RPM Q1 2023 Residential Market and Economic Review

RESIDENTIAL MARKET AND ECONOMIC UPDATE

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, and international investment sales.

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 to our Market Update

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 to tackle, which means weighing up long-term impacts of sustained inflation against immediate household finance strain, and the likelihood of further rate rises in 2023.

Property prices rebounding rather than simply stabilising is providing a 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.staedler@rpmgrp.com.au

Comprehensive Market Research and Intelligence

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 who provide real-time market intelligence, analysis and strategic advice.

The team’s knowledge and expertise is an invaluable resource for RPM’s developer clients, providing the platform for intelligent, informed, and strategic decision-making in the evaluation of residential development and investment opportunities.

Our research is comprehensive, monitoring over 500 projects across the east coast of Australia. And, our reporting can be tailored to provide you the specific intel you need to drive the success of your project.

FOR FURTHER INSIGHTS OR BESPOKE ANALYSIS CONTACT

Michael Staedler

Group Manager - Research, Data & Insights

m.staedler@rpmgrp.com.au

Andrew Raponi

Research Manager - Research, Data & Insights

a.raponi@rpmgrp.com.au

Jonathan Mayes

Research Manager - Research, Data & Insights

j.mayes@rpmgrp.com.au

Or sign up for our quarterly market and economic reports by visiting www.rpmgrp.com.au

Economic Activity

Victorian Population

Borrowing Rates

Victorian Employment

*The Westpac-Melbourne Institute Consumer Sentiment Index is the most widely quoted barometer of consumer sentiment in Australia. A score of greater than 100 means that optimists outnumber pessimists, with readings of below 100 indicating that pessimistic consumers are in the majority. NAB’s Business Survey has been tracking Australian business confidence levels for more than two decades. Businesses are approached quarterly, with two smaller monthly surveys conducted in the intervening months to capture changes on a more regular basis. The panel now exceeds 2,700 businesses.

Victorian Finance

Victorian Building

Melbourne Rentals

Economic Overview

The rebound in consumer demand following rolling pandemic lockdowns has run out of momentum, with Q1 2023 economic growth moderating. National Gross Domestic Product (GDP) rose 0.23% over the quarter, around a third of the growth rate recorded in the previous two quarters. Rolling annual GDP still increased at a solid annual rate of 3.47%, although this figure is also slowing.

Increasingly, private household consumption is being constrained by economic headwinds. Cumulative rises in residential lending rates, escalation in pricing of goods and services, and long-term high inflation growth, have meant wage growth has been unable to keep pace, resulting in a decline in real disposable income for many households. To offset this decline, households are increasingly using savings to cover expenseswith the household savings ratio falling to just 3.7%, its lowest point since 2008 when it coincided with the last cash rate peak of 7.25%.

Even those without a mortgage have not been spared, with strong rental growth diminishing disposable incomes for tenants. Additionally, the recent price correction in most major property markets across Australia, and subsequent reduction in household wealth, has impacted consumer spending decisions.

Consequently, private consumption growth has weakened (down to 0.23% in Q1 2023). The highest quarterly increases in expenditure were across utilities (+5.2%), and transport services (+4.0%), likely attributed to elevated demand for travel during the holiday period.

At the other end of the spectrum, expensive discretionary items such as furnishings and household equipment (- 2.4%) and purchase of vehicles (-2.2%) had the largest quarterly contractions. This was not unexpected given the pressures on household finances, with the strain further evidenced by the considerable spending decline on other non-essential items including alcoholic beverages and cigarettes and tobacco.

Overall, consumption on goods and services considered ‘essential’ increased by 1.1%, while discretionary spending decreased by 1.0%.

Australia Bureau of Statistics

After increasing through the second half of 2022, new dwelling investment contracted 1.3% in Q1 2023. The reduction occurred alongside labour shortages extending construction timeframes, so it demonstrates a noticeable decline in both approval and commencement activity. Elevated construction costs are also deterring home renovations, with alteration and additions activity dropping around 10% from the HomeBuilder peak in 2021.

