-3%.

June 2023

181,626

Long term high population growth, supported by overseas migration.

March 2023

OVERSEAS MIGRATION

152,192 3.2%

Strong rebound since overseas borders reopened in early 2022.

March 2023

Below long term average of 6.1%.

June 2023

Victoria

STATE FINAL DEMAND UNEMPLOYMENT

More robust gain follows the modest gains seen in the last two quarters.

June 2023

Remained relatively steady at below 4%.

August 2023

WAGE GROWTH POPULATION CHANGE

June 2023

0.69%

Keeping in-line with the national average on both the quarter and year (+3.6%), but below inflation.

53,484

Continued strong growth post pandemic & highest quarterly result since Q1 ‘18.

March 2023

EMPLOYMENT GROWTH EMPLOYMENT PARTICIPATION

0.68% 3.50% -0.07% 67.7%

Marginal decrease over the month after solid jobs growth in previous three months.

August 2023

Modest rise and in-line with the national average.

August 2023

OVERSEAS MIGRATION INTERSTATE MIGRATION

46,383 -45

Robust growth over the quarter, underpinned by overseas students.

March 2023

Outflow continues to diminish as interstate movements revert to pre-pandemic trends.

March 2023

Property Indicators

Victoria

MEDIAN HOUSE PRICE

June 2023

June 2023

July 2023

June

Downward trend is slowing. 1.1% decrease over the quarter; 12.6% decrease over the past 12 months. Expectation is for ‘23 to end flat at best.

MEDIAN LAND PRICE

$938K $390K

Steady over month, up 2% over year.

August 2023

MEDIAN UNIT PRICE

Up 3.2% over the quarter, but down by 5.5% over the 12 months.

FINANCE FOR NEW DWELLINGS

Up 13% over quarter, however, down by 29% annually.

June

4,397

From 8,037 auctions.

FINANCE FOR EST. DWELLINGS

CLEARANCE RATE VALUE OF LOANS OWNER OC. VALUE OF LOANS INVESTOR

Up 17% over quarter, however, down by 25% annually.

June

17,258

Up 22% over quarter, however, down by 18% annually.

$631K 77% $14.01B $6.57B

Up 21% over quarter, however, down by 27% annually.

June

TOTAL DWELLING APPROVALS

11,610

Up 2.1% over quarter. However, down by 23% annually.

June 2023

TOTAL COMPLETIONS

12,898

Down 20% over quarter. However, up by 13% annually.

March 2023

VACANCY RATE

2.1%

Rental vacancies tightened slightly over quarter, highlighting strong rental demand.

June 2023

VACANCY RATE OUTER

1.3%

Vacancy rates in outer (20km+) areas remain even tighter than the Melbourne total

June 2023

TOTAL COMMENCEMENTS

15,149

Up 12% over quarter. However, down by 11% annually.

March 2023

DAYS ON MARKET

38

Has remained steady through the first half of 2023, supported by low supply.

June 2023

MEDIAN METRO HOUSE RENT

Up 3% over quarter.

June 2023

$515

MEDIAN METRO RENT OTHER

Up 2.2% over quarter.

June 2023

$460

Economic Overview

Australia’s economy continued to expand over Q2 2023. While the Gross Domestic Product (GDP) rose by 0.36%, it was only half of what was recorded last year. This noticeable slowdown was the result of rapidly rising interest rates and the escalating cost of living – both of which have impacted consumer sentiment.

Furthermore, economic output is not keeping pace with the nation’s population growth. Consequently, GDP per capita is declining; continuing the trend seen last quarter.

Another concern for the economy is declining productivity, mainly due to escalating labour costs. This may worsen cost pressures in labour-intensive service sectors, potentially offsetting any easing of overall inflation that stems from reduced household spending.

Consumer spending habits have changed notably through FY23 in response to successive interest rate rises and inflation growth. Wages have lagged behind the rising cost of living, exacerbating the situation.

As living expenses and home loan repayments surge, more and more household budgets are facing increasing strain. As a result, people are needing to dip into their savings at a greater rate. This can be seen in the household savings ratio diminishing to 3.2% for the quarter - the lowest quarterly level in 15 years.

Although discretionary consumption has been declining since late 2022, with a further 0.5% drop this quarter, there are a few exceptions.

