RPM Q3 2022 Residential Market and Economic Review

RPM Group is Victoria’s most successful residential development sales, marketing and advisory agency. We specialise in sales within master-planned communities, medium and high-density developments, greenfield and infill development sites, 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 the Q3 edition of our quarterly Market Update. This report is designed to unearth and delve into current trends and updates in the property and economic landscape, and we hope you enjoy the read.

The topic at the heart of many public and private discussions at the moment is constrained affordability, and what that means for home owners, investors and prospective buyers. On the flipside, unemployment rates are at historic lows, and forward indicators for the economy are looking positive.

Rising interest rates and construction delays continue to impact the industry. As the cash rate increases, borrowing power and mortgage serviceability become greater hurdles, and while construction supply issues are easing, labour shortages continue to impact new home builds in particular.

From an investor standpoint, low vacancy rates and rent rises are driving yields upwards at pace, but there are still headwinds for developers working to deliver stock to an under supplied market.

Population growth is exceeding expectations, and while that influences CPI quickly, its impact on the property market will not be seen for some time, although it will readily exacerbate rental shortages.

Victoria’s resilience is again being tested, with consumer sentiment sliding, but spending and lifestyle patterns are being determinedly held onto, especially in a post-pandemic environment.

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.

Staedler

Group Manager - Research, Data & Insights

m.staedler@rpmgrp.com.au

Michael

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.

Our 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.

FOR FURTHER INSIGHTS OR BESPOKE ANALYSIS CONTACT

Michael Staedler

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

Andrew Raponi

Research Manager

a.raponi@rpmgrp.com.au

Our research is comprehensive, monitoring over 350 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.

Jonathan Mayes Research Manager

jonathan@rpmgrp.com.au

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

Economic Update

Australia’s economy remains resilient despite a backdrop of global economic uncertainty, heightened geopolitical risks and tightening monetary policy. Real Gross Domestic Product (GDP) - seasonally adjusted - increased 0.6% in Q3 2022.

Supply chain disruptions and capacity constraints continue to impact the economy and underpin inflation, although it is likely they will begin to ease in the near term.

Household spending has sustained domestic demand, despite inflationary pressures, and the household savings ratio is now returning to the long-term average rate following the COVID-19 uplift.

Consumer spending is defiantly strong following the disruptions and restrictions of 2020 and 2021, and many have maintained consumption patterns by drawing down on savings to combat inflationary pressures. Quarterly growth in discretionary consumption remains strong but the growth rate has slowed with consumers potentially starting to adjust to higher inflation and interest rates.

Increased spending on services has been driven by dining out and travel. Transport services consumption has remained high, with strong increases in air travel as a result of increased international travel, up 13.9% in Q3, and 113% on an annualised basis. While there has been strong uplift, the total value of consumption remains below that recorded pre-COVID.

Quarterly expenditure for vehicle purchases was up 10.1% as supply chain disruptions and delays start to subside, although this subcategory has been volatile over the past few years. Spending on hotels, cafes and restaurants has also remained robust as consumers have thrown themselves back into lifestyle expenditure and "revenge spending".

Private investment increased by 0.8% in Q3 and was driven by non-dwelling construction across both new and existing projects (non-residential buildings and other structures including fixtures, facilities and equipment). Dwelling investment increased for the first time in a year, supported by a robust level of housing projects in the pipeline.

The rebound in construction activity was supported by easing supply chain issues, that have impacted the market since the depths of the pandemic, although labour shortages are anticipated to remain a constraint on investment. There have also been fewer weather-related delays compared to previous quarters allowing for greater levels of activity.

Business activity has remained robust with a large pipeline of residential and nonresidential projects expected to sustain construction activity into 2023. Private dwelling and non-residential dwelling expenditure recorded growth of 0.1% and 0.4% respectively this quarter, but a decline in demand for new dwellings in the near term is likely to impact dwelling investment, despite accelerating population growth. Prospects for higher density developments have some positivity given population growth, low vacancy and rental pressures, however the mechanism for delivery will remain a challenge with unavoidable lags in construction and completions still a reality.

Investment in machines and equipment is anticipated to increase as supply chain challenges ease and delayed orders are fulfilled. Expenditure in this category increased 0.4% in Q3 and 4.4% year-on-year. Public consumption is projected to increase through the second half of 2022, which partially reflects the State and Federal Governments’ responses to weather-related damage. Consequently, public consumption is expected to stabilise at a high level.

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

HOUSEHOLD SAVINGS RATIO

23.5% 19.4% 6.9%

Mar-2014 May-2014 Jul-2014 Sep-2014 Nov-2014 Jan-2015 Mar-2015 May-2015 Jul-2015 Sep-2015 Nov-2015 Jan-2016 Mar-2016 May-2016 Jul-2016 Sep-2016 Nov-2016 Jan-2017 Mar-2017 May-2017 Jul-2017 Sep-2017 Nov-2017 Jan-2018 Mar-2018 May-2018 Jul-2018 Sep-2018 Nov-2018 Jan-2019 Mar-2019 May-2019 Jul-2019 Sep-2019 Nov-2019 Jan-2020 Mar-2020 May-2020 Jul-2020 Sep-2020 Nov-2020 Jan-2021 Mar-2021 May-2021 Jul-2021 Sep-2021 Nov-2021 Jan-2022 Mar-2022 May-2022 Jul-2022 Sep-2022

Source: Australian Bureau of Statistics

Supply chain disruptions and capacity constraints continue to impact the economy and underpin inflation, although it is likely they will begin to ease in the near term.