Established property markets are not faring any better. Relatively low new residential listings in response to reduced borrowing capacity forcing potential purchasers to defer their buying decisions, are adversely impacting turnover activity, and subsequently ownership transfer costs. Overall, dwelling investment continues to decline, down 2.0% in Q1.

Business investment has shown more resilience this quarter, increasing 3.4%, with capacity utilisation remaining high, and generous tax incentives driving investment in new machinery (+4.9%) as businesses work to increase outputs to satisfy demand.

A substantial pipeline of infrastructure projects across the transport, utility, renewable, and mining sectors is supporting new engineering construction, which increased 3.1%. Government investment in infrastructure projects also remained strong, underpinning a 3.0% rise in public investment.

The continual unwind of pandemic-related Government spending was offset by spending programs related to Home and Aged Care, and National Disability Insurance Scheme (NDIS), which helped keep public consumption steady in Q1.

Net exports were slightly negative within overall GDP in Q1. Australia’s open international borders mean service exports continue strengthening, and easing overseas supply chain disruptions have increased the value of both consumer and capital goods imports.

HOUSEHOLD SAVINGS RATIO

HOUSEHOLD CONSUMPTION

OUTLOOK

The outlook for Australia’s economy through the remainder of 2023 is volatile with some downside risks. After ten consecutive cash rate rises, the pause in April hinted at the current tightening monetary policy cycle ending. However, a further two 25 basis points rises in May and June have wounded fragile consumer sentiment.

These latest cash rate increases were attributed to persistently high inflation, with the annual growth rate in the monthly CPI Indicator back up to 6.8% in April after easing over the previous three months.

Income growth is picking up, highlighted by the recent Fair Work Commission decisions to increase the minimum wage by 8.6% and the award wage by 5.7%. However, productivity growth remains subdued, pushing up the average cost of labour per unit of output. This is projected to augment inflationary pressures, along with the strong rebound in overseas migration which is now anticipated to result in record net inflows of 401,700 persons in FY23 and 316,100 persons in FY24.

This will maintain a tightening bias on monetary policy, and likely induce additional interest rates rises in the back half of 2023. As a result, the exacerbated strain on household finances may force consumers to rein in discretionary spending even more.

The strain on Government budgets, already saddled with high debt and now mounting interest repayments on that debt given the increased borrowing rates, is evident in the FY24 Federal and State Budgets. The Federal Government has committed to undertake a 90-day review of its $120 billion infrastructure pipeline to pinpoint priority projects, with the intent of delaying other projects to help alleviate skilled shortages in the construction and engineering sectors.

Property market prices have pivoted after the 2022 corrections, although this growth |may be short lived, as it has been driven by very low supply creating competition within a limited buyer pool.

Borrowing capacity remains considerably lower than May 2022 when interest rates began rising, with any further interest rate rises only serving to heighten market entry barriers for potential purchasers. This will force more people to remain in rental accommodation longer, applying upward pressure on rents, on top of last year’s significant growth.

Consequently, the probability of inflation remaining higher for longer is growing, despite expectations of potential negative household consumption levels by the end of the year. Accordingly, CPI growth of 2% to 3% targeted by the Reserve Bank of Australia (RBA) may push out to 2025.

INTEREST RATES

Basis point rises in both May and June have taken the cash rate to 4.10%, the highest it’s been in more than a decade. Behind the decision to lift rates is RBA’s wariness of persistent high inflation, which left unchecked could have severe consequences for the economy.

While acknowledging slowing household consumption levels and economic growth, RBA remains determined to avoid high inflation becoming entrenched, and therefore far more painful to the economy, households and businesses.

8.27%

Cash rate (June 2023)

4.10% Standard variable rate (May 2023)

6.76%

Discounted standard variable rate (May 2023)

5.96%

New loans funded in April across all institutions (weighted average)**:

• Variable interest rate: 5.41%

• Fixed interest rate (fixed period up to 3 yrs): 5.55%

• Fixed interest rate (fixed period over 3 yrs): 5.99%

* The 3-year fixed rate has decreased from a high of 6.27% in March, despite two 25 basis point cash rate rises thereafter, and is now somewhat lower than the discounted standard variable rate.

