Q2 2022 - Residential Market and Economic Review - 1 2022Q2 ECONOMICMARKETRESIDENTIALANDUPDATE
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2 - RPM Group
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.
Q2 2022 - Residential Market and Economic Review - 3 05InsideWelcome to our Market Update 12 Economic Update 32 Industry Leader Insights 34 Apartments and Townhomes 40 Residential Investment
Michael Staedler Group Manager - Research & Data m.staedler@rpmgrp.com.au
Our current circumstances, which include the lowest unemployment rate in the country, mean Victoria is in a position of strength to face rapidly rising interest rises as the RBA works to curb inflation. However, balancing economic buoyancy and household financial strain will be a fine line for the RBA to walk in the coming months.
Q2 2022 - Residential Market and Economic Review - 5
As discussions centre on continually rising interest rates and what that means for household finances and property prices, an important factor is the strength of Melbourne’s economy, despite weathering extensive lockdowns and significant migration leakage over the past 18 months.
This quarter, Melbourne’s median house price dropped 2.9% but remained well above the million-dollar mark, and certainly has not alleviated any affordability concerns. Conversely, regional median prices continued to rise, demonstrating resilience and a level of independence from metropolitan cycles.
As pressures intensify on the construction industry, including supply chain delays, labour shortages and escalating costs, a number of small and medium builders went into receivership, adding to waning purchaser sentiment, particularly as people consider delaying purchase decisions in the vacant land sector to account for this.
We’re pleased to share the latest insights through both an economic and property lens as we collectively navigate the undulating post-pandemic landscape.
any questions about specific market segments, or any topics covered in this report. Please reach out to our highly respected Research & Data division for more information.
The rental market is turning around rapidly as internationals finally return to our shores, and vacancy rates are already below the rolling two-year average, shifting the demand-supply balance and driving up rents, making the sector far more attractive to Weinvestors.welcome
Welcome to Our Market Update
6 - RPM Group
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Our research is comprehensive, monitoring over 300 projects across Victoria. And, our reporting can be tailored to provide you the specific intel you need to drive the success of your project.
RPM’s Research & Data 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 Ouradvice.team’s
Andrew Raponi Research a.raponi@rpmgrp.com.auManager
Michael Staedler Group Manager - Research & Data m.staedler@rpmgrp.com.au
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.
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Comprehensive Market Research and Intelligence
Q2 2022 - Residential Market and Economic Review - 7
GROSS DOMESTIC PRODUCT (GDP) CONSUMER PRICE INDEX (CPI) STATE FINAL DEMAND (SFD) - VIC RETAIL TURNOVER - VIC6.143.88%% 13.39%7.35%3.851.77%% 10.872.55%%12 month change to Q2 Jun-222022 Jun-2212month change to Q2 2022 5 Jun-21averageyear average5Jun-21year Source: ABS Economic Activity Source: RBA CASH RATE VARIABLE RATE Jun-21Mar-22June-220.85% Jun-21Mar-22June-22Jun-21Mar-22June-22 Jun-21Mar-22June-22 DISCOUNTED 4.20RATE% 5.22% 3.59% 3.83% 3.59% 32.19%YEARFIXEDRATE0.100.10%% 4.524.525.27%%% AUS 25,766,605 VIC 6,559,941 TOTAL 10,185NATURALPOPULATIONINCREASE7,804 32,877 Q4 2021 Q4 2020 12 months to Q4 2021 30.5%% change - same qtr. last year 5.7%% change - 12 months earlier OVERSEAS MIGRATION -9,566-18,680Q412,0652021 Q4 2020 12 months to Q4 2021 % change - same qtr. last year % change - 12 months earlier 164.6%53.1% NET INTERSTATE MIGRATION -19,386-6,310Q4-8,7792021 Q4 2020 12 months to Q4 2021 % change - same qtr. last year % change - 12 months earlier 39.1%57.1% change from Q4 2020 to Q4 2021 % change - same qtr. last year 127,953 -3,5240.05%NATIONAL0.50%TOTAL CHANGE VIC TOTAL CHANGE VIC share 3% Victorian Population Borrowing Rates
EMPLOYMENT GROWTH (JOBS CREATED) tocontributionVicAUS(‘000s)Jobs Change% Source: ABS Nov-21 May-21 Nov-20 $1,821 $1,803 $1,769 FULLWAGESTIME 121.8766.92 5.22.8%% 25.831.0%%Q2 Last202212months 103.4725.89 0.7%3.0% 23.616.9%%Q2 PARTLast202212monthsTIME -18.40-41.03 3.7%1.7% 66.053.3%%Q2 Last202212months 1.0% 2.9% CONSUMER SENTIMENT Q2 2022 Q2 2021 86.4 107.2 Source: RBA/Westpac-Melb Institute 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 exceeds2,700 businesses.3.2% 4.1% 4.5% Q2 2022 Q1 2022 Q2 2021 Source: ABS BUSINESS SENTIMENT Q2 2022 Q2 2021 11.8 22.4 Source: RBA/NAB Victorian Employment UNEMPLOYMENT RATE TOTAL
NO. OF FHB FINANCED AVERAGE LOAN SIZE (FHB) 9,471 $502,629 $469,29413,717 Q2 2022 Q2 2022Q2 2021 Q2 2021 Source: ABS NO. OF NON-FHB FINANCED AVERAGE LOAN SIZE (NON-FHB) 22,586 $619,074 $562,51225,160 Q2 2022 Q2 2022Q2 2021 Q2 2021 10% 7%31% FINANCE FOR NEW DWELLINGS FINANCE FOR ESTABLISHED DWELLINGS 4,179 21,094 24,2296,426 Q2 2022 Q2 2022Q2 2021 Q2 2021 10% VALUE OF LOANS - OWNER OCCUPIERS VALUE OF LOANS - INVESTORS $18.74B $7.56B $7.99B$21,04B Q2 2022 Q2 2022Q2 2021 13% Q2 2021 35% SHARE OF FHB LOANS 29.5% 35.3% Q2 2022 Q2 202111% 5% Source: ABS Victoria Finance AUCTIONS HELD CLEARANCE Q211,9679,40511,110Q22022Q120222021 80%79%83% MEDIAN HOUSE PRICE MEDIAN UNIT $670,500PRICE$678,000Q22022Q22021 MEDIAN LAND $379,000PRICE$318,000Q22022Q22021$1,113,500$1,081,000 $679,000 $336,000$1,012,000Q22022Q12022 Q1 2022 Q1 2022 Q2 2021 1.3%6.8%2.9% 1.1% 19.2%3.6% Melbourne Property Source: REIV, RPM Research & Data Source: REIV
VACANCY RATE - MELB MEDIAN METRO HOUSE RENT MEDIAN METRO OTHER DWELLING RENTAVERAGE DAYS ON MARKET - METRO MELB 4.0% 6.1% Jun-22 Jun-22Jun-21 Jun-21 Source: ABS Source: REIV $500 $430 $470 $400 Mar-22 Mar-22 Mar-21 Mar-21 7.5%34 36 6.4% DETACHED HOUSE APPROVALS HOUSE COMMENCEMENTS HOUSE COMPLETIONS TOTAL DWELLING APPROVALS TOTAL COMMENCEMENTS TOTAL COMPLETIONS Q2 2022 Q1 2022 Q1 2022 Last 12 months Last 12 months Last 12 months Q2 2021 Q1 2021 Q1 2021 Q2 Q1Q19,095202220229,65320228,460 16,78214,78411,664 13,09618,73314,112 65,36872,90051,587Q2 2021 32.5%Q113,4702021 3.5%Q110,0072021 22.4%6,914 OTHER DWELLING APPROVALS OTHER COMMENCEMENTS OTHER COMPLETIONS Q2 Q1Q15,689202220227,12920223,204Q22021 7.3%Q15,3032021 73.7%Q14,1052021 48.2%Last6,18212 months 20.3%Last25,21512 months 23.3%Last26,21612months 27.3%19,873 18.9%21.2%10.9% 16.3%4.3%19.0%Last 12 months 15.2%Last40,15312months 12.7%Last46,68412months 12.3%Victoria31,714 MelbourneBuildingProperty
In the 18 months from July 2020, demand for new housing and renovations increased in response to fiscal and monetary policy stimulus and the need for more space as work-from-home mandates were introduced. Consequently, there is a healthy pipeline of residential construction work, but investment has declined 2.9% this quarter after falling 0.5% in Q1.
