RPM Residential Market and Economic Update - Q4 2022

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

We are pleased to share our Q4 Market Update with you. In this latest edition we have examined the current economic climate and sector performance to bring you insights on the Victorian property market.

The new land market in Melbourne and Geelong’s growth areas have traditionally been a more affordable alternative than established housing, but with an increasing number of suburbs under mortgage strain, the affordability dilemma is clearly permeating across markets.

At the heart of affordability constraints are no doubt the rising cost of living and increasing interest rates, which have shot up an incredible 350 basis points since the hikes began. The silver lining to this rapid acceleration is the fact the end is in sight, giving businesses and consumers a level of perceived stability that has been inaccessible for the past few years of flux.

The rising cash rate has had a material impact on the property market, with price correction across the board after the cyclical peaks of the past two years. It’s not all doom and gloom, though, with the RBA’s tightening of monetary policy having the desired effect on inflation so far by reducing spending and slowing the economy.

International migration has surpassed expectations since borders reopened, and this in turn has added demand to the rental market. While this exacerbates the supply-demand imbalance for rental properties, it also provides a level of appeal to investors, who are critical to delivering enough housing to sustain the projected population growth in the long term.

Another positive sign for the Victorian property industry is the improvement in business conditions this quarter, underpinned by strong trading conditions and an uplift in business confidence.

We welcome any questions about specific market segments, or any topics covered in this report. Please reach out to our highly respected Research, Data & Insights division for more information. Enjoy the read.

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

Comprehensive Market Research and Intelligence

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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.

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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

Jonathan Mayes Research Manager

jonathan@rpmgrp.com.au

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Economic Activity

Victorian Population

Borrowing Rates

Victorian Employment

The Westpac-Melbourne Institute Consumer Sentiment Index is the most widely quoted barometer of consumer sentiment in Australia. A score of greater than 100 means that optimists outnumber pessimists, with readings of below 100 indicating that pessimistic consumers are in the majority.

NAB’s Business Survey has been tracking Australian business confidence levels for more than two decades. Businesses are approached quarterly, with two smaller monthly surveys conducted in the intervening months to capture changes on a more regular basis. The panel now exceeds 2,700 businesses.

Victoria Finance

Victoria Building Melbourne Property

Economic Overview

Economic growth moderated nationally through the second half of 2022 as the impacts of rapidly rising interest rates and declining real wages weakened sentiment. Nevertheless, seasonally adjusted Gross Domestic Product (GDP) still increased by 0.5% in Q4 2022.

Wages growth fails to keep pace with strong inflation growth, and consequently household consumption has eased. There is still some latent expenditure from the pandemic boosting particular categories, like a 5.7% quarterly lift in transport services and 1.6% increase for hotels, cafes and restaurants.

Overall though, consumption has pivoted to non-discretionary items in response to deteriorating family finances. This is demonstrated through the growth in food, utilities, health, housing and education, with discretionary spending on clothing and footwear, recreation and culture, cigarettes and alcohol reducing.

To offset the fall in real disposable income, households are increasingly using savings accrued during pandemic lockdowns to cover expenses. Consequently, the household savings rate fell to just 4.5% in Q4. This is the lowest point since 2008, coinciding with the last cash rate peak of 7.25% and borrowing rates above 9%.

Dwelling investment fell 2.1% this quarter. Substantially reduced borrowing capacity is forcing potential purchasers to eschew buying decisions, in turn lowering turnover activity of established dwellings and impacting ownership and transfer costs.

Home renovations are also reducing as HomeBuilder influenced works reach completion and heightened construction costs discourage building activity. On the flipside, new dwelling investment continues increasing, supported by pandemic-induced building supply constraints gradually easing, although labour shortages remain a concern.

Business investment also contracted by 1.4% in Q4, exacerbated by high costs from supply shortages and non-dwelling construction easing as major projects are completed. Similarly, investment in new machinery and equipment edged lower despite high-capacity utilisation, with businesses delaying investment in anticipation of weakening demand.

As pandemic-related Government expenditure is wound back, total public demand still increased by 0.6% this period - attributed mostly to State and Federal responses to weather-related damage, and investment in social assistance programs.

Net exports contributed positively to overall GDP growth in Q4, with service exports continuing to strengthen with Australia’s international borders reopening. Conversely, imports fell in line with weakening consumer demand.

The household savings rate fell to just 4.5% in Q4. This is the lowest point since 2008, coinciding with the last cash rate peak of 7.25% and borrowing rates above 9%.