QUARTERLY CHANGE IN HOUSEHOLD CONSUMPTION EXPENDITURE

Transport services

Purchase of vehicles Hotels, cafes and restaurants

Operation of vehicles Clothing and footwear Health

Other goods and services Total Private Consumption Education services

Rent and other dwelling services Insurance and other financial services Communications Alcoholic beverages Food Recreation and culture

Furnishings and household equipment Cigarettes and tobacco Electricity, gas and other fuel

Average Savings Ratio = 6% 2014-2019 13.9% 10.1% 5.5% 3.5% 3.0% 1.7% 1.4% 1.1% 0.6% 0.5% 0.3% -0.3% -0.4% -0.8% -1.1% -1.5% -2.5% -3.3% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%

Source: Australian Bureau of Statistics

OUTLOOK

Australia’s economic resilience was clearly demonstrated in 2022, but as the impacts of challenging global conditions, high inflation and rising interest rates flow through the market, growth is expected to moderate. Economic growth of 1.5% is anticipated through 2023 and 2024, but the ultimate pathway forward remains uncertain and at the mercy of multiple competing forces.

Median house prices will continue to face downward pressure as interest rates rise and stabilise, although the rate of fall has already started to slow in some markets. The test in the short term will be the market’s ability to absorb the changeover in historically low fixed rate mortgages as they unwind through 2023. Resumption of meaningful price rises are unlikely to occur until the RBA eases cash rates.

A terminal cash rate around 3.6% is forecast by the futures market in late 2023, with many of the major banks forecasting a rate of around 3.85%. Given the broad uncertainty and competing signals across the market, this measure may be subject to change.

The full impacts of inflation and higher interest rates on living standards and consumption have not been felt yet, but there are signs consumers are starting to adjust. While there has been some uplift in wages, they have been outpaced by increasing inflation, specifically nondiscretionary goods inflation, which will impact living standards if it persists.

There is material dislocation across the rental market, emphasised by tight vacancy rates and upward pressure in new rents. Overarching market uncertainty and ongoing interest rate rises are hindering investor participation. Increasing yields may support additional investor participation through 2023, however given the lag between a project’s launch and completion, this supply imbalance will persist into the medium term.

Elevated household savings accumulated through the pandemic have allowed consumers to defend their lifestyles and maintain consumption levels despite higher prices. However, there have been signs of slowing with the growth in retail spending starting to ease through October 2022. Household spending indicators have also demonstrated some deceleration, although they remain above average.

The property market is likely to be impacted over the coming year, given the lag of cash rate increases into the market, with potential for more positive conditions to be expressed through late 2023 or early 2024. This will be predicated on the cash rate pathway the Reserve Bank of Australia (RBA) ultimately takes.

The test in the short term will be the market’s ability to absorb the changeover in historically low fixed rate mortgages as they unwind through 2023. Resumption of meaningful house price rises are unlikely to occur until the RBA eases cash rates.

The cash rate is now the highest in a decade after the RBA’s 25 basis point rise in December to 3.1%.

INTEREST RATES

The cash rate is now the highest in a decade after the RBA’s 25 basis point rise in December to 3.1%.

The key contributing factor supporting RBA’s decision to lift cash rates was the persistence of high inflation across the market. While acknowledging the impact of global factors in supporting elevated prices, domestic forces are also playing a contributing role. As such, returning inflation to its target will require greater balance between supply and demand.

The RBA is anticipating inflation to peak at 8.0% in the 12 months to December despite the 6.9% indicator measure recorded in the year to October. The RBA anticipates inflation will soften through 2023 and hover just above 3% in 2024.

Economic growth has remained resilient, but is anticipated to moderate as global growth slows and consumer spending moderates.

The RBA expects to increase interest rates further through 2023, however, the eventual pathway remains subject to variables including household spending, wage price growth and exogenous global market forces. Source:

CONSUMER PRICE INDEX

The Consumer Price Index (CPI) increased by 1.8% across Australia in Q3 2022, and 7.3% in the 12 months to September - the greatest annual increase in CPI since the 1990s recession. Inflation is being predominantly driven by goods rather than services. Underpinning the cost of living impacts on household finances is the increase in non-discretionary goods (+8.4% annually) compared to discretionary goods (+5.5% annually). Inflation is being underpinned by supply chain disruptions, energy market impacts from the war in Ukraine, and elevated consumer demand following increased household savings amassed during the pandemic. There are some initial signs of inflationary pressures nearing their peak, with October’s monthly inflation read coming in below market expectations.

Housing-related inflation has been an ongoing topic of interest as the market emerges from the disruptions of COVID-19, and this category significantly influences the CPI calculation. The CPI Index for new dwellings purchased by owner occupiers increased by 3.7% nationally, a softening from Q2 which represents normalising of pricing following HomeBuilder and other rebates. This market remains impacted by labour and material shortages. Price growth has moderated across Melbourne and Brisbane (two of the highest HomeBuilder states) but there has been elevated price growth across Adelaide and Hobart.