** It should be noted that the interest rate on most new loans are below the advertised rate.

3 Year Fixed rate (May 2023)*

Source: Reserve Bank of Australia – April and May 2023

CONSUMER PRICE INDEX

Inflation growth looks to have peaked in Q4 2022, with both the quarterly and annual growth rate easing slightly in Q1 2023 to 1.38% and 7.02% respectively. However, this is still significantly above the RBA target range of between 2% and 3%, with growth of 6.8% in the April monthly CPI Indicator suggesting the timeframe back to acceptable CPI growth rates may be pushed out.

As expected following successive interest rate rises, private consumption has shifted towards essential goods and services, with households increasingly halting expenditure on non-essential items. Subsequently, while quarterly growth in the CPI Index for non-discretionary items increased to 1.9% in Q1, corresponding growth for discretionary items slowed to 0.6%.

Growth in the CPI Index for new dwellings purchased by owner occupiers continues to moderate, easing to 1.15% nationally in Q1 2023. More notably, the respective Index for Melbourne declined by 0.92%.

The CPI Index for rents continues its upward trajectory, rising 1.56% in Q1 2023. Rising interest rates and cost of living is leading to home ownership becoming increasingly out of reach, forcing more people to remain in rental accommodation. Pressure on rental demand is being amplified by record high overseas migration inflows.

Supply is unable to keep up, with high borrowing rates and more stringent tenancy laws impacting the appeal to residential investors. As such, vacancy rates are projected to remain tight and continue to place upward pressure on rents.

This suggests inflation is likely to have peaked at the end of 2022, and interest rate rises through the back half of 2022 are starting to restrain spending habits.

QUARTERLY % CHANGE IN NEW DWELLING PURCHASE INDEX

EMPLOYMENT & WAGES

Employment market indicators are impacted by seasonal factors, making them volatile from month to month. This is highlighted by Victoria gaining almost 110,000 jobs, majority full time, over February and March, before shedding 21,800 jobs in April. As a result, Victoria’s unemployment rate increased slightly to 3.9%.

However, labour market conditions have again improved during May, with Victoria adding 26,600 jobs, evenly split between full time and part time employment. Subsequently, the state’s unemployment rate tightened to 3.7%, in line with the corresponding national figure.

Victoria’s employment market is currently strong with limited spare capacity. Although the expected weakening in demand for goods and services through 2023, and resulting reduced labour needs, is likely to soften labour market conditions.

EMPLOYMENT VS UNEMPLOYMENT

In Q1 2023, the hourly rates of pay (excluding bonuses) index for Victoria rose by 0.69% quarterly and 3.48% annually. This was the highest annual increase in a decade, surpassing Q4 2022’s record increase. Inflation growth continues to outpace wage increases, though, leading to a decline in real household disposable income.

CONSUMER SENTIMENT

Consumer sentiment is stabilising, albeit at relatively weak levels, as the combination of successive interest rates rises and persistent inflationary pressures feed hesitancy.

The 79.0 reading is similar to the 1990s recession, and on par with numbers through the Global Financial Crisis, although remains above sentiment levels following the initial shock of the pandemic in April 2020 (75.6).

April’s pause on rate hikes gave sentiment a brief lift, but general consumer pessimism persists. As a result, consumers have a deteriorating view on both family finances and economic conditions over the next twelve months, with both indexes declining around 10% in May. Unemployment expectations are also worsening.

While the time to buy a dwelling index remains relatively low, it improved another 7.4% in May after rising 8.2% in April.

CONSUMER SENTIMENT INDEX (INDEX=100) 75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

115.0

120.0 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23

ECONOMIC OVERVIEW

BUSINESS SENTIMENT

Business conditions remained positive in April, with the NAB Business Conditions Index rising by 11.2 points, bolstered by strong trading conditions (+20 points), and solid profitability (+11 points) and employment (+11 points) readings.

Transport and utilities, and mining industries improved most in April, while the construction sector remained moderate as high costs for both materials and labour impact profitability.