HOUSEHOLD SAVINGS RATIO

OUTLOOK

The full impacts of high inflation and rapidly rising interest rates on living standards and consumption were not fully felt during 2022. Households were able to offset the difference between incomes and the rising cost of living with higher savings levels accumulated through lockdowns.

Due to the spike in fixed-rate mortgages in response to attractive rates in 2020 and 2021 (around 40% of new loans), many households were not impacted by a steep jump in mortgage rates. But as an increasing proportion of these loans mature in 2023 and revert to current rates, the decline of household real wealth and disposable income will be felt.

By the end of 2022, interest repayments as a proportion of gross household income had reached a seven-year high. Additionally, monetary policy is anticipated to continue tightening in the short term, with futures markets forecasting the cash rate to peak at a little over 4% by the middle of 2023.

Subsequently, consumer sentiment, which already plummeted to long-term lows after the cumulative 350 basis point rise in the cash rate from May 2022, will be further impeded. This is expected to result in weaker growth for private consumption expenditure, which constitutes more than half of GDP. Consumers are likely to respond by lowering spending, particularly on discretionary goods and services - which we already saw in the back half of 2022.

This weakening of demand will impact future business investment decisions, including labour hires. As such, the unemployment rate is forecast to edge higher through 2023, although remain relatively low from a long-term perspective. Overall, annual growth in quarterly GDP is projected to ease from 2.66% (December 2022) to 1.5% by the end of the year.

Property markets underwent one of the largest annual corrections in 2022, and while median house prices will continue to face downward pressure as interest rates rise and stabilise, the decline already slowed in the first months of 2023. Stock levels have been relatively low for a summer/autumn season, which may be insulating the property market from higher price falls, as supply more evenly matches demand.

The quick rebound in population growth through 2022, which is expected to return to prepandemic levels from FY24, has helped to replenish worker shortages across some industries. It will also be important to help private consumption remain positive through 2023, as well as support a likely recovery in local demand for goods and services from 2024 as inflation moderates.

INTEREST RATES

The Reserve Bank of Australia’s (RBA) decision to raise the cash rate by 25 basis points in both February and March this year has resulted in the highest cash rate in more than a decade.

Long term high inflation remains the primary factor behind the RBA’s decision to continue raising the cash rate to date, with March the tenth consecutive month of tightened monetary policy. Furthermore, the RBA expects there will be a need for additional cash rate rises during the first half of 2023.

While acknowledging slowing household consumption levels and economic growth, RBA remains wary of persistent high inflation which would have severe consequences for the future economy, and is committed to mitigating this risk.

3.60% 7.77% 6.22% 5.95%

Cash Rate (March 2023)

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

• Variable interest rate: 4.96%

• Fixed interest rate (fixed period up to 3 years): 5.33%

• Fixed interest rate (fixed period over 3 years): 5.95%

Standard Variable Rate for Owner Occupiers (February 2023)

Discounted Variable Rate * (February 2023)

3 Year Fixed Rate (February 2023)

*The 3-year fixed rate decreased slightly in February from 6.30% in November despite three 25 basis point cash rate rises during this period, and is now lower than the discounted standard variable rate.

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

Exceeding Q3’s Consumer Price Index (CPI) increase, CPI increased 1.87% in Q4 2022 and 7.83% on a rolling annual basis, again well above any increases seen since the 1990s recession.

Successive interest rate rises since May 2022 are placing household finances under increasing stress. Despite this, discretionary inflation (+2.6%) still increased twofold compared with nondiscretionary inflation (+1.3%). This was underpinned by elevated demand for travel during the festive period, which led to both domestic and international travel and accommodation being significant contributors to the strong growth in overall CPI in Q4. Another high inflation driver was the pricing increase across energy markets.

The CPI Index for new dwellings purchased by owner occupiers increased by a modest 1.7% nationally, less than half the increase recorded in Q3. Supply-side constraints created by the pandemic are being gradually alleviated, resulting in housing-related inflation easing.

Demand for residential construction has also reduced as the enormous pipeline of work born of HomeBuilder and historically low interest rates is progressively completed. Additionally, reduced lot sales activity in 2022 is translating to weaker house approvals, which will relieve some of the upward price pressures for both materials and labour.

The CPI Index for rents rose by 1.22% in Q4 2022, slightly below Q3, but still indicative of tight vacancy rates and escalating rents, attributed to the reopening of international borders and changes to household formation rates through the pandemic. Pressure in the rental market is likely to persist though, given the limited capacity for timely supply, and higher borrowing costs encouraging more people into rental accommodation before home ownership.

