ECONOMIC AND RESIDENTIAL MARKET REPORT JANUARY 2025
Executive Summary
Michael Staedler General Manager Research, Data & Insights m.staedler@rpmgrp.com.au
• GDP grew 0.33% in Q3, with annual growth of 1.11%.
• Household spending stagnated with essential spending falling 0.1%, discretionary spending rising slightly.
• Fragile consumer confidence is weighed down by concerns around inflation, unemployment, and falling house prices.
Australia's economy saw mixed performance in Q3 2024. With a quarterly GDP rise of 0.33%, the annual increase over the year to September 2024 reached 1.11%. While positive, this is one of the smallest annual GDP gains in over three decades (excluding the pandemic) and underscores the nation’s ongoing economic challenges. Notably, GDP per capita declined for the sixth consecutive quarter, a trend exacerbated by strong population growth.
Household consumption remained flat this quarter. Essential spending fell slightly by 0.1%, driven by a notable reduction in electricity, gas, and other fuels. Meanwhile, discretionary spending edged up, bolstered by higher education related costs.
Inflationary pressures persisted, with prices rising 0.22% in Q3. However, the annual inflation rate eased to 2.81%, settling within the RBA’s target range of 2-3% - albeit at the higher end.
This moderation in inflation, coupled with an improvement in real income, allowed households to begin rebuilding their depleted savings.
Despite these improvements, consumer confidence remains fragile. Concerns around inflation, unemployment, falling house prices continue to weigh heavily on sentiment. This hesitancy is not only curbing dwelling investment but also impeding broader business confidence, which remains slow to recover.
This edition offers valuable insights into the current state of the economy, and we hope it provides clarity and confidence as you navigate your development goals.
For more information, please visit: www.rpmgrp.com.au
Our Research Consultancy Services create bespoke reports crafted to your specifications, translating rich data into in-depth analysis. For a bespoke report, email the team at: contactus@rpmgrp.com.au
Economic Update
Gross Domestic Product
GDP - 12 months to September 2024
Annual GDP growth was subdued at 1.11% in the year to September 2024, well below the 3.31% long term average. Q3 2024 GDP rose just 0.8% year-on-year, the slowest growth since the early 1990s (outside the pandemic). Public sector spending drove Q3 growth, supported by expanded energy relief schemes.
Household gross disposable income improved with a 1.3% rise in employee compensation and 3.6% increase in interest received, though a 3.4% rise in interest paid on dwellings offset gains. Restrictive financial conditions and past income declines weighed on consumption, while persistent inflation kept consumer and business sentiment cautious.
Source:
Household Savings Ratio
Current Savings Rate 3.2%
While half of the long-term average, household savings have increased to its highest level since Q4 2022, driven by wage growth and stage 3 tax cuts.
Long Term Savings Rate - 2014 to 2019 6.4%
Historically low interest rates, combined with lockdown mandates restricting mobility and spending choices, allowed households to build solid savings buffer through the pandemic. Peak
Average Savings Ratio = 6.4% 2014-2019
Household Consumption
Essential Spending - Q3 2024
Household consumption was unchanged from the previous quarter. Essential spending fell 0.1% driven by a notable drop in electricity, gas, and fuel costs due to milder winter conditions and energy bill relief schemes. In contrast, discretionary spending rose slightly, led by higher education-related costs.
Source: Australian Bureau of Statistics
Interest Rates and Inflation
The cash rate remained steady at 4.35% throughout 2024. While the RBA has consistently stated that the current data does not warrant a rate cut in the first half of 2025, November’s softer-than-expected inflation figures have led major banks to suggest the possibility of a reduction by February, or May, with May being more likely.
Regardless of the timing, the consensus is that any rate cut will be gradual and protracted. The RBA is likely to approach any easing with extreme caution to avoid triggering inflationary pressures, a concern highlighted by similar trends in other global economies.
Inflation showed modest growth in Q3 2024, with the CPI increasing just 0.22% for the quarter. This brought the annual inflation rate back to 2.81%, which although falls within the RBA’s target range, is slightly above the 2.5% midpoint.
Housing continues to be a significant driver of inflationary pressures. Supply-side constraints on residential construction, coupled with record population growth fuelling demand, are driving up both building costs and rents. These factors continue to push housing-related costs higher, adding to overall inflationary pressures.
New Dwelling and Rental Index
Source:
Wage Growth vs. Inflation
The hourly rate of pay index rose by 0.79% over Q3, significantly outpacing the 0.22% CPI growth. This shift marks a reversal of previous declines, with a notable improvement in real incomes.
As a result, the annual growth in the Wage Price Index reached 3.53%, surpassing the 2.81% annual CPI.
Victorian Employment and Unemployment
The number of employed persons fell by 4,144 in December, with part-time jobs contributing 13,462 jobs. However, this gain was offset by a loss of 17,606 full-time jobs.
Throughout the second half of 2024, the state’s unemployment rate generally hovered between 4.2% and 4.6%, following a 4.6% peak in June and July. The December drop in full-time employment was largely expected due to fewer job advertisements.