The CPI Index for rents rose by 1.3% in Q3 2022. This is comparatively modest, but the increase from Q2 highlights elevated asking rents being increasingly incorporated into the broader market. Reopening of international borders, low vacancy and changes to household formation rates through the pandemic have underpinned strong rental pressure in the market. Limited capacity for a timely supply response is likely to exacerbate ongoing rental pressure. While CPI rent growth is increasing across Sydney and Melbourne, growth is highest across Brisbane and Perth.

The Australian Bureau of Statistics (ABS) commenced publication of a monthly CPI indicator in October 2022 (released in November). This publication is designed to provide a more timely read of inflation and the economy. The monthly CPI indicator rate for October highlighted an inflation rate of 6.9%, below the 7.3% calculated for September and below market expectations for October. This lower-than-expected figure demonstrates the potential for rising cash rates having started to temper inflation, although the inflation rate remains high and well above the RBA’s target.

EMPLOYMENT & WAGES

Full-time employment in Victoria grew by 10,900 jobs in Q3, representing 10% of total full time jobs created nationally. Conversely, part-time jobs fell by 18,200, suggesting there is some movement from part-time to full-time work.

The unemployment rate remains low at 3.6%, despite some easing from July (3.1%) highlighting limited spare capacity across the market. This is further reinforced by the decline in underemployment and the increase in monthly hours worked across all jobs.

MONTHLY CHANGE IN EMPLOYMENT

Tight conditions in the employment market are yet to translate into strong wage growth. There was some risk of a wage-price spiral given the current high inflation measures, but this has not been the case in Australia where wage increases are relatively modest.

Through Q3, the hourly rates of pay (excluding bonuses) index for Victoria rose 1.4% quarterly and 3.09% annually. This compares with inflation at 2.06% and 7.41% respectively. Historically low unemployment will likely maintain some nominal wage pressure in the market, but inflationary pressures are also anticipated to remain high, ultimately impacting living standards in the short term.

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 Sep-22

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

8.0% -150,000 -125,000 -100,000 -75,000 -50,000 -25,000 0 25,000 50,000 75,000 100,000 125,000 150,000 175,000

WAGES VS. CONSUMER PRICE INDEX

PERCENTAGE CHANGE

8.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

7.41% 0.00%

7.00% Quarterly Growth Annual Growth Wage Price Index Consumer Price Index

3.09% 2.06%

Source: Australian Bureau of Statistics

CONSUMER SENTIMENT

After a brief rise in September 2021, consumer sentiment continues to fall, declining 6.9% in November to 78.0 - the lowest reading since April 2020 as initial reactions to COVID-19 lockdowns were recorded.

The impact and expectations of elevated inflation and interest rates on household budgets is suppressing consumer sentiment. The Federal Budget’s electricity price forecasts of a 56% rise over the next two years only added to wavering sentiment as consumers consider their financial position.

All sentiment index subgroups fell in November, with significant drops recorded year-on-year on ‘view of family finances’ (-24%) and ‘expectations of economic conditions over the next 12 months’ (-30%). This will underpin consumer caution in the near term, with expectations of a softer Christmas retail period, and cautious retail spending through the next 12 months.

The ‘time to buy a dwelling’ index has lifted slightly, but the measure is still low at 77.1. Inflation is expected to remain elevated, albeit easing, through 2023, following October’s read coming in lower than forecast. The US Federal Reserve has also highlighted they are likely to slow future rate rises which will permeate across global cash rate strategies.

120.0

115.0

110.0

105.0

100.0

95.0

90.0

85.0

80.0

75.0

CONSUMER SENTIMENT INDEX (INDEX=100) 78 70.0

Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Feb-19 May-19 Aug-19 Nov-19 Feb-20 May-20 Aug-20 Nov-20 Feb-21 May-21 Aug-21 Nov-21 Feb-22 May-22 Aug-22 Nov-22

Source: Westpac-Melbourne Institute Consumer Sentiment Index

BUSINESS SENTIMENT

Business conditions remain robust, with a 22 point lift in October, and while trading conditions have eased, down six points in October, they remain relatively high at 31. Profitability continues improving, up 22 points in October, likely supported by price measures remaining elevated and labour costs easing following a spike in July when minimum wages were increased.

Employment conditions have moderated but remain positive with a 14 point gain off the back of continued low unemployment rate and the reopening of international borders. Capacity utilisation remains firm at 85.8%, in line with September but below August’s reading.

Business confidence recorded no growth in October, now dipping below the long-term average. Confidence has fallen most sharply across transport and utilities, with mining, manufacturing, finance, business and property, recreation and personal services as well as wholesale industries all recording declines.

Leading business indicators remain mixed, however forward orders and capital expenditure have eased.

40.0

30.0

20.0

10.0

0.0

-10.0

-20.0

-30.0

-40.0

-50.0

NAB BUSINESS CONDITIONS INDEX

+19.2

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

Source: National Australia Bank Business Survey

VICTORIAN POPULATION

Victoria’s population increased 33,373 in Q1 2022*, driven by a strong return to net overseas migration (+32,014). Of note, Q1 normally represents a seasonal high as tertiary students enter the country prior to the commencement of their studies. Natural increase reduced materially though, with +4,709 persons, which is the lowest quarterly increase recorded in Victoria, and mirrors a decline nationally. This reduction was driven by less births, especially compared to 2021’s elevated birth numbers. Net interstate migration remained negative (-3,350) following a strong quarterly decline through the Q4 2021.