The January monthly CPI indicator rate was up 7.4% on a rolling annual basis. Although this remains well above the RBA’s target range, it should be noted that it was below the 8% market expectation and a whole percentage point from the monthly indicator reading in December.

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

Source: Australian Bureau of Statistics

Victoria’s unemployment rate has lifted to 4%; its highest since April 2022. However, a significant proportion in the unemployed category indicated they were waiting to begin a new job, likely overstating the unemployment rate.

MONTHLY CHANGE IN EMPLOYMENT

EMPLOYMENT & WAGES

Employment market indicators suggest demand for labour is beginning to cool, with Victoria shedding 41,300 jobs (combined full time and part time) across November and December.

As a result, Victoria’s unemployment rate has lifted to 4%; its highest since April 2022. However, a significant proportion in the unemployed category indicated they were waiting to begin a new job, likely overstating the unemployment rate.

Subsequently, the labour market remains relatively tight with limited spare capacity, which is underpinning modest wage growth. In Q4 2022, the hourly rates of pay (excluding bonuses) index for Victoria rose by 0.77% quarterly and 3.36% annually. This was the highest annual increase in a decade. However, real wages still declined after the CPI index in Victoria escalated by a stronger 1.63% quarterly and 7.99% annually in Q4 2022.

WAGES VS. CONSUMER PRICE INDEX

Source: Australian Bureau of Statistics

CONSUMER SENTIMENT

Consumer sentiment remains soft, but is far more stable compared to the initial sharp decline from April 2021’s peak. Cash rate rises from May 2022 and persistent inflationary pressures have combined to keep consumer sentiment depressed.

The 78.5 reading is similar to the 1990s recession, which is marginally below the low recorded through the Global Financial Crisis (79.0) but above sentiment levels following the initial shock of the pandemic in April 2020 (75.6).

Elevated inflation and interest rates have clearly weighed on consumers, in particular the widespread anticipation that more increases are likely.

The majority of sentiment sub-index categories declined through February, and similarly yearon-year. The largest monthly declines were in the time to buy a major household item (-10.1%), family finance vs a year ago (-8.0%) and economic conditions next 12 months (-7.7%) categories. Confidence around employment is noted as being relatively positive in the broader context, however even this sub-index value (unemployment expectations) increased 10.6% through the month of February.

Source: Westpac-Melbourne Institute Consumer Sentiment Index

CONSUMER SENTIMENT INDEX (INDEX=100)

After a brief rally through the Christmas and new year period, consumers returned to pessimism following more rate hikes and an elevated CPI reading in December.

After easing in Q4, business conditions strengthened in January with an 18 point lift in the index. This was underpinned by strong trading conditions (+28 points) with both profitability (+17 points) and employment (+10 points) recording robust readings.

Improvement across business conditions was led by the wholesale, construction and manufacturing industries. Consumer-facing retail and personal service sectors have also remained strong.

Overall, these indicators highlight the resilience of the economy. Demand remains robust, supported by strong population growth in addition to the abandonment of China’s COVID-zero strategy.

Source: National Australia Bank Business Survey

Business confidence improved after stagnation in Q4, with capacity utilisation and forward orders (a leading indicator) strengthening.

VICTORIAN POPULATION

Victoria’s population increased by 36,418 in Q3 2022*, the highest increase for a three month period since Q1 2019 with students representing a primary component of this growth (predominantly migrating in Q3 to commence studies). Natural population growth increased 5,220, also reflective of the historically typical quarterly average.

Although remaining negative, net interstate migration improved significantly over Q3 2022, to an outflow of just 484 persons. This compares to an average net interstate migration outflow of approximately 4,300 persons per quarter since the start of the pandemic in Q2 2020. Recent state outflow has been driven by established families. This, however, is projected to return to positive levels in the short term.

Persistent affordability constraints across Victoria may create a hurdle in interstate migration rebounding, as has historically been observed in New South Wales.

According to the Australian Government’s January population projections for Victoria, net overseas migration will continue normalising through FY23, peaking at 81,400 in FY24 before stabilising between 78,000 and 79,000.

Natural increase is also anticipated to rise following moderated growth through the pandemic, estimated around 32,800 in FY23 before settling near 36,000.

Following negative net interstate migration through lockdowns, this population cohort should return to growth in FY24 (+3,700 persons) and stabilise around this level in the short term.