Looking ahead, we anticipate the unemployment rate to edge higher, driven by a lagging economy and continued strong population growth. Unemployment Rate - December 2024
Consumer Sentiment Index
Consumer Sentiment Index (Index-100)
Consumer sentiment improved over 2024 but ended the year on a cautious note, reflecting renewed economic concerns. November peaked at 94.6 index points, the highest since April 2022, but December saw a 1.9 point decline to 92.8, signally fragile confidence.
The downturn stemmed from disappointing Q3 GDP results, inflationary uncertainty, interest rate speculation, and global instability. Housing market confidence also weakened, particularly in Victoria and New South Wales, where expectations for price growth dropped sharply.
The most significant decline was in the economic outlook. Expectations for the economy over the year and five years fell by 9.6% and 7.9% respectively, reversing earlier gains. Persistent concerns about GDP, inflation, and mixed views on potential interest rate cuts contributed to the pullback, highlighting challenges ahead for sustained consumer confidence. December 2024
Business Sentiment Index
Business confidence fell by 0.9 index points in November, the third consecutive monthly decline and the first negative result since January 2022. Business conditions also weakened, with sharp declines in manufacturing and retail, while services held relatively strong.
All three subcomponents of business conditions are now at or below average levels. The survey indicates ongoing soft growth in Q4, although capacity utilisation remains above average. This suggests price pressures may take longer to full normalise.
Source: National Australia Bank Survey
Victorian Population
Population Change Q3 2024 +32,560
Victoria’s population growth slowed significantly in Q3 2024, following a sharp spike in Q1 driven by robust gains across all components.
Despite the slowdown, overseas migration remains the key driver of continued population growth in the state.
Source:
Victorian Population
Natural Increase
+6,789
Natural increase picked up significantly in Q1 2024 to a record high, so unsurprisingly it retracted by around 45% in Q2. It is in line with the outcome from the same period a year earlier. Over FY24, natural increase totalled 31,588 persons, 13% higher than FY23.
Net Overseas Migration
Net overseas migration slowed significantly in Q2 2024 and is back to Q4 2021 levels, which was the first quarter after the borders reopened. This most recent outcome is driven by the Federal Government’s migration and student visa policy adjustments. Over FY24, overseas migration increased by 132,859 persons, 17% lower than FY23.
Net Interstate Migration
+17,914 -21
Net interstate migration continues to remain negligible with a net 24 people leaving Victoria in Q2 2024. Net interstate migration totals only 664 persons over FY24, reflecting a stemming in losses witnessed during lockdowns. However, net interstate migration is now well below the net 2,900 persons who moved into Victoria each quarter pre-lockdown.
Residential Market
Melbourne Residential Property Market
Melbourne’s residential property market hit a peak of $1.125 million in Q4 2021, following a robust 36% increase over two years. At the same time, many anticipated a cooling period, expecting prices to stabilise and growth to moderate.
However, this optimism was short lived. Rising interest rates aimed at curbing inflation pushed the cash rate to peak at 4.35%, leading to a 19.1% decline in residential prices over the next two years ending in Q4 2023.
Despite the high cash rate, signs of stability emerged as 2024 began. Confidence grew that rate had peaked, while strong immigration into Victoria supported demand. This led to a modest price rise of 1.6% in early 2024. Yet, persistent cost of living pressures and lingering inflation concerns kept many buyers on the sidelines.
As consumer sentiment waned, prices dropped throughout the rest of 2024, hitting $894,5000 in Q4 – levels not seen since Q3 2020. Detached houses and apartments both saw declines:
• Median house price sits at $894,500 (-2.1% quarterly change, -1.8% year-on-year)
• Median unit price sits at $622,500 (-0.6% quarterly change, -1.6% year-on-year)
New home demand also weakened, impacted by rising construction costs, driven by higher labour costs. Developers, cautious of oversupply, limited land releases, further constraining the market.
Incentives like the 5-10% rebates on near-titled and titled lots remain common to stimulate demand. Yet, the Q4 2024 median lot price rose 2.4% to $401,000 – a record high. This figure does not reflect rebates or discounts, making land increasingly less attractive to established properties.
Source: REIV and RPM Research, Data & Insights
Melbourne Residential Property Prices
Owner Occupier Loans
Owner occupier loan applications fell 5.5% over the quarter to 26,316 but rose 8% year on year. Loans for new dwellings dropped 3.8% and established dwellings fell 2.9% from the previous quarter.
Financing for new construction and residential land saw sharper declines of 12.3% and 25.1%. This disproportionately affected first home buyers whole loans fell 5.4% quarterly but rose 10.5% annually, maintaining a 36% share of loans. Non first home buyer activity also declined 5% as easing property prices deterred upgraders and downsizers. Owner Occupier Loans - Q3 2024
Source: Australian Bureau
Average Loan Size by Buyer Type
The average loan size for first home buyers reached a record $518,907 in Q3 2024, up 1.2%. This growth reflects strong demand in the sub-$600.000 segment, driven by full stamp duty concession offering a key incentive.