The decline in discretionary spending was headlined by recreation & culture (-2.5%), household furnishings & equipment (-2.5%), cigarettes & tobacco (-1.6%), and alcoholic beverages (-0.6%).

The notable outlier to this trend was vehicle purchases (+5.8%). The driving force behind this counter-cyclical behaviour was the supply chain constraints, leading to a backlog of vehicle orders. As older orders are being fulfilled, current expenditure in this sector is being boosted.

While the Gross Domestic Product (GDP) rose by 0.36%, it was only half of what was recorded last year

Essential consumption categories continued their growth trajectory, increasing by 0.5%. These essential categories, ranging from transport services (+3.2%) to vehicle operation (+0.3%), align with the ongoing trend of prioritising necessary expenses over discretionary indulgences.

Dwelling investment has struggled for momentum over the past two years following the end of the HomeBuilder Grant. Ballooning construction costs and instability across the construction industry have weighed on this sector, resulting in a 0.2% decline this quarter. Home renovation activity has been particularly weak, lowering by a further 2.38% over the quarter; continuing the declining trend seen over seven consecutive quarters. Building constraints has extended the pipeline of new residential work, resulting in a small gain.

Despite the challenges, established property turnover activity improved. This was supported by strong population growth –with residential listings remaining relatively subdued, localised dwelling price growth emerged. This underpinned a nearly 4% increase in ownership transfer costs.

Percentage Change in GDP

Investment in new machinery and equipment has seen solid growth through the first half of the year, rising by 4.26% in Q2. Like the household sector, some easing of production constraints and import bottlenecks led to increased spending on light and heavy vehicles ahead of the termination of some tax incentives.

Public consumption remained flat as governments try to rein in growing debt. Conversely, public investment growth was strong, driven by transport, health, and defence spending. Net exports were a positive for the economy during Q2, with more overseas visitors entering the country than Australians travelling abroad.

Economic Outlook

GDP growth is forecast to be subdued through the second half of the year. While it is more likely that the tightening monetary policy has ended, substantially higher mortgage repayments will continue to impact real disposable income.

The outlook for private consumption expenditure (which accounts for the majority of total economic activity) will be challenging, as the ongoing financial strains are limiting household spending capacity. Additionally, cost of living pressures will remain pertinent as inflation growth, albeit easing, remains above the targeted 2% to 3% range. A key contributor to the recent high inflation has been the housing group, and although construction costs are stabilising, upward pressure on utility prices persists, and will only be partially offset by the various government energy rebates.

High home loan borrowing rates is pushing more would-be buyers into the rental sector for extended periods. Surging population growth, which has further heightened demand for homes, is outpacing housing supply as indicated by tight

vacancy rates. Falling dwelling approval activity, combined with weak vacant lot sale volumes, suggests a short-term moderation for dwelling investment.

The slower economic conditions and increased interest payments is also projected to discourage some new business investments. Capital city office markets are facing challenges with valuation declines and higher vacancy rates, which are impeding the launch of new office projects. However, a broad range of projects in renewable energy, transport, and health sectors will continue to support engineering construction and investment in machinery and equipment.

Amid these challenges, services exports are poised to play a crucial role in sustaining economic growth. The return of student visa holders (set to surpass pre-pandemic levels) and increased airline capacity are expected to boost overseas tourist arrivals into Australia, aligning with the broader recovery in international travel.

Interest Rates

Following a series interest rate hikes spanning 12 out of 13 meetings from May 2022 to June 2023, the Reserve Bank of Australia (RBA) has left the cash rate unchanged at 4.10% at its last three meetings to September. As both household consumption and economic growth have slowed through 2023, the RBA Board appears confident that the current cash rate setting is improving the balance between demand and supply.

However, tight labour markets are persisting and inflation in the services sectors remains a concern. Subsequently, despite the uncertain outlook for the economy, the RBA maintains a tightening bias towards monetary policy.

It should be noted that the interest rate on most new loans is below the advertised rate

Source: Reserve Bank of Australia – July and August 2023

4.10% Cash Rate

September 2023

5.81% 1-3 Year Fixed Rate

August 2023

5.95% Standard Variable Rate

August 2023

6.05% 3+ Year Fixed Rate

August 2023

Consumer Price Index

Inflation growth eased over Q2 2023, with both the quarterly and annual growth rates lowering to 0.83% and 6.03% respectively. However, it’s important to highlight that this still stands at double the upper limit of the RBA’s target range of 2% to 3%. Inflation has since slowed further, highlighted by the July monthly CPI Indicator rising by 4.9%.