PERSONS

POPULATION PROJECTIONS

Source: Australia Government Centre for Population

+5,220

Natural increase

Q3 2022

+31,682

Net Overseas Migration

Q3 2022

+36,418

Overall Population Change

Q3 2022

Source: Australian Bureau of Statistics

*Q3 2022 is the latest available migration data.

POPULATION COMPONENTS

Victoria's population growth recorded the highest quarterly increase since the onset of the pandemic underpinned by student migration and reduced negative interstate migration

Source: Australian Bureau of Statistics

Headwinds avail in Melbourne’s residential market, with continued interest rate rises, reduced borrowing capacity and broader cost of living pressures dampening sentiment and constraining purchaser affordability. Pricing, however, is holding up in some areas as stock is reduced by vendors strategically avoiding the softer market conditions.

Reduced borrowing capacity and other constraints on purchasers, even in the face of softening prices, highlight the value proposition of compact dwelling alternatives, such as townhomes and apartments.

Auction clearance rates softened in Q4 to 68% following stabilisation in Q3. There was a much larger decline through the month of December (65%) compared to November (69%).

There was a higher volume of auctions in Q4 (9,897 compared to 7,584 in Q3), although the numbers remain around historic levels.

$974,500

Median House Price

-1.6% change from Q3 2022

-13.4% from Q4 2021

$627,500

Median Unit Price

-2.6% change from Q3 2022

-9.1% from Q4 2021

New home and greenfield demand continued to normalise after record sales driven by HomeBuilder. Increased cost of living pressures, ongoing elevated construction costs and builder availability are also creating more cautionary behaviour.

Despite the tumultuous landscape, median land prices have remained resilient to date, with another minor increase in Q4. Of note, however, is the fact the greenfield market has tended to lag behind the established house market.

The relative affordability advantage of the greenfield market continues to diminish as established house prices soften. However, if we reflect on the post-2017 downward cycle, we can see smaller pricing declines in the unit sector and new land market, which we are seeing replicated in the post-pandemic price correction.

$382,000

Median Lot Price

+1.3% change from Q3 2022

+10.7% from Q4 2021

68%

Clearance rate from 9,897 Auctions

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

BY DWELLING TYPE

New owner occupier loans fell 7.4% in Q4 to 24,534; a 25.9% drop year-on-year and reflective of both rising cash rate impacts as well as reduced stock on market.

Loans for established dwellings fell significantly, with reduced borrowing power and market uncertainty impacting both purchaser and vendor sentiment.

Loan commitments for residential land dropped 26.6% year-on-year. While this is a category that has only recently been tracked by the ABS (from Q4 2019), it represents the lowest quarterly count recorded. This moderation represents the ongoing normalisation of the market following the pull forward of demand through the pandemic underpinned by HomeBuilder.

New loans for dwelling construction declined 12.0% in Q4, although this remains around historic norms, and includes the tail end of HomeBuilder new builds. Newly erected dwelling loans also dropped 27.6% across the year.

LOANS

LOANS BY DWELLING TYPE

Source: Australian Bureau of Statistics

Construction of a Dwelling Newly Erected Dwelling Established Dwelling Residential Land

The 28.1% drop over the last 12 months is indicative that lender velocity is likely to remain subdued as the market continues to digest the rapid interest rate increases.

VALUE OF LOANS BY PURCHASER TYPE

The total value of loans across the market has reduced in line with loan volumes falling, while average loan values remain firm. New owner occupier loans (excluding refinancing) reduced 7.1% in Q4 and 25% year-on-year.

New loans to investors (excluding refinancing) decreased in total value by 6.4% in Q4 and 19% year-on-year. Investors have become increasingly cautious in the current environment, which combined with price moderation, is influencing the drop in total loan value.

While softening, monthly value of loans was near levels recorded through the previous price peak (2016-2017).

LOANS BY PURCHASER TYPE

Source: Australian Bureau of Statistics

Occupier Investor

Investors are likely to increase participation when there is greater confidence with regard to the economic pathway and expectations of capital growth return to the market.

BY OWNER OCCUPIER TYPE

There were 4.2% fewer first home buyer loans and 8.8% fewer non-first home buyers, increasing first home buyer loan representation in Q4. This demonstrates little more than first home buyers decreasing at a slower rate than subsequent buyers.

Some first home buyer activity may reflect the residual prolonged settlements and building delays across the greenfield markets, smoothing out lending activity across this cohort. First home buyers are strongly impacted by elevated inflation because it reduces capacity to save an adequate deposit (especially renters) and borrow the necessary level of funds to purchase.

