RPM Melbourne Apartments & Townhomes Market Report - January 2025 by RPM Group

MELBOURNE APARTMENTS & TOWNHOMES MARKET REPORT

JANUARY 2025

RPM Group is proudly celebrating our 30th anniversary - a testament to three decades of collaboration, research, and growth. What began as a local endeavour has evolved into a national presence, delivering research, data, and insights across Australia’s eastern states.

For three decades, RPM Group has been a trusted partner to greenfield developers and the broader property industry. We’ve earned a reputation for providing clear and reliable market research that helps our partners make more informed decisions. Today, we are excited to extend this same level of expertise to Melbourne’s infill apartment and townhome sector.

Executive Summary

Luke Kelly

National Managing Director of Built Form luke@rpmgrp.com.au

• Population growth will sustain ongoing demand for built form housing.

• Elevated construction costs will continue to anchor supply levels

• Undervalued units and limited supply risks creating a potential shortfall when the market shifts.

Net overseas migration continues to drive Victoria’s population growth, with the state drawing nearly onethird of new residents nationwide. This steady growth is supporting demand for townhomes and apartments, even as affordability pressures continue to influence buyer and renter behaviours.

Despite this demand, supply remains at a bottleneck. While apartment approvals rebounded in Q3 2024, tripling from the previous quarter’s historic low, annual numbers remain weak. Rising construction costs are further dampening project feasibility and exacerbating the supply gap.

Note: Units include all dwellings that are not detached homes.

Affordability also continues to be a defining factor. With a 46% price gap between houses and units, units appear undervalued – offering potential opportunities for investors. However, the stark disparity between high construction costs and lower resale prices continues to challenge developers’ ability to meet demand.

Looking ahead, migration-driven demand and entrenched supply shortages will likely sustain price and rent stability in the near term. However, the market’s long-term trajectory hinges on better addressing these imbalances.

Whats Inside

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 projects.

We collate and analyse data on Australia’s medium and high-density markets, providing insights on past and present product and pricing, as well as upcoming supply.

This comprehensive understanding of the different markets forms the foundation of our in-depth reports and bespoke analysis.

Your dedicated research team:

Andrew Raponi

Senior Research Manager

Research, Data & Insights

Laurence Rao

Research Manager - VIC

Research, Data & Insights

Michael Staedler General Manager

Research, Data & Insights

Dollar per sqm rates

Upcoming competition and supply

Sales rates

Distribution of price points

Activity levels by market, product & developer

Product mix

This rich data helps our team and clients to better understand:

Market Fundamentals

Australian Economic Indicators

Strong Gross State Product (GSP) and job growth are offset by high unemployment and low weekly earnings.

Population Growth in Victoria

Victoria’s population growth slows but still accounts for nearly one-third of all new residents across the nation.

Victoria welcomed 24,679 new residents in Q2 2024, marking the slowest population growth since December 2021. This aligns with a broader national slowdown in population growth. However, Victoria still accounts for nearly one-third of all new residents across the country, which in turn continues to contribute to dwelling demand.

Net overseas migration remains the key driver of population growth, contributing over two-thirds of Victoria’s population increase. As a result, the state’s actual population has slightly surpassed government projections.

Meanwhile, net interstate migration and natural increase remains low; reflecting ongoing local demographic trends.

Population Change Components

Source:

Buyer Cohorts

Owner Occupiers

Victoria tops first home buyer loans at 37%, outpacing New South Wales, Queensland, and the national average.

In Q3 2024, Victoria recorded 26,316 new owner occupier loan commitments, with a 37/63 split between first home buyers (FHB) and subsequent buyers. Although this ratio has held steady since mid-2023, the total number of loan commitments remains higher than the same time last year –evidence that buyers remain active despite some softening in the market.

First Home Buyer Loans

9,531

Victoria stands out as a stronghold for first home buyers, who account for 37% of all owner-occupier loans; a higher share than NSW (29%), QLD (27%), and the national average (31%). -5% vs. Q2 2024 | +11% vs. Q3 2023 -5% vs. Q2 2024 | +7% vs. Q3 2023

Subsequent Home Buyers

16,785

First Home Buyer New Loan Commitments (monthly)

Investors

Victorian investors remain resilient as overseas investors decline due to taxes, fees, and economic shifts.

Local investors in Victoria remain the second largest group of residential property buyers, accounting for just under a third of all loan commitments in Q3 2024. While investor loan volumes have dipped slightly (from 13,585 in Q2 to 12,569 in Q3) they are still comfortably higher than the same period last year, which saw 11,643 loans in Q3 2023.

The recent state tax and levy changes impacting investors have prompted some existing property owners to sell, with REA estimating that approximately 5,000 investment homes have been sold since the revised land tax thresholds were introduced. However, these changes have not discouraged new investors from entering the market. With these changes having been in place for nearly a year now, their impact on the investment market appears to have stabilised. Unless there are significant policy

shifts or macroeconomic changes, these levies are unlikely to further alter investor borrowing patterns in any material way.