Governments at multiple levels have emphasised the importance of supporting migration to bolster economic conditions and release some employment pressures in key industries. The Federal Government will increase the permanent migration intake from 160,000 to 195,000 with the intent to fill worker shortages in key industries.

The majority of the uplift has been signaled in the skilled visa stream, with the largest individual increase anticipated to be across the skilled independent visa stream, increasing from 6,500 to 32,100.

There was a strong increase in temporary student migrant visa arrivals in Victoria with 37,630 students in Q1 2022, with a combined 65,390 gain in the 6 months to September 2022.

The latest Australian Government population projections for Victoria, released in October, show that overseas migration will revert to net population inflow over FY22, estimated at 49,200 persons.

The recovery in net overseas migration has exceeded expectations, with the Centre for Population lifting forecast estimates between March and October this year. This estimates a 38,000 person uplift through FY22 instead of the previously anticipated 14,400. Overseas migration is anticipated to recover through FY23, peaking at 81,400 in FY24 before stabilising at around 78,000 persons.

MELBOURNE RESIDENTIAL MARKET

The impacts of ongoing interest rate rises, reduced borrowing capacity and broader cost of living pressures continue to create headwinds for the Melbourne residential market. These forces are acting in concert to dampen sentiment and soften prices as purchaser affordability is constrained.

As a result of reduced affordability some buyers are re-evaluating their buying position, and it has become more difficult for some purchasers to upgrade or downsize, given the market. Auction clearance rates stabilised in Q3 after falling to 66% in July 2022. September’s auction clearance rate was 71% and October’s was 69%.

While auction volumes moderated to 7,582 this quarter, it reflects some seasonality, and is actually the highest in a Q3 since 2018.

• Median house price: $933,000 (-7.4% quarterly and -8.1% year-on-year)

• Median unit price: $648,000 (-2.8% quarterly and -4.1% year-on-year)

New home demand is normalising after record sales in the 18 months from the start of HomeBuilder (June 2020). In addition, increased cost of living pressures, elevated construction costs and interest rate rises are creating more cautionary behavior in potential purchasers. As a result, lot prices have started to soften, now starting to reflect the declines in median house prices.

• Median land price: $376,000 (-0.8% quarterly, +15.7% year-on-year)

While a relative affordability advantage remains for new homes in growth areas over established dwellings, this premium has reduced through the second half of 2022. New lot releases have been softening as developers seek to manage their contracted sales and titling timeframes, which increased as a result of record lot sales activity through 2021. Moderating prices across the established housing market (as a result of cost of living and borrowing cost pressures) and increased building costs have started to translate into vacant land market impacts and will likely persist until the other factors abate.

Median House

-7.4% change from Q2 2022 -8.1% from Q3 2021 Median Unit

-7.4%% change from Q2 2022 -4.1% from Q3 2021

MELBOURNE PRICES

Source: Real Estate Institute of Victoria & RPM Research, Data & Insights

PRICE GROWTH

Source: Real Estate Institute of Victoria & RPM Research, Data & Insights

VICTORIAN FINANCE ACTIVITY

LOANS BY DWELLING TYPE

LOANS BY DWELLING TYPE

The number of new owner occupier loans in Victoria decreased by 11.6% in Q3 to 26,491, as increased borrowing rates started to flow through to the market.

The largest decrease was for established dwelling loans, falling 13.2% to 18,318, and while this represents a considerable softening, it is in line with pre-pandemic norms. It is likely, however, that lending activity will remain subdued in the short term as expectations of further interest rate increases and cost of living pressures dampen purchaser activity. It is worth noting that established house prices generally set the pricing hierarchy for competing product types across the market.

40,000

Loans for residential land declined 15% in Q3, now sitting at 2,268 loans. This category has only recently been tracked by the ABS (December quarter 2019) but represents the second lowest quarterly count of loans, marginally above that recorded in March quarter 2022 (2,141 loans). This moderation through 2022 likely reflects a mix of normalisation across the market following the pull forward from HomeBuilder, as well as a response to broader moderation and caution across the market.

New loan commitments for dwelling construction and newly erected dwellings declined in Q3. Construction of a dwelling declined -2.3%, although remains elevated compared to historic norms. While tapering off, the market continues to digest increased new builds from the HomeBuilder grant which have been deferred or delayed as a result of resourcing and capacity constraints. Newly erected dwellings declined 10% to 1,824 loans, the lowest figure since June 2019.

25,000

20,000

15,000

10,000

30,000 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18

35,000 Sep-19

Mar-19

Source: Australian Bureau of Statistics

Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22

VALUE OF LOANS BY PURCHASER TYPE

LOANS BY PURCHASER TYPE

The total value of new owner occupier loans (excluding refinancing) decreased 13.5% in Q3 and 14.5% year-on-year. Fewer auctions in Q3 has also impacted lending activity.

Median house and unit prices are softening as a result of reduced access to debt with potential buyers cautious in the current economic environment.

MONTHLY VALUE OF LOANS ($M)

The total value of new loans to investors (excluding refinancing) decreased by 18.0% in Q3, although only by 5.4% year-on-year. There is a competitive tension across investor participation with the increasing cost of debt, uncertainty across global and local economic conditions, and the potential cash rate pathway against historically low vacancy rates, upward pressure in the rental market and surging net overseas migration.