Notably, the divergence between conditions and confidence among business is widening, with confidence far more fragile. This suggests headwinds ahead for businesses in line with slower economic growth projected through the second half of 2023.

Source: National Australia Bank Business Survey

VICTORIAN POPULATION

Victoria’s population escalated by 39,695 persons in Q4 2022*, which represents the highest quarterly increase post–pandemic. Net overseas migration remains the primary driver of population growth, with the return of both permanent and temporary migrants to Victoria since international borders reopened in early 2022. Students have represented a large component of this net gain.

The improvement in interstate migration has also been significant during the second half of 2022, with the net outflow shrinking to below 900 persons in both Q3 and Q4. This compares to an average net interstate migration outflow of approximately 6,000 persons per quarter from Q2 2020 to Q2 2022, when lockdowns and mobility restrictions impacted business operations and output.

Natural population growth also accelerated to 10,139 persons, somewhat higher than a historically typical quarterly average.

Population projections released in the FY24 Federal Budget revealed a substantial uplift in Victoria’s net overseas migration inflow to 129,900 persons in FY23 and 108,400 persons in FY24. This compares to estimations completed just a few months earlier of around 80,000 persons per annum. Net overseas migration is forecast to moderate at just under 90,000 annually from FY25 to FY27, which would still be near record annual 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.

POPULATION PROJECTIONS

PERSONS

Source: Australia Government Centre for Population

+10,139

+32,800

+39,695

Natural increase

Q4 2022

Net Overseas Migration

Q4 2022

Overall Population Change

Q4 2022

Source: Australian Bureau of Statistics

*Q4 2022 is the latest available migration data.

2022-23 2023-24 2024-25 2025-26 2026-27

Natural Increase Net Overseas Migration Net Interstate Migration

POPULATION COMPONENTS

MELBOURNE RESIDENTIAL MARKET

The rising interest rate and its subsequent impact on borrowing capacity has forced many people to reevaluate purchase decisions. More and more prospective buyers are now comparing what they can afford in a rising interest rate environment to what they desire in a home. Many are also choosing to delay their purchase to either save a larger deposit or purchase when market conditions become more favourable.

First home buyers are most sensitive to interest rate rises, and weaker demand from this demographic is adding to difficulties for existing homeowners to upgrade or downsize. Subsequently, auction clearance rates have fallen from their highs of above 80% during 2021, although remained relatively strong at approximately 75%.

A reduction in the overall supply of properties for sale, as vendors increasingly pull their property off the market or delay listing until purchaser sentiment improves, is also placing a floor under clearance rates. This is evident in the number of auctions in Q1 being 34% lower year-on-year.

New home demand is weakening after record sales during the 18 months from the start of HomeBuilder (June 2020). In addition, rising cost of living pressures, higher construction costs, and the potential for more interest rate rises after the rapid increases to date, are all contributing to more cautionary buyer behaviour.

Nevertheless, lot prices have so far continued to defy market conditions, with the median lot value edging down for the first time by a modest 0.5% in Q1 2023 to $380,000. This still represents the second highest figure on record, and it should be noted that while prices edged down, median lot sizes fell by 2.2%, resulting in a higher per square metre price.

Source: Real Estate Institute of Victoria & RPM Group

Source: Real Estate Institute of Victoria & RPM Group

VICTORIAN FINANCE ACTIVITY

LOANS BY DWELLING TYPE

New owner occupier loans dropped 31.9% annually and 20.1% quarterly in Q1 2023. This was underpinned by rising interest rates and reduced borrowing capacity creating fragile purchaser demand and bringing less stock to market. Consequently, new loans across all dwelling types contracted significantly:

• Established dwellings: -17.5%

• Newly erected dwellings: -20.5%

• Construction of a new dwelling: -31.8%

The significant drop in loans for construction of a new dwelling was likely influenced by weaker land sales activity in greenfield areas, and lower pre-sales activity in apartment projects.