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OVERVIEW
on services rose 3.6%, still underpinned by latent spending in sectors that were impacted by mobility restrictions and lockdowns. This is apparent in the 37.3% surge in spending on transport services, as demand for both domestic and international travel rebounds. It should be noted, however, that expenditure is still only at two thirds of pre–pandemic levels. Spending on hotels/cafes/restaurants and recreational/culture also amassed solid growth of 8.8% and 3.6% respectively. Conversely, spending on goods edged lower by 0.1%, and with increased expenditure on eating out, food spending also declined by 1.2%.
Domestic Product (GDP) increased by a respectable 0.89% in Q2 2022, leading to 3.88% annual growth, well above the long-term average. With household savings ratios remaining historically elevated at 8.7%, consumers are somewhat buffered from the rising cost of living pressures, and despite a 75-basis point cash rate rise, household spending (up 2.15%) was the key driver behind the economic Expendituregrowth.
This is underpinned by construction delays, cost increases and labour and materials shortages, all exacerbated by above-average rainfall across parts of Australia and sustained high absentee rates. A June Australian Bureau of Statistics (ABS) survey of business conditions and sentiment found 31% of businesses were having difficulty finding suitable staff, impacting the work quality or output of around half those affected. The same survey found 41% were experiencing supply chain disruptions, with delays or sourcing issues impacting 40% of these businesses’ bottom lines.
UpdateEconomic
RATIOQUARTERLY
RatioSavingsHousehold Average Savings Ratio = 6% 2014 2019 37.3% 8.8% 0.4%0.4%0.6%1.0%2.0%2.2%2.7%3.0%3.1%3.3%3.6%3.7% 4.3%3.0%1.2%1.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% Transport services Hotels, cafes and restaurants Clothing and footwear Recreation and culture Electricity, gas and otherHealthfuel Operation of vehicles Alcoholic beverages Total Private Consumption Other goods and Communicationsservices Insurance and other financial services Education services Rent and other dwelling services Furnishings and household equipmentFood Cigarettes and tobacco Purchase of vehicles Quarterly Change in Household Consumption Expenditure Source: Australian Bureau of Statistics Source: Australian Bureau of Statistics
CHANGE IN HOUSEHOLD CONSUMPTION EXPENDITURE 19.8%
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Mar-22 Jun-22 Sep-22
23.7%
Q2 2022 - Residential Market and Economic Review - 13
These factors have impacted the non-dwelling construction sector too, which contracted 5.0% in Q2. Future development is also being impeded by the slower than expected return of desk workers and relatively high office vacancies. Conversely, machinery and equipment investment escalated by 3.9%, aided by business confidence remaining buoyant, and the added incentive of avoiding higher labour costs.
Public investment continues increasing, supported by Federal Government defence spending and greater expenditure by State and Local Governments on infrastructure and community projects. However, public consumption edged lower due to Government spending less on health after the Omicron outbreak during Q1 subsided.
8.7%20.0%10.0%0.0%5.0%15.0%25.0%
HOUSEHOLD SAVINGS
To address the current skilled shortages faced by many industries, the Federal Government has increased the 2022-23 permanent migration cap by 35,000 to 195,000 places. This will not alleviate labour capacity constraints in the short term, so protracted construction times across residential, non-residential and engineering projects will remain the reality across private and public sectors for some time. Consequently, it should sustain higher activity levels longer and contribute to economic growth through to the end of 2023.
Despite the many headwinds Australia’s economy is expected to encounter during the remainder of 2022 and into 2023, GDP is projected to remain resilient. Population growth, a key to Australia’s three-decade uninterrupted run of economic growth before the pandemic, has rebounded with the re-opening of international borders, and will help sustain GDP growth.
OUTLOOK
Australia’s economy is earmarked for further growth during the second half of 2022, albeit at a slower pace. While labour markets will remain tight and drive wage growth, households are still likely to encounter a decline in real wages. This is attributed to additional strains on household budgets from further interest rate rises, inflation remaining stubbornly high, and increased fuel prices once the fuel excise tax discount ceases at the end of September.
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Additionally, residential property price corrections will reduce perceived household wealth and drive cautionary behaviour. Private consumption growth is expected to moderate accordingly, with the flow-on to goods and services demand impacting the broader economy.
Public consumption will receive a boost in Q3 following the Federal Government temporarily reinstating the $750 disaster relief payment to certain workers who contract COVID–19. However, public consumption on the whole, including temporary pandemic spending measures, will be progressively wound back to slow down ballooning government debt.
3
After a decade without a cash rate rise, the Reserve Bank of Australia (RBA) has lifted rates monthly since May. The cash rate has risen by 225 basis points in just five months, the most rapid increase since 1994.
Cash
INTEREST RATES
Q2 2022 - Residential Market and Economic Review - 15
Source: Reserve Bank of Australia - September 2022 StandardRateVariable Rate for Owner DiscountedOccupiersVariable Rate Year Fixed Rate
6.22%5.20%6.27%2.35%
This increase in the cash rate has been primarily aimed at bringing inflation back under control to RBA’s target range of 2% to 3%. Household consumption and the overall economy has so far endured these increases, continuing to grow alongside the rises as the tight employment market drives stronger wage growth and helps offset higher mortgage repayments.
The cash rate is at its highest since early 2015, now at 2.35%, with the standard discounted variable rate lifting to 5.20% and three-year fixed rate to 6.22%, with another rise in line with September’s 50 basis point rise anticipated.
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The Consumer Price Index (CPI) increased by 1.78% across Australia in Q2 2022, jumping 6.14% year-on-year; the greatest annual increase in 32 years.