As economic uncertainties resolve, if yields remain elevated due to supply imbalances, there will likely be greater impetus for investor participation across the market.

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000

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 Mar-22 Jun-22 Sep-22

Source: Australian Bureau of Statistics

Owner Occupier Investor

LOANS BY OWNER OCCUPIER TYPE

LOANS BY OWNER OCCUPIER TYPE

The number of new loan commitments to both first home buyers and non-first home buyers eased in Q3 by 12.0% and 11.3% respectively. Consequently, first home buyers’ proportion of total owner occupier loans remains at 29%, above the long-term average of 27%.

NUMBER OF LOANS

40,000

35,000

30,000

25,000

Although first home buyer activity has eased, it aligns with pre-pandemic trends. Some of the ongoing first home buyer demand likely reflects some of the prolonged settlements and building delays across the market, which is smoothing out lending activity. First home buyers are increasingly impacted by rising borrowing costs, cost of living expenses and elevated rental pressures, and will impact participation from these buyers in the short-to-medium term.

Non-first home buyers will also be cautious as the broader market slows and interest rate rises work their way through the economy, although some prospective purchasers will watch and wait strategically for prices to reduce further before entering the market.

20,000

15,000

10,000

5,000

0

Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22

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

Source: Australian Bureau of Statistics

AVERAGE LOAN SIZE BY BUYER TYPE

Average loan sizes retracted in Q3 by 1.2% for first home buyers and 2.7% for non-first home buyers. This reflects the impact of increased interest rates and cost of living limiting loan serviceability, as well as compressing the amount a borrower can access in the given market.

Following near identical average loan sizes recorded in March 2019, the divergence in average loan size between first home buyers and non–first home buyers remains high (21%). This highlights the advantage of upgraders across the established market where, on balance, buyers have access to a greater pool of funds.

AVERAGE LOAN SIZE - BY FIRST HOME BUYER AND NON FIRST HOME BUYER

AVERAGE LOAN VALUE

$650,000

$600,000

$550,000

$500,000

$450,000

$400,000

$350,000

$300,000

Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22

FHB - Average Loan Size Non-FHB - Average Loan Size

Source: Australian Bureau of Statistics

VICTORIAN BUILDING ACTIVITY

APPROVALS BY DWELLING TYPE

APPROVALS

A 0.9% increase in Victorian dwelling approvals was underpinned by elevated approvals across detached dwellings, while townhomes and apartments softened during Q3. Annual approvals have been in decline since Q4 2021, with 62,369 dwelling approvals on a rolling annual basis to Q3 2022, 10% lower than the year prior.

Detached house approvals increased 11%, with HomeBuilder continuing to permeate the market as industry-wide delays and shortages push out completions. Annual house approvals are moderating despite the quarterly uplift, with 38,146 approvals to September 2022. This was a 5.0% drop from the previous month and 21% less when compared year-on-year.

Approvals of semi-detached, row, terrace and townhomes fell 14% in Q3, the third successive quarterly decline in this sector. On an annualised basis, there were 11,927 townhome approvals to September, representing an 8.7% decline from the previous quarter but only 2.5% below a year ago.

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22

Source: Australian Bureau of Statistics

*Quarterly apartment approvals can record significant variance given the concentration of supply that can occur in projects of scale approved in any given quarter.

Townhome demand has been underpinned by strong detached house price growth and the increasing price premium between detached houses and units. The impact of softening across the established house price market and compression of this premium, in addition to overarching economic and financing considerations, is moderating some of this demand. However, rolling annual townhome approvals remain around the average recorded since 2015. There was a 15% drop in approvals for apartments* in buildings four storeys or higher in Q3, a 6% reduction yearon-year. On a rolling annual basis, there were 12,296 apartment approvals to September, which was a 1.3% decline from the previous quarter, but a 42.8% increase compared to September 2021. This lift is not unexpected after developer caution through the uncertain markets of 2020 and 2021.

Projects of scale continue to face headwinds in generating necessary presales figures, but build-to-rent projects that can bypass this investor reliance (subject to project feasibility) may be less impacted. Lower scale, owner occupier-directed projects are also less impacted by these hurdles and better able to deliver supply to the market.

Detached Houses Townhomes Apartments

COMMENCEMENTS

House commencements have moderated from their HomeBuilder-induced peaks but remain historically high. There were 41,350 detached house starts through FY22, 10% lower than the previous year.

This decline is anticipated to continue as the market remains impacted by affordability constraints and broader economic uncertainty. Interest rates are likely to keep rising through 2023, which will intensify headwinds in the short term.

Multi-unit dwelling starts were 23% higher in FY22, but are expected to moderate through FY23 and FY24 before increasing again in FY25. The normalisation of overseas migration and population growth through the next 12-18 months will continue to place strain on the occupancy market, underpinning low vacancy rates and upward pressure on the rental market. Increased rental yields and reduced market uncertainty may incentivise investor participation, however the translation of market demand to project starts and genuine supply through completions will take some time.

The potential for increased participation from the nascent build-to-rent market may support additional starts if commercial returns stack up. These projects can also commence construction subject to stakeholders being satisfied with anticipated investment returns rather than the hurdle of presales, which can reduce the supply lag and better align the supply cycle with demand signals. It should be noted that in the short-to-medium term this sector will likely represent a complementary supply rather than satiate market demand.