This is also apparent in the 22.1% decline in new residential land loans. While this is a category that has only recently been tracked by the ABS (from Q4 2019), it represents the lowest quarterly count recorded. The new home market potential buyer pool is also reduced after the pull-forward of demand through the pandemic underpinned by HomeBuilder and historically low interest rates.

LOANS BY DWELLING TYPE

Source: Australian Bureau of Statistics

Construction of a Dwelling Newly Erected Dwelling Established Dwelling Residential Land

VALUE OF LOANS BY PURCHASER TYPE

Uncertainty surrounding the short-term economic outlook and capital growth prospects is deterring investors from the property market, with new loans to investors (excluding refinancing) decreasing in total value by 22% quarterly and 35% annually. While rental growth is accelerating, income for property is being outpaced by the jump in interest payable.

LOANS BY PURCHASER TYPE

The total value of loans across the market has reduced in line with loan volumes falling, with new owner occupier loans (excluding refinancing) declining by 21% quarterly and 34% annually in Q1 2023.

Source: Australian Bureau of Statistics

MONTHLY VALUE OF LOANS ($M)

BY OWNER OCCUPIER TYPE

First home buyers are particularly impacted by elevated inflation because it reduces capacity to save an adequate deposit and borrow the necessary funds to purchase. Loans to first home buyers dropped 24% in Q1 2023, with non-first home buyer loans reducing 18%. First home buyers now represent 29% of owner occupier borrowers, a slight reduction quarterly, but still slightly above the ten-year average.

BY OWNER OCCUPIER TYPE

LOANS

Upgrader activity is being impeded by weak first home buyer demand for their existing property, and reduced stock is limiting the availability of established dwellings to trade up to.

Source: Australian Bureau of Statistics

Home Buyer Non-First Home Buyer FHB Share of Owner Occupiers

LOANS

AVERAGE LOAN SIZE BY BUYER TYPE

Average loan values for first home buyers fell 1.9% to $495,643 in Q1 2023, but remains near its record high level. The rapid jump in interest rates is likely to have had a greater impact on first home buyer demand within the more affordable price brackets. With this segment being increasingly unable to purchase and constituting a smaller proportion of first home buyers, it is supporting a relatively high average loan size.

Non-first home buyer average loan sizes decreased 1.5% in Q1, now 4.6% below the peak a year ago. This highlights affordability concerns for this cohort who need to adjust their dwelling expectations to combat higher borrowing rates, despite generally having built-up equity and higher household incomes.

SIZE - BY FIRST HOME BUYER AND NON FIRST HOME BUYER

There is currently a $99,100 average loan size difference between non first home buyers and first home buyers, equating to a significant 20%.

VICTORIAN BUILDING ACTIVITY APPROVALS

There were 11,283 dwellings approved in Q1 2023, down 31% quarterly and 27% year-on-year. The contraction in apartment approvals was the primary reason for this decline. On a rolling annual basis, total approvals were down 57%, just 1% above the previous cyclical low in Q3 2019.

Detached house approvals contracted 9.6% to 8,053 dwellings. While approval activity continues to trend down from 2021 peaks, house approvals are now also below pre-pandemic levels of 2019. Annually there were 35,911 detached house approvals; a 19% fall.

Approvals of semi-detached, row, terrace and townhomes dropped to 2,098, the lowest level since Q4 2014. The growing appeal of small lot housing code product as an affordable dwelling option may be impacting demand because it is priced competitively with townhomes. On a rolling annual basis to March 2023, townhome approvals were down 23.7% to 10,358.

Apartment approvals collapsed to a long term low of 1,132, a 69% quarterly drop. This pushed down the annual total to 11,610, 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.

APPROVALS BY DWELLING TYPE

Detached Houses Townhomes Apartments

Going forward, apartment approvals are expected to be supported by the ongoing maturity and delivery of supply from the build-to-rent sector.

Source: Australian Bureau of Statistics

COMMENCEMENTS

Total commencements are projected to reach 54,990 dwellings over FY23, which would be an 18% annual reduction. Commencements are anticipated to continue their decline, albeit at a slower rate of 3% in FY24 and 1% in FY25.