Within the housing group, the CPI Index for new dwelling purchase by owner occupiers, which examines prices for new dwellings (excluding land) and major renovations, escalated by 5.65% nationally. This has been driven by strong demand for residential dwelling construction coinciding with building material and labour shortages, increased freight costs, and the diminishing impact of the HomeBuilder grant and other incentives subsidising construction
Index for rents rose by a moderate 0.71% over Q2 2022, but growth in Sydney and Melbourne rents remain slower than other capital cities. While the reopening of international borders and return of overseas students and workers has led to rental rates rebounding and trending towards pre-pandemic levels, vacancies in the inner city areas of these two capital cities remain relatively high.
CONSUMER PRICE INDEX
Thecosts.CPI
The international travel and accommodation CPI Index jumped by almost 20%, fueled by rising airfare prices and demand. Price increases for fruit and vegetables was another key contributor to inflation, with flooding in key production areas of New South Wales and Queensland and high transportation and fertiliser costs leading to a CPI Index increase of 5.8%.
QUARTERLY % CHANGE IN NEW DWELLING PURCHASE INDEX QUARTERLY % CHANGE IN NEW DWELLING RENTAL INDEX Source: Australian Bureau of Statistics 4.6% 6.9%7.0% 6.0% 4.4%4.8% 2.9%3.4% 5.6% 0.0% 2.0% 4.0% 6.0% 8.0% MelbourneSydneyBrisbaneAdelaidePerthHobartDarwinCanberraNational 0.18%0.35% 1.07%1.20% 1.83%2.07%1.93% 1.47% 0.71% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% MelbourneSydneyBrisbaneAdelaidePerthHobartDarwinCanberraNational
Victoria’s 3.1% unemployment rate was the lowest across all states and territories, suggesting minimal capacity for businesses to source new employees. This scarcity of suitably qualified applicants has led to an increase in part-time workers becoming full-time employees.
Statistics 8.0%7.0%6.0%5.0%4.0%3.0%2.0%1.0%0.0%-100,000-150,000-125,000-75,000-50,000-25,000025,00050,00075,000100,000125,000150,000175,000
The tight employment market is starting to initiate higher wage growth, although wage increases remain significantly below CPI Index growth. The hourly rates of pay (excluding bonuses) CPI Index for Victoria rose by 0.57% quarterly and 2.54% annually. This compares to 1.77% quarterly and 6.13% annual growth for Melbourne’s overall CPI Index. However, the historically low unemployment rate and persisting skilled shortages will ultimately drive upward pressure on wages.
Growth in full time employment positions has been particularly strong in Victoria, with the state adding 22,600 full time jobs over the three months to July 2022. This equated to 64% of total full time jobs created nationally. Conversely, part time jobs declined by 26,900 positions during the same period.
Source: Australian Bureau
WAGES VS. CONSUMER PRICE INDEX of
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22
Jul-22 Full Time Part Time Unemployment Rate 0.57% 2.54% 1.77% 6.13%0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00% Quarterly Growth Annual Growth ChangePercentage Wage Price Index Consumer Price Index
Q2 2022 - Residential Market and Economic Review - 17
MONTHLY CHANGE IN EMPLOYMENT
EMPLOYMENT & WAGES
after declining 3.0% in August, it’s hovering around figures observed through the depths of the pandemic and the global financial crisis, but still well above the recession of the early ‘90s.
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Source: Westpac-Melbourne Institutde Consumer Sentiment Index
Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 Apr-19 Aug-19 Dec-19 Apr-20 Aug-20 Dec-20 Apr-21 Aug-21 Dec-21 Apr-22 Aug-22
The Westpac-Melbourne Institute Consumer Sentiment Index continued to deteriorate through August, although the rate of decline has softened in recent months. With a reading of 81.2
CONSUMER SENTIMENT
CONSUMER SENTIMENT INDEX (INDEX=100) 81.2100.090.080.070.075.085.095.0105.0110.0115.0120.0
Consumers have been increasingly feeling the impacts of rising inflation and cost of living pressures (the highest since the early 1990s), with the RBA anticipating inflation will remain elevated in the near term. This has impacted purchases of major household items, which declined 8% in August and 27% year-on-year.
The increasing cash rate and subsequent borrowing rate rises are negatively impacting consumer attitudes on the housing market. The time to buy a dwelling sub-index is down 2.3%, and 12% from a year earlier. House price expectations have also reduced significantly, down 7.5% in August and 38% year-on-year. Consumers are anticipating a further 1% rise by the end of the year, and sentiment is likely to curtail their spending habits.
Strong readings across trading and profitability conditions suggest that businesses have been able to pass on some costs to consumers and maintain profitability margins, given demand has remained robust despite broader economic headwinds and higher final product prices. The impacts of cash rate increases on mortgages and household budgets have not yet manifested into adjusted spending habits, and borrowers on home loan rates fixed during the pandemic will soon roll into higher variable rates that will constrain household budgets and may start to impact
+17.7Jul-22
NAB BUSINESS CONFIDENCE INDEX
BUSINESS SENTIMENT
Thedemand.employment
Q2 2022 - Residential Market and Economic Review - 19
market tightened, with labour shortages still inhibiting businesses’ ability to hire more staff. The positive industry conditions recorded in July were predominantly driven by the construction sector (+25 points), recreation and personal services industry (+19 points), and mining, with the balance of industries sustaining steady growth. All industries recorded positive trends through the month.
Source: National Australia Bank Business Survey
-40.0-50.0-30.0-20.0-10.00.010.020.030.040.0
Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-18 Mar-19 Jul-19 Nov-19 Mar-20 Jul-20 Nov-20 Mar-21 Jul-21 Nov-21 Mar-22
Businesses have remained optimistic through 2022, with positive and rising business condition readings. The index recorded a 17.7 rise in July, and business conditions have remained positive despite the headwinds of inflation, rising interest rates and broader geopolitical instability. These positive conditions are underpinned by record capacity utilisation (reflected in the historically low unemployment rate) and price rises. Each sub-category (trading, profitability and employment) recorded robust growth through July following some softening in June.
20 - RPM Group Source: Australian Bureau of Statistics Q4 2021 is the latest available data Source: Australia Government Centre for Population Natural increase Q4 Net2021Overseas Migration Q4 Overall2021 Population Change Q4 2021+13,471+12,064+10,185 POPULATION PROJECTIONS PERSONS
The Australian Government’s latest population projections for Victoria (released April 2022) suggest overseas migration will reach an annual net inflow of 65,300 over 2022-23 before returning to long-term levels from 2023-24. Interstate migration is projected to take longer to recover, with a small net outflow anticipated in 2022-23 before returning to net inflow.
Victoria’s population increased by 3,925 in 12 months following an annualised outflow of 26,732 to September 2021. While population growth is normalising, it remains well below the 131,654 recorded in the 12 months to December 2019, highlighting the significant impacts from the pandemic and recovery on population growth.