80,000

70,000

60,000 Forecast

40,000

30,000

20,000

10,000

50,000 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 20243/25

Houses Multi-units

Source: Australian Bureau of Statistics

GROWTH AREA AFFORDABILITY

More and more suburbs are now under mortgage stress. Overall, across growth areas, only eight suburbs had a household income ratio below 35% - a drop from 16 suburbs in Q2 and 37 suburbs in Q1. This highlights the impact of affordability constraints and rising interest rates on loan serviceability.

A further 25 suburbs had a household income ratio between 35% and 39%, a level synonymous with the emergence of constrained affordability. The majority of these suburbs were located within Wyndham (seven suburbs).

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.

There were 19 suburbs with household income ratios above 40%, up from 17 in the previous quarter. Seven of these were located in Melton, mainly at the lower end of the affordability ratio band, and with englobo land in Berwick, Botanic Ridge and Burnside near fully exhausted, new housing is now resembling infill rather than greenfield development, with product prices reflecting a more compact form than other markets.

The 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 Q3-2022, a selection of suburbs still reflect a mortgage to household income ratio of below 35%, with the changing composition of lot sales to an increasing proportion of small lots maintaining attractive affordability.

The general reduction in affordability across the greenfield market reflects increasing borrowing costs, raising the cost side of the affordability equation. Additionally, purchasers are now estimating higher build costs in their land purchase decision-making, adding to the (both real and perceived) affordability squeeze.

Calculation assumptions: This chart depicts the median lot price in Q3 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 $271,429 in Mitchell and $362,500 in 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 variable rate in of 4.4%.

Industry Leader Insights

DANIEL GRADWELL ANZ ASSOCIATE DIRECTOR PROPERTY

WE SPOKE TO ANZ ASSOCIATE DIRECTOR, PROPERTY, DANIEL GRADWELL, ABOUT

THE BIGGEST INFLUENCES ON THE ECONOMY AND PROPERTY MARKET, AND WHAT’S ON THE HORIZON.

WHAT ARE THE UNDERLYING FACTORS DRIVING THE ECONOMY, AND IN PARTICULAR, THE HOUSING MARKET?

The economy and labour markets are still incredibly strong. In fact, we’re seeing extraordinarily low unemployment levels across all states, capital cities, regional areas, most demographics and just about all industries. This in itself is a great news story, but what’s even more favourable is we’re finally seeing some wage growth. And while it’s only sitting around 3 to 3.5%, it’s the strongest growth we’ve had in a decade.

Forward indicators are still positive, with more vacancies than unemployed people at present, but there will be a point in time it starts to slow down. We’d realistically expect to see some signs of slowing towards the middle of next year, although that deceleration is likely to be gradual.

BORROWING POWER RENT RISES

REDUCTION IN BORROWING CAPACITY (%)

-10

-20

-30

-40

-50

-60

0 0 50 100 150 200 250 300 350 400

Increase in Interest Rate (BP)

Interest Only Principal and Interest P&I; existing debt 2x Income P&I; existing debt 4x Income

WHAT IS HAVING THE GREATEST INFLUENCE ON MELBOURNE’S PROPERTY MARKET?

Two of the factors still having the greatest impact on the market are interest rates and construction costs.

While very few property purchasers borrow to their upper limit, rising interest rates impact different types of buyers in different ways - which has a material impact on property prices. As an example, for investors, including home owners wanting to purchase a single investment property, existing debt pulls back borrowing power significantly more - either taking them out of the market or shifting product or location focus.

Construction costs are still creating adverse consequences, especially when there’s been a 20% increase in costs in just 12 months. But on a more positive note, and it’s still very early days, we’re starting to hear more anecdotal observations about costs easing and fewer delays, which will ultimately drive consumer confidence in the sector.

10

5

0

RENTS (ANNUAL % CHANGE) -70

-5

-10

15 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22

Melbourne Houses Melbourne Units Rest of Victoria Dwellings

WHAT IMPACT HAS AUSTRALIA’S INTERNATIONAL REOPENING HAD ON THE MARKET?

The population story is a really good one. We’ve talked about the attractiveness of Australia, and in particular Melbourne, for a while now, and as soon as the borders opened we didn’t just see a rebound in migration, we saw an absolute influx to record levels in the first quarter of this year.

This will help with labour shortages and it will boost the economy. And it’s more than simply more people working means more people spending money, because newly arrived people tend to spend more than they’re earning to set themselves up.

The downside is it puts more pressure on the housing market, and in particular the rental market, which is already under stress with very low vacancy rates, and readily rising rents.

This highlights the importance of investing in and bringing new stock to market.

ANZ Research expect the RBA cash rate to peak at 3.85% by May 2023. The most immediate impact of this is a reduction in the amount home buyers can borrow for their mortgage, and that’s the main driver of lower prices right now. Higher interest rates will eventually slow the broader economy as well, but with unemployment at 50-year lows, we are well placed to adapt to these changes.

Daniel Gradwell, Associate Director, Property, ANZ

Apartments and Townhomes

The apartment market continues to recover from the unprecedented policy interventions and shocks resulting from COVID-19. While the rental market is historically tight, the market remains challenged by overarching policies that continue to temper overall demand and the delivery of supply.