Softer market conditions will also create caution among non-first home buyers, especially with regard to potential shifts through the inter-settlement period. Additionally, reduced stock is impeding purchasing activity for upgraders.

LOANS

LOANS BY OWNER OCCUPIER TYPE

Source: Australian Bureau of Statistics

AVERAGE LOAN SIZE BY BUYER TYPE

The increase in loan size in Q4 bucks the trend of the broader market, up 1.7% for first home buyers, and 0.3% for subsequent buyers. It is worth recognising this increase in loan sizes may be influenced by certain demographics not participating in the market at all. In fact, average loans for first home buyers hit a new peak of $505,064 and may reflect the absence of buyers who traditionally transact at the more affordable price brackets, therefore skewing the median upwards.

Average loan size for non-first home buyers increased marginally but remains below the previous peak recorded in March 2022 ($623,630). These buyers traditionally have increased access to deposit funds from built-up equity, and are more likely to have established careers with higher household incomes. There is currently a 20% average loan size difference between this group and first home buyers, equating to a significant $99,000.

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

Source: Australian Bureau of Statistics

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

Average loan size for non-first home buyers increased marginally but remains below the previous peak recorded in March 2022 ($623,630).

VICTORIAN BUILDING ACTIVITY APPROVALS

There were 16,300 dwellings approved in Q4 2022, 7.9% up from Q3. This increase was supported by a relatively strong uplift in apartment approvals, but while approvals increased on a quarterly basis, they continued to trend downward from a longer-term scale, down 1% on an annualised basis, and 13.3% below the year prior.

Detached house approvals dropped 10.9% to 8,939, but these figures are more reflective of historic norms than the pandemic and HomeBuilder influenced peaks of recent quarters. Annually there were 36,784 detached house approvals; a 3.4% decline from Q3 and 23% below 2021.

Approvals of semi-detached, row, terrace and townhomes increased 7.2% through Q4 2022 (2,682 approvals) but are down 26.6% from Q4 2021. On an annualised basis there were 11,068 townhome approvals in 2022, which was 8.1% below Q3’s annualised number, and 17.6 lower than the year prior.

Townhome affordability has influenced demand, and even with the reducing price premium between detached houses and units, townhome approval levels are sustaining in response to retaining their appeal amid reduced borrowing capacity.

Apartments finished 2022 strongly with 4,680 building approvals in Q4*. This is a 55% increase from Q3 and 82% increase year-on-year. On an annualised basis there were 13,945 apartment approvals in 2022, 13.4% above the previous quarter and 38.6% higher than a year prior. It also reflects the highest rolling annual approval numbers since September 2020.

New apartment approvals, while essential to support ongoing population growth, are likely to remain challenged. However, some uplift may be supported by the ongoing maturity and delivery of supply from the build-to-rent sector.

APPROVALS BY DWELLING TYPE

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.

Detached Houses Townhomes Apartments

COMMENCEMENTS

There are anticipated to be 57,750 total dwelling commencements through FY23, which is a 14% decline from the previous financial year. Total commencements are anticipated to continue moderating, but at a slower rate (around 6% per annum) until FY25.

Detached house commencements continue to trend downward after the peak levels driven by HomeBuilder, but remain at the higher end of average for the market. The 12% annual reduction in detached housing starts in Q4 is prognostic of the short term as the market digests the COVID pull-forward in demand and commencements. Additionally, the market remains impacted by affordability constraints and broader economic uncertainty, and with interest rates likely to keep rising through 2023, these headwinds are set to remain for some time.

Multi-unit dwelling starts are anticipated to be 17% lower in FY23, following a strong uplift in commencements recorded in FY22 (25,870 units), likely supported by some pull-forward in townhome commencements from HomeBuilder.

The necessity for additional multi-unit starts will be even more apparent as population growth continues. Overseas migration has accelerated with international borders reopening, and is expected to stabilise to longer term averages over the coming 12 to 18 months. Rental pressures are anticipated to persist in the foreseeable future with significant levels of new supply required to support the normalisation of demand, however, this is unlikely to be delivered to market in the short term.

Source: Australian Bureau of Statistics

Commencements are anticipated to stabilise and trend marginally upwards to FY25 with 22,620 commencements.

GROWTH AREA AFFORDABILITY

Mortgage stress is permeating the market, with just four suburbs (all based in Greater Geelong) now with a household income ratio under 35%. Just 12 months ago, 33 suburbs sat beneath this ratio, which highlights the impact of rising interest rates on housing affordability and loan serviceability.