VICTORIAN POPULATION
There is scope for some marginal short-term upward correction with the permanent migration cap recently increased from 160,000 to 195,000 following the Jobs and Skills Summit. This increase is designed to fill immediate gaps in the healthcare, infrastructure and technology sectors. Whether the increased cap will remain beyond the current financial year is yet to be determined.
Victoria’s population increased by 13,471 in Q4 2021 (latest available data), representing the first net population increase since June 2020. Net overseas migration rebounded to 12,064, the first inflow recorded since March 2020, and the natural increase of 10,185 is the highest since March 2019. Interstate migration leaked 8,779 persons, the highest quarterly outflow in a decade (even higher than throughout COVID-19 lockdowns), and was likely underpinned by the high cost of housing as median prices peaked and rents began to rise.
-20,000020,00040,00060,00080,000100,000120,000140,000 2021-22 2022-23 2023-24 2024-25 2025-26 Natural Increase Net Overseas Migration Net Interstate Migration
Q2 2022 - Residential Market and Economic Review - 21 Source: Australian Bureau of Statistics POPULATION COMPONENTS -30,000PERSONS-20,000-10,000010,00020,00030,00040,000 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Natural Increase Net Overseas Migration Net Interstate Migration
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• $379,000 median land price (+3.6% quarterly, +19.2% year-on-year)
Purchasers became increasingly price conscious in Q2 2022, as rising interest rates reduced borrowing capacity. Many reevaluated their position and considered delaying purchases until saving a larger deposit. Given the weaker buyer demand, upgraders and downsizers have also been Auctionimpacted.clearance
The relative affordability advantage of new homes in growth areas over established dwellings is pushing buyers out from middle ring suburbs and promoting lot price growth. New lot releases have also been moderating, as developers seek to rein in title timeframes, which have blown out after record lot sales activity in 2021. This in turn is keeping new lot supply similar to lot absorption and applying upward pressure to lot prices. However, the rate of lot price growth will likely slow through the second half of 2022 as residential borrowing costs rise and reduce the borrowing capacity for future purchasers.
Clearance+19.2%+3.6%Median70.7%$379,000LotPricechangefromQ12022fromQ22021ratefrom 1,140-1.1%-1.3%Median+6.8%-2.9%Median$670,500$1,081,000AuctionsHousePricechangefromQ12022fromQ22021UnitPricechangefromQ12022fromQ22021
MELBOURNE RESIDENTIAL MARKET
Median sales in Q2 2022:
• $1,081,000 house price (-2.9% quarterly, +6.8% year-on-year)
• $670,500 unit price (-1.3% quarterly, -1.1% year-on-year)
New home demand is normalising after record sales in the 18 months from the start of HomeBuilder (June 2020). In addition, rising cost of living pressures, heightened construction costs and interest rate rises are all contributing to more cautionary behaviour.
rates subsequently fell to 70.7%, although there was still a healthy total volume of 11,110 auctions. This is down 7% year-on-year, but may be slightly inflated by vendors rushing properties onto the market in anticipation of prices dipping further.
Nevertheless, lot prices have continued to grow:
Q2 2022 - Residential Market and Economic Review - 23 Source: Real Estate Institute of Victoria & RPM Research & Data Source: Real Estate Institute of Victoria & RPM Research & Data MELBOURNE PRICES PRICE GROWTH MEDIAN HOUSE & UNIT PRICE % CHANGE MEDIAN LOT $400,000$350,000$300,000$250,000$200,000$150,000PRICE$1,000,000$600,000$400,000$500,000$700,000$800,000$900,000$1,100,000$1,200,000 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 Jul-19 Dec-19 May-20 Oct-20 Mar-21 Aug-21 Jan-22 Jun-22 Median House Price (LHS) Median Unit Price (LHS) Median Lot Price (RHS) 7% 26% 32% 107% 1% 8% 12% 50% 19% 21% 39% 90%-20%0%20%40%60%80%100%120% 1 Year 2 Years 5 Years 10 Years Median House Price Median Unit Price Median Lot Price
of a
Construction Dwelling Newly Erected Dwelling Residential
Established dwelling loans declined marginally by 0.1% but remain at historically high levels despite expectations of increasing borrowing rates.
LOANS BY DWELLING TYPE
Source: Australian Bureau of Statistics
NEW LOAN APPLICATIONS
24 - RPM Group 40,00030,00020,00010,0005,000015,00025,00035,000 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22
LOANS BY DWELLING TYPE
Established Dwelling
The number of new owner occupier loans in Victoria increased by 4.0% in Q2 2022 to 29,969 approvals. All residential dwelling types remained static or grew following some softening through Q1 (likely impacted by lower activity through January). The highest quarterly increase was in residential land loans, up 24.7%, and while this is a significant improvement, it remains soft from a long-term perspective.
New loan commitments for dwelling construction increased 18.6% this quarter, whereas for newly erected dwellings they reduced 0.5%. HomeBuilder builds are tapering off, though some remain in the pipeline due to capacity constraints, labour shortages and supply chain issues. The next round of new home construction is also being pushed out by longer lot title timeframes.
Land
VICTORIAN FINANCE ACTIVITY
Source: Australian Bureau of Statistics
Investor demand shifted to higher-priced low-density dwellings in response to the growing preference of tenants wanting more internal space. However, the reopening of international borders and return of overseas students and workers, has led to vacancy rates across inner city apartment markets tightening significantly and rents increasing back to pre–pandemic levels, renewing investor demand in this sector.
Q2 2022 - Residential Market and Economic Review - 25 $6,000$4,000$3,000$2,000$1,000$0$5,000$7,000$8,000
Owner Occupier Investor
LOANS BY PURCHASER TYPE
The total value of new investor loans (excluding refinancing) increased 8.9% this quarter and rose 21% from last year. On an annualised basis, total investor loan value is higher than the boom period of the mid-2010s, having remained elevated since March 2021.
MONTHLY VALUE OF LOANS ($M)
The total value of new owner occupier loans (excluding refinancing) increased in Q2 by 3.9%, but is down 9.0% year-on-year. Fewer auctions, which are more concentrated in the expensive inner and middle suburban areas, impacted the total value. Additionally, median house and unit prices softened, rising interest rates limited borrowing capacity, and there was increasing caution amongst potential buyers.
LOANS BY OWNER OCCUPIER TYPE
Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 Jun-18 Oct-18 Feb-19 Jun-19 Oct-19 Feb-20 Jun-20 Oct-20 Feb-21 Jun-21 Oct-21 Feb-22 Jun-22
Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22
While first home buyer activity has moderated this year, it remains above pre-pandemic levels. The elevated figures likely reflect the prolonged settlement and building delays observed across the land market, which has extended some of the loan activity.
LOANS BY OWNER OCCUPIER TYPE
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Going forward, first home buyers may delay their purchasing decision as barriers to enter the property market are exacerbated, reducing borrowing capacity and the ability to save a necessary deposit. This is likely to impact purchasers in other categories too as upgraders potentially wait for prices to reduce.