While private consumption has shifted towards essential goods and services, inflation growth for non-discretionary and discretionary items were identical at 0.8%.

Growth in the CPI Index for new dwellings purchased by owner occupiers stabilised at 1.15% nationally in Q2. Following a Q1 decline, the respective Index for Melbourne increased by 1.33%.

The CPI Index for rents has continued its upward trajectory, rising 2.47% this quarter. Greater demand for rental properties is being underpinned by record high net inflows from international migration. Home-ownership continues to elude many local prospective buyers due to the recent surge in interest rate rises, pushing them into the rental sector. As a result, supply is struggling to keep up with demand.

High borrowing rates and more stringent tenancy laws are impacting the appeal to residential investors. As such, vacancy rates are projected to remain tight and continue to place upward pressure on rents.

New Dwelling Index Rental Index

Source: Australian Bureau of Statistics

Source: Australian Bureau of Statistics

Employment and Wages

Victoria shed 2,700 jobs over August, after the employment market experienced solid growth over the previous three months, adding 51,500 jobs. The job losses over August occurred in full time positions, with the number of part time jobs increasing.

Despite the overall net reduction in jobs over August, Victoria’s unemployment rate still improved to 3.5%. This suggests that there is low spare capacity in the employment market, further

evident by the high participation rate of 67.5%, and underscores the relative strength of labour market conditions.

This is supporting modest wage growth. Notably, Victoria’s wage price index rose at a faster rate than its consumer price index in Q2 - a first since Q3 2021.

Consumer Sentiment

Although consumer sentiment has stabilised, it remains pessimistic. While the current 81.0 reading is an improvement from last quarter, it resembles the cautious atmosphere of the Global Financial Crisis – marred by the new higher interest rate and cost of living pressures.

The cash rate has remained on hold since July, resulting in a brief lift in sentiment, but general consumer pessimism persists. Family financial concerns also saw a slight improvement over August but remain at historically low levels. Overall confidence in the economic conditions for the year ahead also fell.

Despite improving over the month, unemployment expectations sit significantly higher when compared to last year. Interest rate expectations have eased over the year, suggesting consumers may be adapting to the new rate environment.

The time to buy a dwelling index fell 5.7% in August; remaining near extreme historical lows, down 7.8% when compared to last year.

Consumer Sentiment Index (Index-100)

Source: Westpac-Melbourne Institute Consumer Sentiment Index

Business Sentiment

Business conditions remained positive in July, with the NAB Index recording a significant 6.8-point rise, underpinned by robust trading, profitability, and employment conditions. Notably, the mining, transport and utilities, and wholesale industries improved most over July, with the construction sector seeing growth as material and labour costs stabilised (albeit at the new higher base).

There were differences in conditions and confidence levels among businesses; rising within the mining industry while dropping within the retail industry despite conditions holding strong. The lower levels of confidence across all industries are in line with the slower economic growth expected through the second half of the year and the predicted headwinds.

NAB Business Conditions Index

Source: National Australia Bank Business Survey

Victorian Population

Victoria’s population escalated by 53,484 persons in Q1 2023*, marking the highest quarterly post-pandemic increase.

This boom is largely attributed to net overseas migration (particularly international students) resuming following the 2022 reopening of international borders.

Population projections released in the FY24 Federal Budget revealed an uplift to the state’s international migration inflow to 129,900 in FY23 and 108,400 persons in FY24. For comparison, estimations from a few months ago marked 80,000 persons per annum. Net overseas migration is forecast to moderate at just under 90,000 annually from FY25 to FY27 – which is still near record levels.

Natural increase is estimated to rise to 32,800 persons in FY23 before settling at a higher projection of around 38,000 through to FY27.

There has also been a notable improvement in interstate migration from the second half of 2022 with the net outflow shrinking to just 45 persons in Q1 2023. This compares to an average net interstate migration outflow of approximately 6,000 persons per quarter from Q2 2020 to Q2 2022 when lockdown restrictions impacted business operations and output.