Construction and funding cost pressures are undermining the commerciality of some projects that has led to delays or in some select cases the cancellation of projects. Other projects, generally targeting a more premium owner occupier cohort, have been able to increase their prices in response to these pressures and deliver much needed supply to the market, however these projects generally reflect smaller boutique projects and a lower volume of overall supply.

The rental market has been under significant pressure of late. Vacancy rates across Metropolitan Melbourne units are exceptionally tight at 3.2% (REIV), meaning while rent inflation went up 1.2% year-on-year, asking rents are up 20%. The added pressure of borders reopening to holiday markers, students and skilled professionals, as well as the reverberations from COVID-19, like extended work-

from-home arrangements and changes to household formation rates as a response to market forces, will continue to exacerbate the market in at least the short term as they unwind and stabilise to a post-pandemic norm.

Overseas arrivals have surprised on the upside since the borders were reopened in late 2021. Net overseas migration projections have been revised upward significantly from their projections between March and October of this year. This increase in timing and volume to Victoria’s population will place pressure on the local market. Projected net overseas migration across Victoria is anticipated to be 49,200 persons through FY2022 (an increase of 38,200 from the March estimates) and 79,700 through FY23 (an increase of 14,400 from March estimates).

The return of holiday makers will likely create further tension in the rental market by encouraging some rental stock conversions back to short-stay accommodation, which increased significantly as a result of closed international and state borders through the depth of COVID. Changes in annual rental bonds are, in part, highlight this shift.

New annual unit rental bonds in Melbourne increased 19% between March 2020 and September 2021 while borders were closed. They declined 4% from the peak to June quarter 2022 as borders reopened, however they have rebounded through the September quarter as rental pressures in the traditional market make it a competitive option to short stay for some investors. Current rental pressures may be exacerbated from households impacted by construction delays on new builds, but may free up in the medium term as dwellings are completed.

It is in this context the emergence of build-to-rent products become compelling as an avenue for supply at scale. While subject to their own hurdles, including increasing construction and funding costs, and commercial return requirements, they do offer an avenue to produce supply without the pre-sale requirements that have hindered the delivery of large-scale projects since the late 2010s.

While house prices are softening across the market, there was a significant price premium established through the pandemic, and while 12% below their December 2021

peak, houses remain $344,500 above median unit prices. This material price difference still represents a strong proposition for townhomes and apartments, especially when combined with the strain of inflationary pressures, reduced borrowing capacity and increasing rental costs.

While house prices are softening across the market, there was a significant price premium established through the pandemic.

OTHER DWELLING APPROVALS, COMMENCEMENTS, AND COMPLETIONS

Approvals dropped 16.6% in Q3 2022. The market remains impacted on multiple fronts, with townhome approvals specifically waning (down 32% year-on-year) following the pull-forward effect of HomeBuilder, which was a strong driver of townhome approval uplift in 2021.

Apartment approvals have been varied in the past 12 months, with the majority of approvals (53%) being driven by larger projects of nine storeys and above. This in itself can create material shifts in quarterly numbers, especially compared with townhomes.

Approvals for larger scale projects have improved from recent historic lows but remain challenged by pre-sale hurdles and reduced investor activity. The build-to-rent sector will be somewhat sheltered from these headwinds and provide an additional potential avenue for supply across the market.

Apartment and townhouse completions increased in Q2 2022, and are likely to remain elevated in the short term off the back of elevated approvals in 2021. However continued supply chain issues may delay projects and impact stock delivered to market.

OUTLOOK

The projected population growth for Victoria influences various submarkets in different ways, while supporting economic activity and consumer demand it has the potential to create additional pressure in the rental market. The Federal Government’s increase of permanent migration visas to 195,000 in FY23 will bolster industries with severe staff shortages, but it will place additional pressure on the already stretched rental market. This is more probable given this increase to permanent visas will likely reflect additional population rather than an increase to the allocation of visas for temporary migrants already in the country.

The challenging borrowing environment has potential to elevate price sensitivity, and while interest rates take around three months to flow on to mortgages, uncertainty may keep some buyers on the sidelines for some time yet. Furthermore, interest rates can take beyond 12 months to fully flow into the real economy, there remains some uncertainty as to the economic pathway from the recent interest rate changes in addition to any future rises. This could intensify already tight rental market conditions, given limited supply and ongoing normalisation of population growth.

Developers are likely to remain impacted by construction and funding cost pressures in the short term, potentially limiting appetite for new projects, and subsequently delaying supply to market. This is most likely to impact investor driven product types with limited pricing power and higher substitutability. While an uplift in yields from increasing rents may start to encourage investors back into the market, these purchasers will still have consideration for overarching market uncertainty through the short-medium term.

Downsizer and owner occupier product is less likely to be impacted in the same way with buyers able to capitalise remaining price gains and may be more willing to accept some price movement in higher quality projects. Owner Occupier purchasers can still benefit from principal place of residence stamp duty concessions.

It remains difficult for the market to respond as necessary, with development lags limiting the supply response. This is being observed though the downturn in approvals and commencements which will translate into declining completions in the medium term. While population is anticipated to continue normalising over the next 18 months there is unlikely to be a necessary and timely supply response, although reduced borrowing power and elevated cost of living pressures will support demand for affordable housing alternatives across the market.