Source: Australian Bureau of Statistics
FHB % SHARE OF40%35%30%25%20%15%10%5%0%LOANS40,00030,00020,00010,0005,000015,00025,00035,000
First Home Buyer Non-First Home Buyer FHB Share of Owner Occupiers
NUMBER OF LOANS
LOANS BY OWNER OCCUPIER TYPE
The number of new loan commitments to both first home buyers and non-first home buyers increased by 1.5% and 5.2% respectively. Consequently, the proportion of first home buyers remains above the long-term average.
Non-first home buyers are spending $116,445 more than first home buyers, whose average loan size is $502,629. This divergence has increased since March 2019 when loan sizes were near identical.
Average loan sizes for first home buyers increased by 0.8% this quarter, while loan sizes for non–first home buyers declined 0.7%. This is likely attributed to the better performance of properties at the more affordable end of the market.
AVERAGE LOAN SIZE BY DWELLING TYPE
Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22
AVERAGE LOAN SIZE - BY FIRST HOME BUYER AND NON FIRST HOME BUYER
FHB - Average Loan Size Non-FHB - Average Loan Size
Source: Australian Bureau of Statistics LOAN$600,000$400,000$300,000VALUE$350,000$450,000$500,000$550,000$650,000
Q2 2022 - Residential Market and Economic Review - 27
townhomes fell by 2.0% in Q2, although remain above the ten-year average as it comes off the HomeBuilder-induced uplift. The rolling annual figure is 8.0% higher year-on-year, with a total of 12,814 approvals. This is likely to ease in the near term as quarterly approvals stabilise to reflect a post-COVID norm. Townhome demand has been underpinned by strong detached house price growth and recent building cost pressures making it a more affordable
28 - RPM Group
Approvalstimeframes.of
Therealternative.were
10,0006,0004,0002,00008,00012,00014,00016,000
Victorian dwelling approvals were down 3.2% in Q2 2022 to 14,932. The rolling annual figure has also softened, with 68,325 approvals 4.4% lower than the equivalent period a year prior.
Detached house approvals increased 2.5% to 9,064, but reduced 15.4% annually, moderating to reflect pre-HomeBuilder initiative levels and driven by recent lot settlements having longer title
APPROVALS
VICTORIAN BUILDING ACTIVITY
*Quarterly approvals of apartment projects may vary subject to the profile and size of individual projects that may commence construction in any given quarter.
3,024 approvals of units in four storey (or above) buildings - a decline of 17.6% from Q1*, but annually approvals have been trending upwards with a 37% yearly increase to 12,459
Theapprovals.emergence and evolution of the nascent build-to-rent market will support additional approvals and supply given they are not reliant on pre-sale hurdles to commence construction, which has impeded the build-to-sell market (especially projects of scale). Elevated house prices have also supported downsizer activity and demand for boutique owner-occupier focused apartment projects.
APPROVALS BY DWELLING TYPE
Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22
Source: Australian Bureau of Statistics
Detached Houses Townhomes Apartments
Houses Multi-units
After falling 8.0% in 2020-21, multi–unit dwelling starts have increased 28.2% over 2021-22 to 26,790 commencements (the highest annual total since the peak in 2017-18). This was underpinned by elevated townhome approvals through the second half of 2021, the emergence of build-to-rent projects, and the reopening of international borders supporting rental growth.
Source: Australian Bureau of Statistics
60,00040,00030,00020,00010,000050,00070,00080,000
2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24
Q2 2022 - Residential Market and Economic Review - 29
COMMENCEMENTS
A combination of ongoing new house demand and construction delays are anticipated to support elevated building activity in the short term. According to the Housing Industry Association (HIA), there were 42,370 detached housing starts in 2021-22, an 8% decline from the previous year but a 3.6% positive revision from the forecast.
House commencements have increased on the back of extremely strong lot sales activity since late 2020 as a result of HomeBuilder’s tight construction timeframe requirements. Detached house starts rose 27.7% over 2020-21 to a record 46,060 commencements.
New house demand is anticipated to soften in 2022-23, given the pull-forward of demand in the past two years. The market will still be challenged in the short term by the sharp rise in interest rates and their impact on affordability and household budgets. Furthermore, ongoing supply chain disruptions across the construction sector, increased building costs and capacity constraints may delay or reduce building commencements. As a result, the decline in detached house starts is forecast to accelerate, falling 11.5% in 2022-23 and 12.1% in 2023-24 to 32,980 commencements - a correction to long-term levels.
While overall commencements are trending down there may be some upside in multi-unit commencements. The restart of overseas migration from February has led to vacancy rates tightening, and strong rental growth has lifted rents beyond pre–pandemic levels. With new supply anticipated to remain below long-term levels, tight vacancies and improving yields will underpin the next upward cycle in pre-sales activity, and subsequently, construction.
Forecast
COMMENCEMENTS
Up from 10 last quarter, 22 suburbs had a mortgage to household income ratio between 35% to 39%, a bracket synonymous with the emergence of constrained affordability.
Housing affordability has remained a critical issue across the market and received significant attention as a result. Historically, affordability concerns have focused on first home buyers, given they often rely on subsidies or other support to purchase a dwelling. But recent affordability constraints are impacting an expanded portion of buyers.
This chart examines the ratio of mortgage repayments to household income for 55 suburbs throughout the growth corridors of Melbourne and Greater Geelong. Although the new home market experienced robust price growth during Q2 2022, a selection of suburbs still contain a mortgage to household income ratio below 35%, with the changing composition of lot sales to incorporate more small lots helping to maintain affordability.
Thetrend.general
30 - RPM Group
GROWTH AREA AFFORDABILITY
The common benchmark for identifying housing stress in Australia has historically been defined as households that allocate at least 30% of disposable income to finance their mortgage. This ratio has been in place for decades and in recent times there is a growing view the ratio should be closer to 35% or 40% to reflect the market of today.
Calculation assumptions: This chart depicts the median lot price in Q2 2022 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 cost ranges from $265,625 (Cardinia) to $325,000 (Casey) 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 variable rate in June 2022 of 4.20%.
Housing stress is apparent through the decline of suburbs with household income ratios below 35% - just 16 suburbs compared with 37 suburbs in the same bracket in Q1. Most households with a ratio below 35% were located across the Western corridor, with higher household incomes particularly apparent in Wyndham.
Suburbs with mortgage income ratios above 40% increased by 3 to 17, with the majority of these suburbs located in Casey and Cardinia, with lower incomes in Cardinia influencing this reduction in affordability across the greenfield market is likely a result of increased borrowing costs. Additionally, purchasers are increasingly incorporating higher build costs in their budgeting, further constraining affordability.