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 are now 18 suburbs with a household income ratio between 35% and 39%, a level synonymous with the emergence of constrained affordability. This is down from 25 suburbs in Q3, with interest rate rises pushing additional suburbs into less affordable brackets.

Suburbs with household income ratios above 40% have shot up to 29, up significantly from just three suburbs a year ago, and indicating widespread mortgage stress. The majority of these suburbs are located in Melton and Casey. Development land in Berwick, Botanic Ridge and Burnside is near fully exhausted, so product offering is more akin to infill rather than greenfield, with the smaller lot sizes creating a more affordable sector.

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 remained robust price growth through during Q4-2022, a limited selection of suburbs still reflect a mortgage to household income ratio of below 35%, with an increasing proportion of small lots maintaining attractive affordability.

Calculation assumptions: The following chart depicts the median lot price in Q4 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 costs range from $293,750 (Mitchell) to $400,000 (Moorabool) while income levels reflect net levels (i.e. after tax income) to provide a more accurate level of disposable income. In addition, the chart also assumes a 20% deposit has been paid and mortgage repayments are based on a 30 year loan at the discounted standard rate.

Source: Reserve Bank of Australia, Australian Tax Office, and RPM Research, Data & Insights

Industry Leader Insights

WE RECENTLY CAUGHT UP WITH ANZ’S DANIEL GRADWELL WHO SHARED INSIGHTS ON AUSTRALIA’S ECONOMIC CLIMATE, THE IMPACT OF INCREASED INTERNATIONAL MIGRATION ON THE PROPERTY MARKET AND THE ANTICIPATED CASH RATE PEAK.

DANIEL GRADWELL ASSOCIATE DIRECTOR PROPERTY ANZ

WHAT ARE THE KEY FACTORS INFLUENCING THE ECONOMY RIGHT NOW?

Last year ended with quarterly GDP growth of 0.5%, which is not bad, but it’s the slowest growth we’ve had since lockdowns. We’ve also started to see household spending cool off, and the labour market begin to soften, although it’s still in good shape.

All this simply means the rising cash rate is having the desired impact, as a slowing economy is exactly what those rate rises are designed to achieve.

The forecast cash rate peak is around 4.1%, which means there are a couple of hikes to go, but when you think about the rapid change we’ve endured over the past 12 months - with 350 basis points added - there should be a perceived level of stability ahead. This eventual rate stability is in turn likely to create a sense of consumer and business confidence as we exit an extended period of volatility, which included the pandemic, lockdowns, returns to ‘normal life’, undetermined interest rate rises and unknown Government responses.

LABOUR MARKET VIC

WHAT DOES THIS MEAN FOR THE PROPERTY MARKET?

We’re starting to see some more positive data come through from the housing market, with Sydney and Melbourne in particular getting closer to stabilising. However, it’s a bit too early to predict that the property price falls have finished.

While we can take comfort that most of the interest rate rises are behind us, other headwinds will influence property prices, including unemployment, which has remained at an unsustainably low rate for quite a while now. It’s not all bad, though. In fact when you look at job vacancies there are still almost double the number there were pre-pandemic, which demonstrates a longer-term strength in the market with businesses trading well and hiring staff.

DOES THE RETURN OF OVERSEAS MIGRATION HELP DRIVE UP PROPERTY PRICES?

During the first half of 2022, overseas migration into Australia was faster than ever before, and although the data are delayed, anecdotal evidence suggests this influx continued through the rest of the year. From a housing point of view, this really impacts on the rental market, although in the long run it will put a floor under housing prices.

More immediately, this population boost puts more pressure on the rental market, and we’re seeing rents increasing accordingly. With the softening of property prices, though, it means yields are now more attractive, potentially drawing more investors back into the market. But with building approvals still sitting at such a low level and construction costs still high, more investors will not alleviate supply issues right away.

We’re starting to see some more positive data come through from the housing market, with Sydney and Melbourne in particular getting closer to stabilising. However, it’s a bit too early to predict that the property price falls have finished.

Daniel Gradwell, Associate Director, Property, ANZ

Apartments and Townhomes

The apartment market remains at a critical juncture. The fundamentals supporting the requirement for additional supply has been moderated by its delivery process. The mismatch of supply and demand, especially with regard to apartments has been an issue on the horizon since the late 2010s and is of little surprise to those observing the market.

The supply imbalance, and subsequent flow-on into the market, is forcing rents skywards and placing greater cost of living pressures on local occupiers. Vacancy rates remain low at 2.5%, (REIV) and rent is steadily increasing, with unit rents up 9.5% on a rolling annual basis. Other market indicators demonstrate a tighter market with a higher growth in rents (especially asking rents).