Having fallen by 10% over FY22, detached house commencements are forecast to continue to trend downward by around 12% per annum through to 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 with interest rates possibly rising further during the second half of 2023, these headwinds are set to remain for some time. House starts are projected to be just 28,410 by FY25, which would be the lowest level since FY13.

Multi-unit dwelling starts are estimated to contract by 28% over FY23 to 18,550 commencements, which will 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 are expected to rebound to 24,270 starts 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 to entice investors to replenish supply, especially if interest rates start to come down in 2024 and 2025.

COMMENCEMENTS BY DWELLING TYPE

Source: Housing Industry Association

ECONOMIC OVERVIEW

GROWTH AREA AFFORDABILITY

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

There are now just 5 suburbs with a household income ratio between 35% and 39%, highlighting constrained affordability and interest rate rises pushing additional suburbs into less affordable brackets.

Subsequently, the majority of growth area suburbs contain a household income ratio of above 40%, with 18 suburbs 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 influential in the growing incidence of relatively affordable townhomes and small lot housing code product.

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 53 suburbs throughout the growth corridors of Melbourne and Greater Geelong.

Calculation assumptions: The chart depicts the median lot price in Q1 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 $287,500 (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.

Source: RBA, ATO & RPM Group

Industry Leader Insights

We spoke to ANZ’s Daniel Gradwell who shared his insights on the current state of the economy and its impact on the Victorian property market.

WHAT ARE THE KEY INFLUENCES ON PROPERTY SECTOR PERFORMANCE THIS YEAR?

As the RBA’s cash rate gets close to a ceiling, we’ve been seeing the pace of housing market price declines start to decelerate. But interestingly, even with the rate hikes in May and June, we have actually started to see house prices rebound rather than simply stabilise, which in itself is a positive sign.

The most recent upswing is more apparent down the eastern seaboard, where price increases were more prominent during the market ascent particularly during the pandemic. The flipside of this price recovery, however, is mounting affordability concern, which is already widespread.

HOUSING PRICE CHANGE BY AUSTRALIAN CAPITAL CITY

CUMULATIVE HOUSING PRICE CHANGE (%)

Source: ANZ Property and CoreLogic Housing Data

Daniel Gradwell - Associate Director Property, ANZ

WHAT ARE THE IMPLICATIONS OF THE RISING COST OF LIVING ON THE HOUSING MARKET?

Household finances are impacted by every moving part of the broader economy, and from a fundamental cashflow perspective, each rate hike takes a slice out of what someone can borrow. Access to finance is just one side of the coin, though, with existing mortgage holders dealing with considerably increased repayment numbers each month for the past year. And with about 25% of Australia’s mortgage debt still on low fixed rates that will roll onto far higher rates over the next year or so, the pressure on household finances is set to intensify.

Wages are picking up now, but lagging well behind inflation, and for many that creates a reality of disposable income going backwards. For the housing market, the concoction of entry and affordability barriers is impacting alongside a demand-supply imbalance which is not likely to ease any time soon.

ANZ FIXED RATE HOME LOAN EXPIRY PROFILE

WHAT FACTORS ARE FUELLING THE DEMAND-SUPPLY IMBALANCE?

Looking at Victoria’s population growth figures, an oversized share comes from overseas migration, which has rebounded discernibly since the borders reopened. Understandably, these new arrivals (natural, interstate and overseas) need somewhere to live. Unfortunately, there is nowhere near enough new dwelling construction to absorb the population increase.

In fact, the number of new homes built last year in Victoria was lower than 2020 or 2021, which were impacted by lockdowns and site capacity restrictions. There’s still a significant residential construction backlog, but it’s not looking to let up any time soon, particularly with competing infrastructure and long-term projects pulling resources away from private builds. The silver lining of this situation is demonstrative investment in future-proofing Victoria through community builds and infrastructure.

The lack of housing, however, also drives up rents and tightens vacancy rates, and will ultimately force many to make compromises on their living situations based on financial grounds - for example, moving back with parents or relinquishing home office space.