Natural population growth also grew to 7,146 persons –somewhat below the historically typical quarterly average.

*Q1 2023 is the latest available migration data.

+7,146 Natural Increase

Natural increase over Q1 was lower than the long term average.

+53,484 Overall Population Change

Extremely strong growth, underpinned by overseas migration.

+46,383

Net Overseas Migration

Long term high net inflow from overseas migration for a quarterly period.

+138,900 Annual projected increase to FY27

This compares to average annual population growth of 128,500 persons over the five years to FY19 (pre-pandemic).

Population Components

●

Population Projections

Source:

●

Source:

Melbourne Residential Property Prices

Prospective buyers are now comparing what they can afford in a high interest rate environment to what they desire in a home; with many choosing to delay their purchase in favour of saving a larger deposit or until market conditions become more favourable.

First home buyers are most sensitive to the high interest rates, and weaker demand from this demographic is adding to difficulties for existing homeowners to upgrade or downsize. In response, vendors are increasingly deciding to delay listing their properties on the market until purchaser sentiment improves. This is evident in the reduction in the overall supply of properties for sale, highlighted by the number of auctions during Q2 being 28% lower than the corresponding number over the same period last year.

This relatively low supply of properties for sale is helping to keep a floor under clearance rates. Subsequently, while auction clearance rates have fallen from their 2021 high of above 80%, they have remained comparatively strong at around 77% over Q2 2023.

New home demand is weakening after record sales during the 18 months from the start of the HomeBuilder Grant (June 2020). Rising cost of living pressures, higher construction

costs, and the potential for more interest rate rises during the second half of the year (following rapid increases since May 2022) are contributing to cautionary buyer behaviour. Additionally, new supply is being restrained to be commensurate with lower lot absorption, to avoid the emergence of a large excess in stock and downward pressure on lot prices.

However, weaker demand in the new home market has not impacted headline lot prices, with the median lot value edging higher by 1.6% over Q2 2023 to a new record of $386,000. This also represented annual price growth of 1.6%. This has led to Melbourne’s land-to-house price ratio deteriorating to 41% (above the long-term ratio of 35%), making the price of a house and land package less competitive relative to established house pricing.

We should note that the $386,000 median value reflects headline values and does not take into consideration rebates and discounts, which are constituting up to 10% of the lot price. Nevertheless, the resultant land to house price for a median lot price that takes into consideration rebates and discounts would still be above the 35%, providing minimal scope for further lot price growth.

As expected, the rapid increase in the cash rate and subsequent impact on borrowing capacity has forced many to re-evaluate their purchasing decisions.

Melbourne Property Prices

● Median House Price ● Median Unit Price ● Median Lot Price

Price Growth

Source: REIV & RPM Research, Data & Insights

● Median House Price

● Median Unit Price

● Median Lot Price

Source: REIV & RPM Research, Data & Insights

Victorian Finance Activity

Loans by Dwelling Type

New owner occupier loans rose 21.9% this quarter but were down 20.2% compared to last year. Despite the quarterly rise, it should be noted that this was off the back of a historically low number of loans recorded last quarter. It is also lower than any other quarter since the start of the pandemic. Additionally, seasonal cyclical patterns where Q1 typically sees lower rates due to industry closures and holiday periods likely contributed to the Q2 increase.

New loans across all dwelling types rose over the quarter:

• Established dwellings: +22.2%

• Newly erected dwellings: +14.6%

• Construction of a new dwelling: +11.4%

New Loan Applications

Established dwellings saw an impressive 22.2% increase, possibly influenced by growing confidence in borrowing capacity. Backed by the belief that interest rate rises has neared peak, established dwellings presented a more appealing option considering the high building costs associated with new constructions. However, these loans remained down by 18.2% compared to last year, underscoring the ongoing market challenges.

New residential land loans rose 42.7%, although this surge can partly be attributed to historically low figures recorded last quarter. Figures for these loans remain relatively low compared the first recordings in mid-2019. The new home market’s potential buyer pool has also shrunk, partly due to the pullforward of demand driven by HomeBuilder and the historically low post-pandemic interest rates.