Q2 2022 - Residential Market and Economic Review - 31 Source: Reserve Bank of Australia, Australian Tax Office, and RPM Research & Data PRINCIPAL LOAN AMOUNT MORTGAGE REPAYMENTS AS A % OF INCOME0%10%20%30%40%50%60%$600,000$400,000$300,000$200,000$100,000$0$500,000$700,000$800,000 Beaconsfield Burnside Cranbourne Officer GoonNarNar CookPoint Fyansford Eynesbury RiseFraser Aintree Deanside VillageJunction Wollert Truganina DuneedMount Strathtulloh ParkThornhill Craigieburn Donnybrook CreekArmstrong Rockbank Beveridge Charlemont Leopold Mambourin Werribee Woodstock ValeWyndham
At the moment rate rises are driving everything. From a property perspective, one of the biggest immediate impacts is borrowing capacity. As a rule of thumb, we look at an average 10% reduction in what you can borrow for each 1% rise - and we’re already 2% higher than just a few months ago.
Industry Leader Insights
WHAT DOES THE CURRENT ECONOMIC LANDSCAPE LOOK LIKE?
DANIEL GRADWELL ANZ ASSOCIATE DIRECTOR PROPERTY
WE SPOKE TO DANIEL ABOUT THE STATE OF THE ECONOMY AND PROPERTY SECTOR, AND WHAT INDUSTRY INSIDERS ARE ANTICIPATING FOR THE MARKET.
32 - RPM Group
Q&A
a purely economic standpoint, the cash rate rises are being implemented because our economy is so strong, and people are still spending money, which shows what a solid base we’re starting from.
But it’s not all doom and gloom. What’s really important is that we’re in a great position to absorb some of these blows. Default rates are low and forced sellers aren’t coming onto the market yet, which is a reassuring story. The other factor is tight lending conditions in place since APRA significantly refined criteria from 2016-17, creating a more generous financial Ultimately,buffer.from
Victoria Queensland South Australia Western Australia (%)RateUnemployment
(%)changepricehousingCumulative
Again, rising interest rates are having the biggest impact on just about everything. From a borrowing perspective, interest rates not only put pressure on household finances, they also impact pre-approvals, so people looking in a specific bracket with pre-approved finance six months ago may simply not be participating in that sector of the market now.
Mar-2096432578
UNEMPLOYMENT RATE HOUSE PRICE CHANGE VS. MARCH 2020
Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 fall 10% fall 15% fall
While on the other side of the coin, property prices are starting to come down, even if they drop by 15% in Melbourne or, say 18% regionally, they’ll still only come down to 2020 prices, which doesn’t necessarily immediately make them ‘affordable’. From a rental perspective, vacancy at 1% is far too tight, and the reality is it’s going to get worse before it gets better as the construction industry faces a tremendous backlog and a plethora of supply and resourcing issues. Given the pace of rental demand, it’s likely this issue will peak in around two to three years.
Unemployment rates are now lower than they have been for 48 years, which in itself is an incredible story. Interestingly, after some of the most stringent lockdowns in the world, and certainly in the country, Melbourne’s unemployment is the lowest in Australia at 3.1%.
Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22
New South Wales
WHAT ARE THE KEY FACTORS INFLUENCING MELBOURNE’S PROPERTY MARKET?
Australia 5%
20-505101525Mar-20
The Reserve Bank of Australia has a delicate balancing act to perform over the coming months in curbing inflation and supporting the local economy, and with Consumer Price Index (CPI) data now moving from a quarterly to a monthly model, it will equip them with more timely insights to achieve that key balance.
Q2 2022 - Residential Market and Economic Review - 33
WHAT SHOULD WE BE KEEPING AN EYE ON OVER THE COMING MONTHS?
We should keep a close eye on household spending, because combined with housing prices, it’s responsible for so much of our economic position. At the moment it’s really strong, but as interest rates increase - which is by design - the heat will start to come out and we may see more households under financial strain.
Many small and mid-sized builders have gone into receivership and in recent months larger players, such as Caydon Property Group, have fallen prey to the current environment, citing unsustainable cost pressures as the catalyst for their downfall. With more organisations likely to collapse in the short to mid-term, builders are increasingly requesting contract negotiations to avoid falling into a similarly perilous position.
Apartments and Townhomes
OVERVIEW
Compounding these cost pressures are widespread price falls in the retail market. This is putting strain on the balance sheet, especially as Melbourne's housing market continues to recede. Median unit prices now sit at $670,500, a 1.3% quarterly drop and 1.1% decrease year-on-year. The modest falls reflect consumer sentiment rather than the material impact of rate rises, which is likely to be seen towards the end of the year, given the lag between rate rise announcements and borrowing capacity limitations or household finance changes.
cost pressures have contributed to apartment and townhome approvals falling by 14%. Labour and materials shortages have been exacerbated by high fuel prices and disrupted supply chains, and government sanctions on Russia and Belarus have had a material impact on specific construction elements like the price of timber. While inflation rose 1.8% in Q2 2022, construction costs rose 9%, and fuel shot up by 13%.
34 - RPMContinuedGroup
There was hope that Q2’s wage growth would offset any strain on households caused by rising inflation, but the 0.7% quarterly and 2.6% annual wage growth increases were well below the 6.1% inflation figure.
Q2 2022 - Residential Market and Economic Review - 35
While property prices have eased slightly, rental vacancies have tightened in both Metropolitan Melbourne and Regional Victoria. In Melbourne, even before the pandemic shifted the way we live and the types of properties people want, apartments and townhomes had increased in popularity and developers had started including them in Nowmaster-planning.theyaresought
after, especially for younger age groups. Regional areas continue to see incredibly low vacancy rates, to the point where businesses and critical services are struggling to attract and house new workers. This has once again demonstrated the clear need for more medium and higher density dwellings to cater to demand.
36 - RPM Group
*It should be noted that apartment activity can be easily misrepresented as it only takes one or two large-scale developments to have a material impact on the overall number for the quarter.
Commencements increased 6.6% this quarter to 7,129 dwellings - a 73.7% increase year-on-year. Unfortunately, these have not translated to date into completions, with figures falling significantly in the face of rapidly rising materials costs and serious skilled labour shortages impacting budgets and timelines. While HomeBuilder did prop up much of the market initially, its success arguably exacerbated shortages by catapulting demand forward. There were 3,204 completions in Q2, 33.4% down from Q1 and 48.2% below a year ago, but more tellingly, the lowest quarterly result since March 2010.
OTHER DWELLING APPROVALS, COMMENCEMENTS, AND COMPLETIONS
Townhome approvals have reduced for the last three quarters in a row, now down to 2,811 in Q2, the lowest number since Q4 2020. This decline has been influenced by developers not being in a financial position to wear additional costs, and therefore not moving forward with approvals.
Townhome and apartment approvals were down 13.5% this quarter to 5,689, but remained 7.3% up year-on-year*. These results are relatively strong considering the significant headwinds at play, including construction costs impacting builders and developers, and rising interest rates hindering consumer sentiment.
Taking a longer-term perspective, rolling annual townhome and apartment approval levels are 7.1% and 35.7% higher than the start of the pandemic (Q2 2020), and demonstrates an overall normalisation of approvals in the medium term.