Overseas investors have slowed considerably. Only 1,199 Foreign Investment Review Board (FIRB) loans for residential property were approved in Q2 2024, marking a 16% decline from Q1.

Chinese investors remain the largest foreign buyer group despite their activity dropping from 2,601 approvals in FY23 to 1,998 in FY24. The value of these approvals has also fallen, from $3.4 billion to $2.6 billion; driven by higher foreign investment fees and duties, rising financing costs, and a slowing Chinese economy.

Source: ABS Lending Indicators, Australian Government Treasury

Greater Melbourne Pricing, Rents, and Vacancies

Melbourne Unit Market

Steve Williams

Sales Director Metro

stevew@rpmgrp.com.au

Melbourne’s unit market saw a slight rise in Q3 2024, with varied performance across the regions. Units continue to outperform houses, albeit marginally.

The current median price for units sits at $628,000, a slight 0.2% increase over the quarter. Over the past two years, prices have remained steady following the market cooling in 2021. The outer ring has seen little change in value over the past three years, showing greater stability compared to the inner ring where prices have recovered somewhat after a mid2023 dip. In contrast, the middle ring continues to underperform, hindered by a lack of affordable housing options.

Melbourne unit prices remain steady amid housing shortage and resilient demand.

Looking ahead, the trajectory for unit prices remains uncertain for 2025. Interest rates have significantly impacted unit values, particularly in late 2022 and early 2023. A cautious ‘wait and see’ sentiment prevails.

Despite these challenges, Melbourne faces ongoing housing shortages, particularly in the inner and outer rings. Low development activity and sustained migration continue to drive demand (despite the slowdown). These factors may help stabilise unit prices, maintaining an equilibrium through mid to late 2025.

Note: Units include all dwellings that are not detached homes.

2 Inner ring: 0-10km radius around Melbourne CBD. Middle ring: 10-20km radius around Melbourne CBD. Outer ring: 20km+ radius around Melbourne CBD, including the Mornington Peninsula.

Source: REIV and RPM Research, Data & Insights

Melbourne Unit Market by Region

Outer ring units continue to outperform middle and inner ring units, delivering stronger near-term results and sustained long term growth.

Inner ring: 0-10km radius around Melbourne CBD.

Middle ring: 10-20km radius around Melbourne CBD.

Outer ring: 20km+ radius around Melbourne CBD, including the Mornington Peninsula.

Note: Units include all dwellings that are not detached homes.

Melbourne Property Value Relativity

Melbourne’s house to unit price gap narrows but remains above average, hinting that units may be undervalued.

In Q3 2024, Melbourne’s median house price increased by just 0.1% to $916,000, while the median unit price rose slightly more at 0.2%, reaching $628,000. The current price gap between houses and units remains significant at 46%, a figure that has remained relatively consistent over the past six quarters. This is much lower than the 64% peak seen in Q1 2022 but still well above the historic average of 37%.

For the gap to align with long-term trends, unit prices would need to climb by approximately 8-10%, suggesting that units may currently be undervalued. This disparity could narrow over time as buyers shift from higher priced houses to more affordable units.

There is also a notable price gap between established and new dwellings. The significantly lower cost of established homes poses a challenge for developers, as the price per square metre for established stock undermines the feasibility of delivering new units.

$1,200,000

$1,100,000

$1,000,000

$900,000

Melbourne Off the Plan Unit Price

$840,000*

$800,000

$700,000

$600,000

$500,000

$400,000

Note: Units include all dwellings that are not detached homes.

$628,000

* Assumes 70sqm internal size at $12,000/sqm

Source: REIV and RPM Research, Data & Insights

Melbourne Median House Price vs. Median Unit Price

Median Unit Prices - Capital Cities Comparison

Victoria's median unit price growth lagging well behind Perth, Brisbane and Adelaide

September 2024 vs. September 2023

Source: CoreLogic

Vacancy Rates and Rental Stock

Melbourne’s vacancy rates are at 2.4% due to limited supply and strong migration.

Total vacancy rose 0.2% through Q3 2024, with the inner ring (+0.2%) and outer rings (+0.2%) leading the shift. Despite this, the rates remains well below the historic average of 3.0%.

The number of rental bonds continues to decline, signalling a shrinking pool of active rentals. As of September 2024, the Residential Tenancies Bond Authority (RTBA) held 529,652 bonds, marking a 2% drop from Q2 and over 23,000 fewer bonds compared to the same period last year. Several factors are contributing to this decline; high Victorian taxes and strict regulations are driving investors to sell, while a lack of approvals and new rental stock is stalling any recovery for bond numbers.

With fewer available rentals and no significant boost in new housing supply, together with strong migration, Melbourne’s vacancy rates are unlikely to ease substantially – remaining near 2.5% for the foreseeable future.

Source: REIV & RPM Research, Data & Insights

Unit and Apartment Rents - Melbourne by Region

Source: REIV & RPM Research, Data & Insights

Inner ring: 0-10km radius around Melbourne CBD.

Middle ring: 10-20km radius around Melbourne CBD.

Outer ring: 20km+ radius around Melbourne CBD, including the Mornington Peninsula.