Source: Australian Bureau of Statistics

Loans by Purchaser Type

Despite the uncertainties, the value of loans has increased in line with the volume over the quarter. However, year-onyear comparisons show that new loans to investors (excluding refinancing) have decreased 27% in total value. Although rental growth has been on the rise, the high interest rates have made it challenging for investors.

The total value of loans across the market has reduced in line with falling loan volumes. New owner occupier loans (excluding refinancing) saw a 25% annual decline in Q2.

Monthly value of loans ($M) by purchaser type

Loans by Owner Occupier Type

Both first home buyer and upgraders saw increases in the number of loans, albeit from the low base set last quarter. Annual comparisons show that buyers are still being impacted by elevated inflation and high interest rates. These factors have reduced their capacity to save for adequate deposits and have limited their borrowing capacity. As a result, the number of loans to both first home buyers and non-first home buyers have dropped by 21% over the year.

Despite the challenges, first home buyers continue to represent 30% of owner occupier borrowers; this is a slight quarterly increase and remains above the ten-year average. Upgrader activity is being impacted by weak first home buyer demand for existing properties, and reduced stock is limiting the availability of established dwellings to trade up to.

Average Loan Size by Buyer Type

Average loan values for first home buyers fell 0.1% to $494,963 this quarter (1.5% annual decline) but remains at a relatively high level. The rapid jump in interest rates is likely to have had the most impact on first home buyers within the more affordable price brackets. The relatively high average loan size is a result of lower income, first home buyers increasingly unable to purchase.

Non-first home buyer average loan sizes decreased 2.5% in Q2 and is now 6.3% lower than last year. Affordability concerns remain for this cohort, who are needing to adjust their dwelling expectations in line with harsher lending conditions despite having built up equity and higher household incomes.

There is currently a $84,936 average loan size difference between this group and first home buyers, equating to a significant 17% variance.

Number of Loans by Owner Occupier Type

Victorian Building Activity

Approvals

11,610 dwellings were approved in Q2, which is a 2% quarterly increase but 23% annual decrease – the decline largely attributed to the fall in apartment approvals over the last year. Detached house approvals contracted 5.3% to 7,636 dwellings. As approval activity continued to trend down from 2021 peaks, house approvals remain below pre-pandemic levels. On an annual basis, there were 34,462 detached house approvals, marking a 13.7% fall.

Approvals for semi-detached, row, terrace and townhomes rose to 2,301, up 5.6% for the quarter, although remains relatively low compared to the long-term average. On a rolling annual basis to June 2023, townhome approvals were down 26.4% to 9,864, the lowest they’ve been since 2015. The growing appeal of small lot housing code products as an affordable option may be impacting townhome demand.

Apartment approvals did see some rebound to the long-term low witnessed in the previous quarter with a 47.8% quarterly rise. However, this increase to 1,673 approvals is still considerably low, sitting 46.1% lower than a year ago. The annual total has fallen to 10,195, but it should be noted that apartment approval numbers can be volatile from quarter to quarter, depending on the volume and size of the projects approved. Going forward, apartment approvals are expected to be supported by the ongoing maturity and delivery of supply from the build-to-rent sector.

Commencements

Total commencements are expected to reach 56,220 dwellings over FY23, which will be a 16% annual reduction. Commencements are anticipated to continue their decline into FY24 albeit at a slower rate of 8%, before seeing a small 1% rebound in FY25.

Having fallen by 10% over FY22, detached house commencements are anticipated to continue to trend downward by 12% over FY23, with further falls of 15% and 9% predicted over FY24 and FY25. This will be a symptom of low land sales activity since the start of 2022.

The market remains impacted by affordability constraints and broader economic uncertainty, and although interest rates look to have stabilised to a degree, the heightened levels mean these headwinds are set to remain for some time. House starts

Commencements by Dwellings Type

are projected to be just 28,250 by FY25, which would be the lowest level since FY13.

Multi-unit dwelling starts are expected to contract by 23% over FY23 to 19,820 , which would be the fewest starts since FY10. Weak pre-sales activity during 2020 and 2021, combined with recent material and labour shortages and associated increased costs, have all impacted multi-unit dwelling starts.

Commencements for multi-units are expected to rebound to 24,270 in FY25. The necessity for increased multi-unit starts will be even more apparent to satisfy burgeoning demand from expected record overseas migration in FY23 and FY24. With rental pressures projected to persist for some time, there is hope it will entice investors to replenish supply, especially if interest rates start to come down in 2024 and 2025.