TOWNHOME APPROVALS Year to 2018June Year to 2019June Year to 2020June Year to 2021June Year to 2022June Year to 2018June Year to 2019June Year to 2020June Year to 2021June Year to 2022June 7%18% 19% 14% 7% 13,835 11,165 10,402 11,875 12,721 22,211 12,176 13,400 9,088 12,494 22% 45% 10% 32% 37% APARTMENT APPROVALS
Q2 2022 - Residential Market and Economic Review - 37 APPROVALS TOTAL TOWNHOMES TOTAL APARTMENTS TOTAL Q2 2022 2,811 2,878 5,689 Change from Q1 2022 -3.3% -21.6% -13.5% Change from Q2 2021 -12.5% 37.7% 7.3% 12 months to Q2 2022 12,721 12,494 25,215 % change 12 months to Q2 2021 7.1% 37.5% 20.3% COMMENCEMENTS OTHER DWELLINGS COMPLETIONS OTHER DWELLINGS Q1 2022 7,129 Q1 2022 3,204 Change from Q4 2021 6.6% Change from Q4 2021 -33.4% Change from Q1 2021 73.7% Change from Q1 2021 -48.2% 12 months to Q1 2022 26,216 12 months to Q1 2022 19,873 % change 12 months to Q1 2021 23.3% % change 12 months to Q1 2021 -23.8% TOTAL APARTMENT & UNIT PRICES MEDIAN PRICE CHANGE FROM Q1 2022 CHANGE FROM Q2 2021 Q2 2022 $670,500 Q1 2022 $679,000 Q2 2021 $678,000 1.3% 1.1% Note: Approvals are to the current quarter (Q2 2022), while commencements and completions are delayed by a quarter (Q1 2022).
In addition, with international travel now fully reinstated, demand is projected to increase in the short and medium terms and continue to outstrip supply. This will ultimately encourage investors to the market considering record low vacancy rates and increasing rents.
Consequently, demand for townhomes and apartments will increase, given their relative affordability. The increased presence of townhome and apartment developments in middle, outer and regional areas has been a positive shift, and ongoing demand cements this trend which has been a staple in inner-ring areas for some time.
As such, moving forward, the burden on both developers and builders will be high. While the appetite for townhomes and apartments is high across Melbourne, its growth areas and the regions, supply-side headwinds will continue through this cycle and well into the next. Developers and builders will need to take increasing care to navigate the current environment, while working to satisfy demand.
OUTLOOK
38 - RPM Group
House and unit pricing is projected to continue falling well into 2023 given the likelihood the cash rate will be near 3% by the end of 2022. The subsequent increased housing affordability will be largely offset by higher mortgage repayments and reduced borrowing capacity.
Unfortunately, supply is unlikely to keep up with increasing demand in the short and medium term. With traditional supply models, supply generally lags 12 to 18 months behind demand, and for apartments the timeframe is even more protracted. While commencements have picked up in recent months, revenues and costs are based on pre-2022 numbers, and with the construction cost challenges and shifting retail market, there is risk that an approved project may not come to market when projected.
Demand is projected to increase in the short and medium term and continue to outstrip supply. This will ultimately encourage investors to the market.
Q2 2022 - Residential Market and Economic Review - 39
House prices in the inner and middle rings dropped 1.3% in Q2 to $1,737,000 and $1,223,000 respectively. Conversely, outer ring house price rose by 0.9% to $856,000 - potentially demonstrating the elongated trend towards remote work arrangements. Year-on-year both middle and outer ring homes increased by 1.3% and 6.5% respectively, while inner ring houses fell 1.6%.
price falls continuing over Q2 2022, it’s clear the market is quickly heading towards the anticipated cyclic trough, a lowpoint many commentators believe is necessary to get the sector back on track.
While traditionally, falling house prices ease affordability concerns, the rapidly rising interest rates and decade-high inflationary figures means the landscape remains challenging. The upward mobility in interest rates impinges on prospective buyers’ ability to secure finance, and is being reflected in consumer confidence ratings, which have dropped each month this year and are likely to continue falling until there is some respite in the rate rises.
The median Metropolitan Melbourne house price now sits at $1,081,000, a notable decrease of 2.9% in just one quarter. However, the incredible growth during 2021 means the median is still 6.8% higher than a year ago.
Following a similar pattern, units and apartments in Melbourne’s outer ring also bucked the price fall trend this quarter and rose 0.5% to $631,500. Inner ring units dropped 0.8% to $650,500 and those in the middle ring decreased 1.4% to a median of $736,000. Across the sector, the $670,500 median landed 1.3% lower than the previous quarter and 1.1% lower year-on-year.
Regional Victoria followed a different path to Melbourne, with positive growth in both house and unit prices. Median house prices now sit at $625,000, while units and apartments are $435,500. This represents 1.3% and 2.8% growth for the quarter respectively, and a 12.3% and 12.5% lift year-on-year. While interest rates are rising and lending conditions are increasingly arduous, the benefits that life in Regional Victoria offers continues to outshine the surrounding noise.
InvestmentResidential
OVERVIEW
40 - RPM
WithGroupproperty
Regional Victoria followed a different path to Melbourne, with positive growth in both house and unit prices.
Q2 2022 - Residential Market and Economic Review - 41
RENTS
Geelong median rents rose across the board for units and houses on a quarterly and an annual basis. This again highlights the increased demand for rural towns and regional cities generated over the last two years.
With international students returning and the city coming back to life, the supply-demand balance in the rental sector has pivoted, with a competitive landscape pushing up rents, and new stock slowly trickling onto the market following pandemic-driven development pauses and building supply chain challenges. Subsequently demand is outgrowing supply and it’s expected to continue as interest rates rise further and heavily indebted investors sell to potential owner occupiers, thereby removing more stock from the market.
42 - RPM Group
The majority of the rental housing market saw median rent growth in Q2 2022, with the exception of inner ring two-bedroom homes which dropped by $20 a week. Inner ring four-bedroom houses performed best with a 13% increase to $990 per week. Year-on-year, most house rents have again grown, but smaller inner-ring homes dropped instead. Middle ring four-bedroom houses recorded the largest proportional rise of 11% or $65, while inner ring four-bedroom homes rose by $90, or 10%.
Median unit rents varied across different categories. Inner ring two-bed units had the greatest growth, rising by 6%, or $25 a week. Conversely, single bedroom units in the outer ring dropped $30. On a rolling annual basis, most unit types have recorded increased median rent, aside from one-bed units in the outer ring of Melbourne which stayed static.