The Federal Government’s increase of permanent migration visas to 195,000 in FY23 will bolster industries with severe staff shortages, but it will place additional pressure on the already stretched rental market.

Residential Investment

House prices continue to slide in response to stringent lending conditions and rising cost of living, with interest rates climbing to reach levels not seen since 2014.

Metropolitan Melbourne house prices have now fallen below the million dollar mark, but the smallest corrections are in the outer ring, demonstrating the strength of some of the growth areas. Properties in Regional Victoria have fallen for the first time since Q1 2020, but still remain higher than a year ago.

The smallest corrections have been observed in the outer ring, demonstrating the relative strength of the growth areas

RENTS

The rental market remains competitive as international migration hits pre-pandemic levels, but the supply of new rental properties coming onto market is still lagging.

Rental prices have increased across most sectors in Melbourne this quarter, and have risen slightly year-on-year. The outlier is four-bedroom homes in the inner ring, which dropped significantly this period, but are up substantially from a year earlier. The return of internationals to the rental market has been a significant influence on these rises and will continue to drive rising rental competition going forward.

RENTALS - MOVERS AND SHAKERS Melbourne

Units had similar results in Q3, with the inner ring recording the greatest variances. The inner ring in particular has become greatly more competitive from a rental perspective, and this is exacerbated by pandemic-driven delays in new builds and apartments, creating a supply lag.

Geelong once again saw rent rises across house and unit markets from both a quarterly and annual perspective. Year-on-year, it was single bedroom units and three-bed homes that increased the most.

VACANCY RATES

YIELDS

Vacancy rates continue to tighten across most parts of Melbourne. The exception is Mornington Peninsula where vacancies have risen, but the market has been much tighter for longer, so the two-year average is actually the lowest across all areas.

With continued supply-side issues caused by work delays and weaker investment activity off the back of the pandemic, the return of international workers and students has exacerbated an already tight rental market. Melbourne’s overall vacancy rate has fallen to 3.2%, with a significant shift in the inner ring galvanising this change. In Q3 alone, inner ring vacancy rates dropped a full 1.1%, no doubt a direct result of pre-pandemic CBD activity resuming alongside international arrivals.

As property prices continue to fall and rental prices climb, yields will naturally increase. This is apparent in the Q3 yield rises across the board, with the outer ring the outlier, recording falls across both units and houses. This is not unexpected as CBD offices begin to encourage more in-person work time, and rental demand is starting to skew back towards the city, while house prices in the outer ring remain relatively high.

The steep annual increase in unit yields can be attributed to the tougher market conditions for rental units when international migration bans were in place.

VACANCY RATE

VACANCY RATES - TOTAL DWELLINGS

MELBOURNE

Inner total 5.8% 4.4% 3.3% 6.2% -2.50% -1.09%

Inner (0-4km) 5.7% 3.9% 3.2% 6.4% -2.45% -0.72%

Inner (4-10km) 6.0% 5.5% 3.4% 6.1% -2.61% -2.05%

Middle (10-20km) 7.1% 6.1% 5.6% 6.5% -1.55% -0.57%

Outer total 2.1% 1.6% 1.6% 2.0% -0.42% 0.06%

Outer (20+km exc. Mornington Peninsula) 2.0% 1.6% 1.6% 2.0% -0.41% 0.04%

Outer (Mornington Peninsula) 1.5% 1.4% 1.9% 1.3% 0.43% 0.48%

Melbourne total 5.0% 4.0% 3.2% 5.1% -1.79% -0.79%

Geelong 1.5% 2.5% 3.2% 1.8% 1.61% 0.69%

YIELDS - HOUSES

OUTLOOK

With international students and skilled workers returning to Melbourne, the rental market remains competitive. The continued interest rate rises mean lending conditions are tough, leading to fewer house hunters and more demand for the rental market. While the world grapples with inflationary issues, building costs remain high and new supply of rental properties will only trickle onto the market.

Melbourne’s property prices continue to slide, and rising interest rates make it harder each month for potential homeowners to secure a loan, eliminating more buyers from the market, placing downward pressure on prices, and upward pressure on rents.

Unfortunately, the influx of international migrants will have little impact on property prices in the short term, as many new arrivals rent for a period before buying. Conversely, the return of international students and workers has strengthened the rental market, although it has exacerbated the supply lag.

Regional Victoria has finally started to slow in response to rising interest rates. After more than two years of price growth, house prices fell over Q3, and although buyers can get more for their money regionally, the limited number of buyers in the current market is also influencing regional areas.

Melbourne’s property prices continue to slide, and rising interest rates make it harder each month for potential homeowners to secure a loan, eliminating more buyers from the market, placing downward pressure on prices, and upward pressure on rents.

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

Michael Staedler Group Manager

Research, Data & Insights m.staedler@rpmgrp.com.au +61 434 619 280

Jane Ormerod

Head of Property Management jane@rpmgrp.com.au +61 488 210 951

Ed Wright

National Director Head of Transactions & Advisory edwright@rpmgrp.com.au +61 421 213 021

Peter Grant Managing Director Business Development peter@rpmgrp.com.au +61 411 494 499

Andrew Swinson Director

Wealth Management & International andrews@rpmgrp.com.au

+61 488 123 739

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.