Source:

Growth Area Affordability

All growth area suburbs now have mortgage-to-income ratios above 35%, indicating the impact of heightened interest rates on housing affordability and loan serviceability.

There are only six suburbs with a mortgage-to-income ratio between 35% and 39%, highlighting the impact constrained affordability and interest rate rises have had on residents.

Subsequently, the majority of growth area suburbs contain a household income ratio of above 40%, with 17 suburbs at 50% and higher. This emphasises the impact of the cumulative 400 basis point cash rate rise and resultant widespread mortgage stress. This is impacting new and established greenfield suburbs alike and is a key factor in the growing incidence of relatively affordable townhomes and small lot housing code products. Although it’s looking more likely that interest rates have peaked, they are not expected to fall in the short-term providing little relief from the current affordability constraints.

The common benchmark for identifying housing stress in Australia has historically been defined as those households that allocate at least 30% of disposable household income to finance their mortgage. This ratio has been in place for decades and in recent times there is a growing view that the ratio should be closer to 35% to 40% to reflect today’s market.

The chart examines the ratio of mortgage repayments to household income for 51 suburbs throughout the growth corridors of Melbourne and Greater Geelong.

Calculation assumptions: The chart depicts the median lot price in Q2 2023 by suburb, along with a median anticipated construction cost and net income by corridor. The median construction costs and incomes are taken from RPM’s Internal Buyer Surveys. The construction costs range from $313,000 (Mitchell) to $412,500 (Moorabool) while income levels reflect net levels to provide a more accurate level of disposable income. In addition, the chart also assumes a 20% deposit has been paid and mortgage repayments are based on a 30-year loan at the discounted standard rate.

Mortgage to Household Income Ratio - Melbourne Growth Areas

Botanic Ridge

Officer South

Burnside

Cranbourne

Greenvale

Cranbourne West

Clyde North

Clyde

Cranbourne East

Officer

Mickleham

Doreen

Deanside

Thornhill Park

Wollert

Mernda

Craigieburn

Nar Nar Goon North

Aintree

Bonnie Brook

Strathtulloh

Kalkallo

Truganina

Bacchus Marsh

Fraser Rise

Truganina

Nar Nar Goon

Wallan

Beveridge

Pakenham

Point Cook

Fyansford

Donnybrook

Melton South

Tarneit

Weir Views

Werribee

Manor Lakes

Mambourin

Portarlington

Sunbury

Wyndham Vale

Armstrong Creek

Charlemont

Leopold

Ocean Grove

Lara

Rockbank

Diggers Rest

Mount Duneed

Apartments & Townhomes

Supply stalls despite the growing need for apartments and townhomes

Australia’s apartment and medium density sectors have recently found themselves at the centre of the nation’s attention; facing increasing scrutiny for their role in the ongoing pressures in the rental market. While the Covid-19 pandemic contributed strongly to the current situation, the root cause goes beyond the pandemic as these issues have been steadily deepening over several years yet only recently began making themselves truly felt.

One of the key driving forces behind the current market pressure is the historic surge in overseas migration, primarily fuelled by international students. This influx of people has generated a substantial demand for housing, yet the completion of housing projects has failed to keep up. The consequences of this gap between the increasing need and available supply have become more pronounced in recent times.

The build up

Looking back, the boom in large-scale housing projects and market supply during the late 2010s and early 2020s was fuelled by more favourable conditions for investor purchasers, particularly for projects launched in the mid-2010s. However, demand stagnated in the late-2010s, as policies negatively impacting investor and overseas purchasers were increasingly introduced, leading to a shortage of completed projects likely to extend into the medium term. Recent and current project launches have fallen significantly short of addressing this heightened demand, and the process of bringing new projects to fruition comes with a considerable time lag – typically spanning three to five years. This ultimately underscored the deferred relationship between approved supply, and actual supply, which is increasingly acute across the apartment market, especially projects of scale (those that are most needed in the market at the moment).

There are further challenges that compound the current situation, including suppressed pre-sales, increased construction costs and financing expenses. These factors have shifted the market towards smaller owner occupier properties, which, while gaining traction, cannot accommodate the current demand for renter occupier housing.