HOUSING COMPLETIONS PER YEAR - VICTORIA

Apartments and Townhomes

The threat of undersupply has been hanging over the apartment market since before the pandemic, and with the recent uplift in population and overseas migration, as well as the lowest apartment approvals in over a decade, this dislocation is accelerating.

Unlikely to let up any time soon, this remains a prominent issue as rental prices continue to climb - increasing 23.8% on a rolling annual basis - adding to cost-of-living pressures (which will continue to impact as the RBA fights to suppress inflation). Vacancy rates have also fallen once again, sitting at 2.2%.

Since the reopening of international borders, migration levels have eclipsed projections, with high levels of foreign students returning to study, and holiday makers also now arriving. The Centre for Population’s May 2023 forecasts now anticipate Victoria to record +129,900 persons through FY23 (a significant increase from the January 2023 forecast), which will directly impact the rental market.

Low vacancy levels, robust population growth and repricing of historic leases will all influence the rental market in the short and medium term, and household formation rates are likely to adjust in response - for example, more lone renters combining to form a larger household. While this may open up some backfill space, new supply is ultimately the linchpin of the rental market.

Private building approvals for apartments in Melbourne specifically have risen from pandemic lows, but remain well below 2014-2018 levels , and a robust lag in construction is still impacting the sector as a whole, delaying any meaningful supply impact.

Pre-sales requirements can represent a key hurdle that prohibits delivery of new supply across the market, especially in times of tighter lending conditions. Additionally, it can shift the market structure to favour (although not exclusively) larger owner-occupier apartments with lower risk, impacting future rental stock levels. Not least, project viability in the current market is being eroded by high construction and financing costs.

Stock at scale and investor buyers remain critical to re-balancing the market, but with recent budget changes to land taxation directly impacting investors, appetite may be reduced.

Build-to-rent models could play a role in easing supply pressure in future, and while in its formative stages, recent reductions to managed investment trust (MIT) tax for foreign investors may serve to attract more foreign investors and assist in fostering growth across this nascent industry.

Early 3191, a DM Property and RPM project

OTHER DWELLING APPROVALS, COMMENCEMENTS, AND COMPLETIONS

Apartment and townhome approvals were down 56% in Q1 2023, a steep drop from Q4 2022, which was the peak since the onset of the pandemic.

Commencements dropped 10%, reflecting approvals easing through much of 2022. There is potential scope for upswing in the near term given the historic correlation between approvals and commencements, before a likely softening in line with recently reduced approvals volumes*.

Completions accelerated 32% in Q4 2022, now 41% higher year-on-year, and are likely to remain robust given the uplift in commencements recorded between September 2021 and March 2022.

*Given the challenging state of construction costs, funding costs and builder availability, delays between approvals and commencements in the near term may distort the normal flow of projects to completion.

3,230

Total approvals

4,209 (-10.1%) Commencements (Q4 2022)

6,794 (+32.2%)

Total completions (Q4 2022)

Note: Approvals are to the current quarter (Q1 2023), while commencements and completions are delayed by a quarter (Q4 2022).

OUTLOOK

A core overarching issue in delivering necessary apartment supply is Government and private enterprise at all levels pulling in different directions. While each seeks to pursue policies for their individual benefit, they ultimately conflict and detract from one another. With Federal Government controlling international migration, State Governments directing land tax and stamp duty, planning approvals controlled by local councils, and construction finance determined by financiers and their risk appetite, the collective intent to deliver adequate supply in a timely manner is undermined.

Although the demand for new supply has never been greater, hurdles for delivering projects of scale through traditional means and disincentives for investor buyers are prohibiting developers from producing necessary supply levels.

International migration is adding demand pressure to an already tight market, and vacancy rates continue to fall in reply to the increased levels of competition. Given the increasing cost of living and rent rises, renter household sizes are likely to grow.

Investors will be key to driving pre-sales and supporting the delivery of supply at scale, however recent changes to land taxation have added yet another hurdle to enter the market. Greater investor participation may take some time with overall holding costs relative to rental increases underpinning some investors to sell out of their assets with limited viability for many investors likely to limit their participation in the market (in addition to broader taxes and imposts directed to this purchaser cohort).