Non first home buyers also saw loan sizes rise by 2.9% to $620,530, just 0.8% below the Q1 2022 peak, despite higher borrowing costs. Buyers are adapting to financial conditions while maintaining standard LVR levels.
Victorian New Loan Applications
Victorian Construction Activity
Dwelling approvals reached 14,497, continuing the improvement seen in Q2 following the steep Q1 decline. Despite consecutive positive quarters, approvals remain below the past decade’s range. Year on year, approvals grew 4.0%, rebounding modestly from 2022, when high construction costs dampened demand and viability for medium and high density developments.
Detached house approvals totalled 8,893, rising 2.8% quarterly and 7.9% annually. Townhome approvals, however, fell sharply, declining 18% quarterly and 19.2% annually to 2,407. Apartment approvals rebound significantly, surging to 3,197 in Q3 after a record low of 1,023 in Q2. Although this aligns with 2022 averages, further growth is needed to address undersupply caused by elevated construction costs.
Total commencements fell 4.2% in FY24, with detached house starts down 8.1%. Multi-unit starts increased by 2.9% but remain 20% below the average wage. The downturn reflects reduced borrowing capacity, cost of living pressures, and rising building and financing costs.
In FY25, commencements are projected to rise 3.3% to 54,424 dwellings, nearing the decade average. Detached house starts may dip 0.7% to 32,509 due to affordability constraints limiting lot sales. Over the next three years, detached house starts are forecast to average 33,424 annually, a 2.1% increase from FY24.
In contrast, multi-unit starts are expected to grow 9.8% in FY25, driven by affordability pressures shifting demand to townhomes and apartments. This upward trend is projected to continue through FY27, with an average of 25,173 multi-unit dwellings annually – a significant improvement from FY24 levels.
Detached House Approvals
8,893
+2.8% over the quarter | +7.9 annually.
Townhome Approvals
-18.0% over the quarter | -19.2% annually.
Apartment Approvals
3,197
2,407 +212.5% over the quarter | +17.7% annually.
Source: Australian Bureau of Statistics
14,497
16,760
Outlook
Michael Staedler General Manager Research, Data & Insights m.staedler@rpmgrp.com.au
Despite efforts by the RBA, inflation has proven stubborn, with only minimal interest rate reductions expected over the next two years.
The economy has slowed significantly, with growth declining over the past year and limited prospects for near term acceleration. This marks the nation’s most prolonged period of economic weakness since the recession in the early 1990s.
Weak household consumption remains the primary drag, exacerbated by persistently high inflation. Despite efforts by the RBA, inflation has proven stubborn, with only minimal interest rate reductions expected over the next two years. A single rate cut is anticipated in the first half of 2025, but this will likely provide limited relief, as inflation continues to erode real incomes, suppress household spending, and weaken consumer confidence – especially for large purchases.
Business and housing investment are also forecast to weaken further in the coming year, compounding the economic slowdown. Diminished consumer confidence is expected to maintain pressure on business output, particularly in discretionary industries such as retail, accommodation, tourism, and food services.
Although business confidence has deteriorated, low record unemployment rates have so far prevented a significant rise in joblessness. However, these low unemployment levels present their own challenges for businesses, including higher wages, labour shortages, and stagnant productivity levels, which continue to place pressure on profits.
The property market reflects similar strains, with the weakening economy adding downward pressure on the established housing market. Affordability constraints and high land prices are deterring interest in new housing, though there is some optimism: forecast commencement numbers suggest an improvement in housing supply, addressing a critical market need.
For more information, please visit: www.rpmgrp.com.au
Our Research Consultancy Services create bespoke reports crafted to your specifications, translating rich data into in-depth analysis. For a bespoke report, email the team at: contactus@rpmgrp.com.au
Our Team
Research, Data & Insights
Michael Staedler
General Manager
Research, Data & Insights m.staedler@rpmgrp.com.au
Andrew Raponi
Senior Research Manager a.raponi@rpmgrp.com.au
Laurence Rao
Research Manager - VIC laurence@rpmgrp.com.au
Simon Brinkman
Research Manager - QLD & NSW simon@rpmgrp.com.au
Executive, Sales and Marketing Leadership
Luke Kelly
National Managing Director Built Form luke@rpmgrp.com.au
Rod Anderson
National Managing Director
Communities rod@rpmgrp.com.au
Peter Grant
National Managing Director Business Development peter@rpmgrp.com.au
Imogene Schaefer
General Manager
Marketing imogene@rpmgrp.com.au
Michael Vilar
General Manager
Medium Density michaelv@rpmgrp.com.au
Greg Rankin
General Manager Communities gregr@rpmgrp.com.au
Johnathon Driessen
General Manager
Communities johnathon@rpmgrp.com.au
Tim Hyland
National Strategy Manager
Transactions & Advisory tim@rpmgrp.com.au
Unlocking Australia’s Property Landscape
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