Amid these challenges, the Victorian State Government has signalled a shift towards established areas, emphasising a 70/30 supply ratio – 70% for established metropolitan areas and 30% for greenfield regions. Historically, greenfield regions have been the primary source of supply in Victoria, but the emphasis is changing in response to evolving market dynamics.

Planning approvals and policies need more alignment

The State Government has signalled upcoming policy changes to streamline the approval process, a move in the right direction and one that will be beneficial to the market. However, it’s important to note that approvals don’t always translate into actual supply – especially for volume or investor-focused products required to underpin market conditions.

Pre-sales, particularly for today’s much-needed investor products of scale, require relatively high levels of demand before project commencement, this is subject to the risk profile of financiers seeking presales to de-risk the project prior to giving construction finance to a project. The mid-2010s policy changes impacting investors has vastly reduced investor participation across the build-to-sell apartment market of scale.

While supporting, and likely increasing, planning approvals is a positive. This must occur in concert with changes to relevant demand side policies before increases in supply are truly felt in the market. This current disconnect is akin to increasing the speed limit to 120km/h but maintaining policies that limit a vehicle to 80km/h.

Pictured: Motif at Geelong by DM Property

Approvals, Commencements & Completions

Apartment and townhome approvals increased by 20% in Q2 2023 compared to the previous quarter. However, approvals are still relatively low considering the value recorded in Q1 2023.

Commencements experienced significant growth, with a 72.6% increase in Q1 2023, marking the first increase since commencements began easing in March 2022. This growth is underpinned by the historical correlation between approvals and commencements.

Completions declined by 19.1% in Q1 2023 compared to the previous quarter but represented a still substantial 77.1% increase compared to the previous year. Completions in the near term are likely to be supported by the commencements recorded in the 12 months to March 2021.

3,974

Total Approvals

6,922

Commencements (Q1 2023)

+20% +73%

5,546 Completions (Q1 2023)

8,000

7,000

6,000

At a 3,000

-19% 2,000

5,000

4,000

9,000 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 RPM Q2 2023 Residential Market and Economic Review 36

Source: Australian Bureau of Statistics

Note: Approvals are to Q2 2023, while commencements and completions are delayed by a quarter (Q1 2023).

Pictured: Motif at Geelong by DM Property

Outlook for Apartments and Townhomes

Build-to-rent initiatives hold promise but often target tenants at higher price points, leaving a gap in the availability of higher-volume rental units. While lower-scale, owner occupier focused projects are gaining traction, they cannot meet the current high demand for renter occupier housing.

Rental pressures remain in the market, with vacancy rates remaining at historic lows, despite some minor increases through 2023. It is likely overarching rental pressures will remain in the market through the near term.

We previously commented on market shifts that have helped alleviate some of the current rental pressures, and stabilising expressed rents. The regrouping of smaller households (formed during the pandemic) has commenced in earnest but will have more to fully work through the stabilised household structures.

Additionally, the HomeBuilder completion delays are placing some additional strain on the rental market as these households await building completion which will allow them to move from renter to owner occupier household. Both these factors will help support some relief in the rental markets, however additional supply (under the current migration policy) will be required to take the heat out of the market.

The market faces ongoing challenges, especially with the Federal Government’s commitment to an elevated migration policy. Addressing these challenges will require support on both the supply and demand sides to turn theoretical supply into actual dwellings.

Residential Investment

Melbourne’s property market has undergone significant shifts in Q2 2023, influenced by several key factors.

The Reserve Bank of Australia’s (RBA) decision to raise the cash rate by two increments led to tightened lending conditions –making it more challenging for prospective homebuyers to enter the market. Construction costs began to stablise at elevated levels, further impacting the overall affordability of housing.

Metropolitan Melbourne saw a notable 1.1% drop in median house prices for the quarter and a 12.6% decrease compared to the same period last year. This decline was not uniform across the board, as the inner and outer rings witnessed sharper declines while the middle ring saw an increase. However, all areas still had notably lower median prices compared to 12 months ago.

In contrast, median unit prices grew by 3.2% this quarter. Melbourne’s middle ring saw the most growth, while the inner and outer rings saw smaller rises. Nonetheless, when comparing current prices to those from a year ago, median unit prices dropped by 5.5%, highlighting the ongoing uncertainty.