Overseas migration has returned to strong levels since the reopening of Australia’s borders, with recent changes for international students from China now required to return to face-to-face learning likely to increase pressures across the market.

The Centre for Population has revised their forecasts in response to higher than predicted overseas migration, with Metropolitan Melbourne predicted to record +79,700 persons

through FY23 then stabilise at around this level through to FY26. New arrivals typically rent initially and are likely to contribute to short-term occupancy and rental market pressures.

The strain on the rental market will be influenced by a range of factors in the short and medium term, including; low vacancy levels, robust population growth, and repricing of historic leases. Household formation rates (for example lone renters combining into dual or group households) will adjust in response to these factors.

While this may open up some backfill space, genuine contributions through new supply will likely be required to assist in satiating this demand and moderating current market pressures.

This has been observed across Metropolitan Sydney following their peak supply recorded through 2018, with rents softening pre-COVID as the market digested this supply, however this took a record level of annual completions to occur.

While private building approvals for apartments in Melbourne rose in 2022, they remain below approval levels from 2012 to 2019, and are not satisfying increasing demand. With new apartment supply key to easing pressure in the rental market, the reality is any kind of meaningful impact will be some time off, even if projects were to launch today, given the typical delay between a project launch and delivery, this supply would be around two to five years away depending on the size of the project.

In addition to cost pressures in relation to construction and financing projects, the two ongoing hurdles to deliver apartment supply at necessary volumes to sustain a growing population are pre-sales requirements, and investor participation (both local and overseas).

In the absence of the latter, the former can represent a key hurdle that prohibits delivery of new supply, at the necessary levels, across the market. Alternatively, it shifts the market structure to favour (although not exclusively) larger owner occupier apartments within smaller projects of lower risk, which do not ultimately contribute significant numbers to additional rental stock.

While this stock plays an important role there remains the requirement for stock at scale, underpinned by investor buyers, to support new rental supply. This stock will likely require support through investor participation to drive volumes, with a material reduction in their participation as incentives were steadily wound back from the mid-2010s. While build-torent can contribute to the delivery of this supply an ongoing participation from traditional investors and investor driven projects will be required to satiate the ongoing occupier demand a required supply for apartments across the market.

Vacancy rates remain low at 2.5%, (REIV) and rent is steadily increasing, with unit rents up 9.5% on a rolling annual basis.

OTHER DWELLING APPROVALS, COMMENCEMENTS, AND COMPLETIONS

Apartment and townhome approvals were up 45% in Q4, reaching the highest quarterly approvals number since the onset of the pandemic (7,598 approvals in Q4 2019).

Commencements declined by 14%, given approvals and commencements are broadly correlated, it is likely the commencements will record growth through the December quarter when the results are released.

7,362 Total approvals

Completions trended upward 6% from their recent low in Q2 2022, but still remain 24% lower year-on-year. Completions are likely to remain around or slightly above this level, given the uplift in commencements recorded between September 2021 and March 2022 which was supported by townhome products and the HomeBuilder incentive.

4,381 (-14%) Commencements (Q3)

7,598 (+45%) Apartment approvals

5,440 (+6%) Total completions (Q3)

Note: Approvals are to the current quarter (Q4 2022), while commencements and completions are delayed by a quarter (Q3 2022).

OUTLOOK

The outlook for the apartment market is conflicting. While the drivers for new supply remains strong, the development and delivery for necessary projects are challenged by a multitude of factors.

The reopening of international borders has intensified occupancy demand, tight vacancy rates and rental pressures across the market. Smaller household formations established during the pandemic, in order to secure more work-from-home space amid lower rents, are likely to revert to larger renter households, or return to the family home (for younger renters).

There will be a period of market inertia as leases end and are renewed at market rates, allowing for some backfill of supply, but this gap is unlikely to adequately satiate the ongoing demand for rental stock, especially given the influx of one of the primary population drivers - overseas migrants. This will be exacerbated by the recent change in policy from China requiring students to return to face-to-face learning for accredited overseas degrees.

Investors will be vital to drive pre-sales and support the delivery of supply at scale, while buildto-rent can circumvent pre-sales hurdles, they are unlikely to provide the required quantum of stock to support the short- and-medium-term population growth in the absence of the buildto-sell market. However, investors are likely to remain less active until there is more certainty around interest rates, inflation and stability in the broader economy.