This will shift the burden from individual “mum and dad” investors to larger foreign institutional investors.

Recent changes to taxation of managed investment trusts may help entice foreign investors into the market and accelerate the pipeline of build-to-rent stock into the market. Sadly, however, this will provide limited support in the short to medium term with the construction lag moderating the provision of supply.

Early 3191, a DM Property and RPM project

Residential Investment

The rate of housing price decline is softening, with only a single percentage point reduction in values this quarter, compared to the slides of 2022 resulting in such significant year-on-year value discrepancies. This follows a 1.6% decrease in Q4 2022, signifying a potential market stabalisation ahead. Regional markets have remained somewhat protected from the pricing cliff of the metropolitan house and unit sector.

MEDIAN HOUSE AND UNIT RENTS

Excepting single bed units in the outer ring (while demand has shifted towards central locations post-pandemic, the scarcity of product in this category also quickly skews data), all house and unit types have recorded rental increases on an annual basis. This aligns with rising interest rates and cost of living pressures, and more prospective buyers priced out of the market creating a stronger demand on the rental sector.

MOVERS AND SHAKERS - LARGEST MEDIAN RENTAL CHANGES OBSERVED OVER Q1 2023

MELBOURNE HOUSES MELBOURNE UNITS GEELONG

HOUSE WEEKLY RENTS

VACANCY RATES

Vacancy rates have yet again tightened across Melbourne, with the exception of Mornington Peninsula. A reflection of sustained high building costs, tight lending conditions and increased cost of living, this continuing trend has now driven vacancy rates well below the two-year average.

The middle ring saw the largest change falling 0.9% this quarter, but over the past year, Melbourne’s inner ring has seen the biggest swing, dropping four percentage points as post-pandemic life resumed.

Geelong’s vacancy rate remains unchanged, but given it is a traditionally tighter rental market, there is less room to move.

METROPOLITAN MELBOURNE YIELDS Q1

Despite the slowing pace of price deceleration in the property market, rental rates have continued to climb, resulting in consistently increasing yields across Q1 2023.

Unsurprisingly, inner-ring unit yields have led the pace of acceleration over the past year, aligning with increasing rents following a resurgence of international migration.

VACANCY RATES - TOTAL DWELLINGS

YIELDS - UNITS

OUTLOOK

The rental market is becoming even more competitive as supply lags behind increasing demand levels driven by more potential home buyers being forced to rent for longer as they navigate tight lending conditions and the rising cost of living. Interest rate increases in Q1 2023, and sustained high building costs, have exacerbated pressures on personal finances.

Despite the slowing rate of price decline in the property market, yields continue to grow as the demand-supply imbalance drives rents up.

With high levels of inflation set to linger, we expect to see rental vacancies remain tight for at least the remainder of the year.

From a regional perspective, house prices have fallen this quarter in response to rising interest rates and reduced buyer sentiment, which has not been seen for some time given the appeal of regional areas over the past few years. Rental vacancy rates, however, have remained stable.

Our Team

HELPING YOU UNLOCK YOUR PROPERTY POTENTIAL. GET IN TOUCH TODAY.

Peter Brannighan

Chairman

peterb@rpmgrp.com.au

+61 418 442 661

Gary Dunne

Chief Executive Officer

gary@rpmgrp.com.au

+61 410 548 025

Luke Kelly Managing Director

Project Marketing

luke@rpmgrp.com.au

+61 400 688 520

Rod Anderson

Managing Director

Communities rod@rpmgrp.com.au

+61 417 595 859

Peter Grant Managing Director Business Development peter@rpmgrp.com.au

+61 411 494 499

Michael Staedler

Group Manager

Research, Data & Insights

m.staedler@rpmgrp.com.au

+61 434 619 280

Ed Wright

National Director

Transactions & Advisory

edwright@rpmgrp.com.au

+61 416 445 078

Jane Ormerod Head of Property Management

jane@rpmgrp.com.au

+61 488 210 951

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.

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