Regional Victoria displayed a mix of trends with the median house price rising by 0.6% but units falling by 2.6% for the quarter. When comparing these prices to those recorded 12 months ago, median house prices fell by 2.6% while median unit prices dropped by 4.9%.

Median House and Unit Rents

The rental market continues to be challenging for tenants; high cost of living, projections of substantial migration, and a limited supply of new rental properties, has created an increasingly tough environment.

The pressure on tenants is particularly pronounced in Melbourne where rental prices for both houses and units rose during Q2. These price increases are part of a broader trend where rental costs in all sectors have risen compared to last year.

Geelong has not been immune to these trends, as rental prices for both houses and units have seen upward movements over both Q2 2023 and the past year.

House Weekly Rents

Units and Apartments Weekly Rents

Vacancy Rates

Competition is intensifying in Melbourne’s rental market, underscored by the tightening vacancy rates across most of the city. This is influenced by several compounding factors that are increasing pressure on the availability of rental properties.

Firstly, the current economic landscape means dreams of becoming a homeowner is becoming elusive for many; pushing more people into the rental market only to be met with low vacancy rates. At the same time, Melbourne continues to experience heightened levels of migration; an increased number

of people who are also vying for rental properties within an already constrained market.

Adding to these challenges is the limited supply of completed building projects. With new construction lagging behind demand, there are simply not enough dwellings to meet the population’s needs. As a result, vacancy rates are being squeezed as prospective renters scramble to secure available properties.

Source: Real Estate Institute of Victoria

Source: Real Estate Institute of Victoria

Metropolitan Melbourne Yields

The upward trajectory of rental prices has led to increased yields for property investors. When combined with shifts in property prices, these rents have led to higher yield across the market.

Rental yield from houses has been on the rise across all areas throughout the quarter. Melbourne’s outer ring saw the most significant growth at 0.22%. The growth becomes more pronounced when comparing these figures to a year ago; with

yields for houses across Metropolitan Melbourne rising by 0.55%. This growth in yields is consistent across all rings, with the outer ring leading the way with a 0.50% increase.

Yields - Houses

Yields - Units

Source: Real Estate Institute of Victoria

Outlook

Melbourne’s property market saw a series of significant shifts in Q2 2023 driven by rising interest rates, a return of high migration levels, and competitive market conditions.

The raised interest rate has meant that inflation has begun to stabilise. This stability has offered some clarity for prospective home buyers; providing a clearer picture of their financial standing. However, it didn’t alleviate the burdens of high cost of living; which continues to affect all parties. Additionally, building costs (despite showing signs of stabilisation) remain elevated, affecting both home buying and rental markets.

While the unit market saw a slight upswing, Melbourne’s house prices declined for the quarter. The interest rate stability may have provided assurance for some, the dream of home ownership remained elusive for many due to restricted borrowing capacities.

Melbourne’s competitive rental market continued to exert upward pressure on rental prices as demand outpaced supply. This is expected to persist over the year due to high migration levels, persistent construction costs, and high cost of living pressures.

Similar trends were observed in Regional Victoria as a result of raised interest rates and reduced buyer sentiment. Although regional rents were higher compared to last year, they did remain relatively stable during the quarter – indicating a less frantic demand. Stringent lending conditions contributed to minimal growth in the first half of 2023 – a stark contrast to the rapid surges seen in the post-pandemic era.

Our Team

Get in touch with our team

Gary Dunne

Chief Executive Officer gary@rpmgrp.com.au

Rod Anderson

National Managing Director Communities rod@rpmgrp.com.au

Ed Wright

National Director Transactions & Advisory edwright@rpmgrp.com.au

Imogene Schaefer

General Manager Marketing

imogene@rpmgrp.com.au

Luke Kelly

National Managing Director Project Marketing luke@rpmgrp.com.au

Peter Grant

National Managing Director Business Development peter@rpmgrp.com.au

Michael Staedler

Group Manager

Research, Data & Insights m.staedler@rpmgrp.com.au

Jane Ormerod

Head of Property Management jane@rpmgrp.com.au

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Disclaimer

Although all reasonable care has been taken in the preparation of this document, RPM Group takes no responsibility for the accuracy of the information contained herein. It is recommended that all the information be verified if it is to be used for commercial purposes.