Unit and Apartment Rents - Melbourne by Region

Inner and Middle Ring Apartment Sales - Q3 2024

Buyers tackle affordability challenges by opting for smaller homes.

Greater Melbourne Dwelling Supply

Building Approvals - Greater Melbourne

Melbourne’s medium and high density housing supply remains constrained despite promising figures in

Q3.

Townhome approvals have continued to decline, with just 2,145 dwellings approved in Q3 2024 – a 16% drop from the previous quarter and 14% lower than the same time last year. Over the past 12 months, only 8,913 townhomes have been approved, marking the second lowest total since early 2016.

Apartment approvals, on the other hand, rebounded noticeably with 3,191 approvals in Q3. This is triple what was recorded in June 2024’s record low. Despite this improvement, annual figures remain underwhelming.

Current market conditions remain tough. Price pressures, planning delays, and difficulties in achieving viable pricing rates are keeping supply constrained. Build to Rent (BTR) tax structures and Foreign Investment Review Board (FIRB) policies are further dampening activity, especially in the apartment market.

Apartment Approvals Quarter

3,191 Dwellings

Townhome Approvals Quarter

2,145 Dwellings

Apartment Approvals Rolling Annual

7,474 Dwellings

Source: REIV & RPM Research, Data & Insights

Townhome Approvals Rolling Annual

8,913 Dwellings

Medium and High Density Construction Outlook

Construction Costs

Construction Pricing Movement

Rising

material costs and labour shortages strain Melbourne’s residential construction as major infrastructure projects divert resources into the next decade.

Raw housing construction material costs climbed again in Q3 2024, this time by 0.6%, the sharpest increase since Q2 2023. This rise was largely driven by higher metal prices, particularly copper and aluminium, which have significantly pushed up the cost of electrical equipment and cables. Other items, such as plumbing and sanitarywear, have dropped in price.

The ‘outputs’ index for other housing construction* rose 0.4% over Q3. While this increase is lower than the ‘inputs’, it continues to be heavily influenced by a shortage of skilled labour and competition from large-scale infrastructure projects.

Looking ahead, the Rider Levett Bucknall Tender Price Index (TPI), which reflects the cost developers pay for construction projects, suggests that overall cost growth will gradually ease in 2025 and stabilise further in the following year. However, this outlook applies broadly to the construction industry. In Melbourne’s residential sector, pressures are likely to persist as major infrastructure projects dominate resources well into the next decade.

While the Metro Tunnel project nears completion, its resources are expected to shift to new initiatives, including the Suburban Rail Loop (SRL) projects between Glen Waverley and Box Hill, as well as the tunnelling between Glen Waverley and Cheltenham.

Inputs and Outputs to Housing Construction

Victoria Other Residential Outputs Melbourne Construction Inputs

* Outputs for other housing construction represent the price of a completed dwelling handed over to a developer.

Source: ABS Producer Price Indexes

Outlook

Michael Staedler

General Manager

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

Affordability strains and migration slowdown stall demand but supply shortages are keeping rents and unit prices steady.

The recent slowdown in unit prices can be attributed to two key factors: affordability constraints and a reduction in net overseas migration, both of which have combined to dampen demand.

Affordability has emerged as the primary brake on price and rent growth. Households, particularly those on single incomes typically living in townhomes and apartment, are increasingly burdened by housing costs. The benchmark for housing stress (spending more than 30% of income on rent or mortgage payments) has become a widespread reality.

At the same time, a slowdown in net overseas migration, particularly due to a decline in foreign student arrivals, has reduced demand-side pressures.

With fewer newcomers entering the rental and apartment markets, demand has softened, further stabilising prices. Yet, these demand-side factors are being offset by entrenched supply constraints. Persistently low approval rates for new developments are already impacting start and completion rates. Even projects that secure formal approval face significant hurdles in reaching financial viability. Many fail to meet pre-sale or funding thresholds, exacerbating the supply shortage. As a result, the market finds itself in a delicate equilibrium; while demand stabilises, the constrained supply ensures that rents and unit prices are unlikely to drop significantly in the short to medium term.

State government initiatives to streamline approvals and address bottlenecks in construction financing are steps in the right direction. However, major obstacles remain, particularly for off the plan developments.

At a conservative estimate of $12,000 per square metre, a 70sqm off-the-plan apartment would sell for approximately $840,000. This is 34% higher than the Melbourne median unit price of $628,000. This price disparity continues to provide challenges to the feasibility of new apartment projects.

For more information, please visit: www.rpmgrp.com.au

For a detailed market analysis or a tailored report, email the team at: contactus@rpmgrp.com.au

Research, Data & Insights

Michael Staedler

General Manager

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

Andrew Raponi

Senior Research Manager a.raponi@rpmgrp.com.au

Laurence Rao

Research Manager - VIC laurence@rpmgrp.com.au

Built Form

Luke Kelly

National Managing Director of Built Form

luke@rpmgrp.com.au

Steve Williams

Sales Director Metro

stevew@rpmgrp.com.au

For detailed insights or custom reporting, contact the team: contactus@rpmgrp.com.au

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