Capital values have softened as a result of the current cash rate cycle, but there is some indication the market may have bottomed with a recent uplift recorded across the Sydney market. However, there still remains uncertainty as to how the market digests some upcoming concerns (i.e. fixed interest mortgage “cliff”) in the near term.

While reduced cash rates will be the catalyst for meaningful price growth, the pathway forward remains unclear, increasingly so given recent financial instability emanating from the United States. This is evidenced by strong recent changes in expected peak cash rates from 4.18%* to expectations that cash rates have effectively peaked and are likely to moderate through the second half of 2023, stabilising thereafter. The market remains cautious in its transition to post COVID norms, underpinned by ongoing degrees of uncertainty.

*According to the Interbank Cash Rate Futures

Capital values have softened as a result of the current cash rate cycle, but there is some indication the market is approaching the bottom with a recent uplift recorded across the Sydney market.

Residential Investment

This time a year ago, property prices peaked. It’s not surprising then, that median house prices in Metropolitan Melbourne are 13.4% lower year-on-year. However, despite interest rates continuing to climb, tight lending conditions and sustained high construction costs, median house prices reduced just 1.6% this quarter, with homes in Melbourne’s middle ring in fact rebounding to sit at $1,140,500.

The attraction of Regional Victoria remains, with both house and unit prices higher than last year, and house prices again growing quarterly to reach $609,500 after a slight dip in Q3.

Middle ring house values rose 0.2% quarterly, reversing downward trend.

RENTS

As more prospective buyers are priced out of the house market as a result of interest rate rises, the rental market is becoming more and more competitive, exacerbated by the return of international students.

Rents have risen across almost all house and unit sectors, with Geelong’s rental market in particular remaining hotly contested, and prices reflecting as such.

RENTALS - MOVERS AND SHAKERS

Melbourne House Rents

Inner Ring 3 Bed

Largest quarterly rental increase at +$50 per week or +7%

Melbourne Unit Rents

Inner Ring 3 Bed

Largest quarterly increase at $38 per week (+15%)

Geelong Rents

All house types and 3 bed units

Largest quarterly increase at $10 per week

UNITS & APARTMENTS

VACANCY RATES

As interest rates continue to rise, more aspiring home buyers will be forced to rent for longer until lending conditions become more favourable.

This will add pressure to an already tight rental market given the return of international migration and delayed construction timeframes in the wake of the pandemic.

This competitive rental environment is apparent in the remarkably low, and lowering, vacancy rates across Melbourne. With Melbourne’s overall vacancy rate dropping again in Q4, it’s sitting at 2.5%, markedly lower than the 4.9% two-year average.

While Geelong and Mornington Peninsula’s vacancy rates did not fall at the same rate as Metropolitan Melbourne, these areas are already much tighter rental markets with very little vacancy.

YIELDS

Yields are naturally climbing as property prices soften in a tight rental market, but with regional prices going through a lesser correction, regional yield rates are stagnating, although remain significantly higher than Metropolitan Melbourne.

As international migration, including student populations, return to our shores in droves, inner city house and unit rental yields in particular are being boosted, and are sitting 0.27% and 0.47% higher respectively year-on-year.

VACANCY RATES - TOTAL DWELLINGS

OUTLOOK

Yields for Victoria’s increasingly competitive rental market will remain high for the foreseeable future, given property value corrections and tight lending conditions driving more would-be home buyers into renting for longer.

As inflation issues linger, building costs remain high, causing a further imbalance between demand and supply for rental properties, adding fuel to the fire.

The influx of international migrants is a positive for the property sector overall, but it has little impact on property prices in the short term, as most new arrivals prefer to rent for a period before buying - placing greater pressure on the rental market for the time being.

Although the Regional Victoria property market has slowed in response to rising interest rates, house prices still managed to climb in Q4 2022. Regional areas can still offer larger lots at relatively more affordable prices, but even with the sustained attractiveness of regional living in a post-pandemic era, stringent lending conditions are restraining the previously solid growth levels.

Our Team

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

Peter Brannighan Chairman

peterb@rpmgrp.com.au

+61 418 442 661

Gary Dunne Chief Executive Officer

gary@rpmgrp.com.au

+61 410 548 025

Luke Kelly

Managing Director

Project Marketing luke@rpmgrp.com.au

+61 400 688 520

Rod Anderson

Managing Director Communities rod@rpmgrp.com.au

+61 417 595 859

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

+61 411 494 499

Ed Wright

National Director

Head of Transactions & Advisory edwright@rpmgrp.com.au

+61 421 213 021

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

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.