UNITS & APARTMENTS BEDROOMS Q2-2021 Q1-2022 Q2-2022 CHANGE FROM Q1 2022 CHANGE FROM Q2 2021 2 YEAR ANNUALAVERAGEGAIN Inner 1 $330 $350 $360 $10 3% $30 9% 4.4% 2 $450 $450 $475 $25 6% $25 6% 2.7% 3 $628 $688 $680 -$8 -1% $53 8% 4.1% Middle 1 $320 $330 $325 -$5 -2% $5 2% 0.8% 2 $400 $415 $410 -$5 -1% $10 2% 1.2% 3 $500 $520 $530 $10 2% $30 6% 3.0% Outer 1 $300 $330 $300 -$30 -9% $0 0% 0.0% 2 $378 $385 $390 $5 1% $13 3% 1.6% 3 $440 $430 $448 $18 4% $8 2% 0.8% Geelong 1 $250 $270 $280 $10 4% $30 12% 5.8% 2 $348 $370 $380 $10 3% $33 9% 4.6% 3 $430 $460 $460 $0 0% $30 7% 3.4% HOUSE BEDROOMS Q2-2021 Q1-2022 Q2-2022 CHANGE FROM Q1 2022 CHANGE FROM Q2 2021 2 YEAR ANNUALAVERAGEGAIN Inner 2 $593 $600 $580 -$20 -3% -$13 -2% -1.1% 3 $720 $700 $700 $0 0% -$20 -3% -1.4% 4 $900 $880 $990 $110 13% $90 10% 4.9% Middle 2 $395 $390 $393 $3 1% -$3 -1% -0.3% 3 $450 $450 $460 $10 2% $10 2% 1.1% 4 $585 $600 $650 $50 8% $65 11% 5.4% Outer 2 $380 $360 $390 $30 8% $10 3% 1.3% 3 $400 $420 $430 $10 2% $30 8% 3.7% 4 $450 $470 $480 $10 2% $30 7% 3.3% Geelong 2 $350 $360 $360 $0 0% $10 3% 1.4% 3 $395 $420 $430 $10 2% $35 9% 4.3% 4 $470 $495 $500 $5 1% $30 6% 3.1%
vacancy rate now sits at 4.0%. Vacancy rates for the inner ring saw the largest shift in Q2, dropping by 1.8%, while the middle ring also fell by a significant Year-on-year,1.0%.
Melbourne’s vacancy rate is 2.1% lower, and 1.1% below the rolling two-year average. While vacancy rates are lower in all areas, the inner ring vacancy rate dropped by 3.2% in just 12 months.
YIELDS
Vacancy rates in Melbourne continued falling in Q2 2022, with almost every area recording decreased vacancy rates. This highlights the return of demand for rental properties as international students flood back into the country. With a lack of new supply coming onto the rental market on top of this increased demand, vacancy rates are tipped to continue falling. In addition to international migration, CBD offices are re-opening and people are resuming their social lives, making housing closer to the city once again an attractive Melbourne’sprospect.overall
Unit yields have also grown across all sectors and areas, with an overall yield of 3.45% sitting 0.16% above last quarter. Inner ring units are outperforming all other areas, with yields rising 0.23% to 3.80%. Yields are up overall across Metropolitan Melbourne year-on-year by 0.23%. Units in Regional Victoria did not perform as strongly, however, falling by 0.29% in Q2 and 0.32% year-on-year.
VACANCY RATE
0.01.02.03.04.05.06.07.08.09.0 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 (Percentage)RateVacancy Inner Total Middle (10-20km) Outer Total Melbourne Total Melbourne Two Year Average Geelong
VACANCY RATES
House yields increased across all areas of Melbourne in Q2 2022, with an overall rise of 0.07% to sit at 2.26%. Year-on-year, house yields in the middle and outer rings are higher, but inner ring housing yields are lower. Regional house yields have also grown this quarter, but are sitting 0.14% lower than last year.
With property prices on the decline and the rental market starting to climb, yields have unsurprisingly increased. As interest rates continue to rise these factors are likely to intensify, meaning yields are projected to trend upwards for the foreseeable future.
44 - RPM Group
YIELDS - HOUSES -
Outer total 2.3% 1.6% 1.6% 2.0% -0.68% -0.05%
VACANCY - TOTAL
Inner total 7.6% 6.2% 4.4% 6.2% -3.20% -1.79%
2021
Outer (20+km exc. Mornington Peninsula) 2.3% 1.7% 1.6% 2.0% -0.70% -0.07%
RATES
Geelong 1.5% 1.7% 2.5% 1.7% 0.98% 0.74%
Inner (4-10km) 6.9% 6.5% 5.5% 5.9% -1.47% -1.00%
DWELLINGS
Q2 2022 - Residential Market and Economic Review - 45
MELBOURNE
1.7% 0.8% 1.4% 1.5% -0.31% 0.60%
Inner (0-4km) 8.0% 5.9% 3.9% 6.4% -4.01% -1.97%
Outer (Mornington Peninsula)
UNITS
Middle (10-20km)
6.6% 7.1% 6.1% 6.3% -0.46% -0.97%
Melbourne total 6.1% 5.1% 4.0% 5.1% -2.03% -1.04%
HOUSES Q2 2021 Q1 2022 Q2 2022 Inner 2.12% 2.07% 2.10% Middle 1.94% 1.89% 1.96% Outer 2.59% 2.57% 2.61% Metro 2.26% 2.19% 2.26% Regional 3.55% 3.37% 3.41% UNITS Q2 2021 Q1 2022 Q2 2022 Inner 3.59% 3.57% 3.80% Middle 2.71% 2.89% 2.90% Outer 3.18% 3.19% 3.21% Metro 3.22% 3.29% 3.45% Regional 4.20% 4.17% 3.88% YIELDS
Q2 Q1 2022 Q2 2022 2 YEAR AVERAGE ANNUAL CHANGE CHANGE QUARTER
As has been the case over the last two years, Regional Victoria remains isolated from Melbourne’s trends, with property prices increasing this quarter. As many have established long-term remote working arrangements, the regional property market continues to benefit. Numerous aspects continue to attract people to regional areas; including less disruptions from ongoing COVID-related issues, and larger blocks offering more value for money. With vacancy rates below 2%, Melbourne’s outer ring also highlights the demand for greenfield and regional living.
46 - RPM Group
OUTLOOK
Melbourne property prices have been on a steady decline this year, and experts forecast continued falls in the back half of 2022. As the lending environment becomes more onerous, less buyers in the market may lead to a mismatch between supply and demand. Although opening the borders will bring more residents requiring housing into the country, the impact on demand is likely to be skewed towards rental accommodation in the short term, as many look to rent before settling into their new environments.
The rental market is expected to see significant movement over the short to medium term with increased competition for rental properties already apparent. With the Department of Home Affairs receiving record high numbers of international students applying for visas in June, there is a mass of renters ripe to enter the market, which is already struggling from a lack of supply. As supply chain issues linger, the construction industry is struggling to keep up with demand, so an influx of new supply is not expected any time soon. Finally, as interest rates rise, the amount of potential buyers who no longer qualify for a mortgage, and the number of investors struggling to service loans, will increase. Both factors place increased demand on the rental market.
As Melbourne’s inner city life emerges from its slumber and international students, workers and travellers return to our shores, the rental market looks to become highly competitive and undersupplied, pushing rental prices up.
Q2 2022 - Residential Market and Economic Review - 47
Melbourne property prices have been on a steady decline this year, and experts forecast continued falls in the back half of 2022.
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48 - RPM OurGroup Team
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+61peterb@rpmgrp.com.auChairmanBrannighan418442661LukeKellyManagingDirectorProjectMarketingluke@rpmgrp.com.au+61400688520
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