RPM Q42023 Economic and Residential Property Market Report

Page 1

Q4 2 3

ECONOMIC AND RESIDENTIAL PROPERTY MARKET REPORT

Executive Summary

• Economic growth has progressively slowed in 2023, with GDP increasing by 0.24% over Q4 and 2.06% over the year.

• Household expenditure growth has stagnated due to rising interest rates and inflation.

• Affordability concerns and elevated construction costs in the residential sector have dampened new dwelling investment, adding pressure to the rental market.

Welcome to our Q4 2023 Economic and Residential Property Market Report. This report examines Australia’s economy and property sector performance within the context of Victoria’s land and housing market.

Economic growth has steadily slowed during 2023, with Gross Domestic Product (GDP) increasing by 0.24% over Q4 and 2.06% over the year. Furthermore, economic output is not keeping pace with the nation’s population growth, leading to a decline in GDP per capita for the year.

Household expenditure growth has stagnated in response to rapidly rising interest rates and strong inflation growth. With mounting living expenses and higher home loan repayments, households are facing intense budgetary strains, leading them to adjust spending habits. In fact, discretionary spending has decreased by a notable 0.9% in Q4, while essential item expanses have risen by 0.7%.

Wage price index growth outpaced consumer price index in Q4, allowing the household savings ratio to improve from its 15-year low of 1.1% in Q3 to 3.2%. However, despite this uptick, the household savings ratio remains relatively low, indicating that households are continuing to deplete their savings to meet living expenses.

Affordability concerns persist in new dwelling investment, which is being exacerbated by elevated construction costs in the residential sector. This has led to a notable decline in building approval activity, as fewer prospective buyers feel the current market conditions are favourable. Consequently, rental markets are under pressure, with historically low vacancy rates and escalating rental rates.

We welcome any questions about specific market segments or topics covered in this report. Please contact our Research, Data & Insights division for more information.

For more information, please visit: www.rpmgrp.com.au

For a detailed market analysis or a special report, email the team at: contactus@rpmgrp.com.au

2 RPM Q4 2023 Economic and Residential Property Market Report

What’s Inside

3 RPM Q4 2023 Economic and Residential Property Market Report
Economic Overview Melbourne Residential Market 05 18 GDP Household Savings & Consumption Interest Rates & Inlfation Labour Markets Market Sentiment Population Economic Outlook 06 07 09 11 13 15 17 20 21 22 25 27 31 33 Property Prices Affordability Finance Activity Building Activity Apartments and Townhomes Rental Markets Market Outlook

A data-driven, holistic approach to property

At RPM, we always start with in-depth research and data-driven insights. When we are guided by data, analysis and key findings, we maximise success.

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 as well as analytical and strategic advice.

Our knowledge and expertise are an invaluable resource for RPM’s developer clients, empowering them to make intelligent, informed, and strategic decisions when evaluating residential developments and investment opportunities.

This rich data helps our team and clients to better understand:

Volume of lots sold

Distribution of lots of a particular size

Dollar per sqm rates

Distribution of price points

Stock release levels

Activity levels by market, product, & developer

Volume

Stock level fluctuations

4 RPM Q4 2023 Economic and Residential Property Market Report
of stock returned to market

Economic Overview

RPM Q4 2023 Economic and Residential Property Market Report

Gross Domestic Product

GDP increased by a moderate 2.06% over 2023, down from solid economic growth of 3.81% in 2022.

This easing is attributed to fragile consumer confidence, reflected in slowing household expenditure and dwelling investment activity. Growth is expected to remain subdued through much of 2024, as cautious consumer behaviour persists.

Relief may begin with the July tax cuts, and while the prospect of further interest rate rises is diminishing, reductions are most likely to be seen later in the year.

Source: Australian Bureau of Statistics

6 RPM Q4 2023 Economic and Residential Property Market Report GDP Quarter on Quarter Change MAT GDP - Annual Change GDP - % change
GDP Growth Q4 2023 12 months to Q4 2023 0.24% 2.06% -7.00% -6.00% -5.00% -4.00% -3.00% -2.00% -1.00% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Dec-23

Household Savings & Consumption

The current household savings rate is 3.2%.

Although improving from the previous quarter, household savings remain relatively low, as higher inflation and home loan mortgage repayments erode savings.

Source: Australian Bureau of Statistics

7 RPM Q4 2023 Economic and Residential Property Market Report Savings Ratio Average Ratio 2014-2019 Household Savings Ratio
24.1% 19.3% 1.9% 3.2% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23 Average Savings Ratio = 6.4% 2014-2019

Household Savings & Consumption

Household consumption remained steady in Q4 2023, after declining in Q3. Increased mortgage repayments and higher cost of living expenses are forcing consumers to rein in expenditure, particularly on discretionary items.

Essential Consumption Discretionary Consumption 0.75%

Source: Australian Bureau of Statistics

8 RPM Q4 2023 Economic and Residential Property Market Report
Cigarettes and tobacco -6.15% Electricity, Gas and Other Fuel +6.93% Purchase of Vehicles -3.60% Hotels, Cafes, and Restaurants -2.75% Clothing and Footwear -2.52% Furnishing and Household +1.06% Health and Wellbeing +0.94% Operation of Vehicles +0.89%
and services +0.73%
Other goods
-0.86%

Interest Rates and Inflation

Following November’s 25 basis point increase, the cash rate has held steady at 4.35% in early 2024.

With signs of inflation beginning to ease, there is growing likelihood that the RBA’s tightening monetary policy, which saw a total rise of 425 basis points from May 2022, has ended. Despite the RBA easing its tightening bias, it remains wary that inflation is not completely under control, leaving some uncertainty on its next announcement.

Inflation growth has slowed through 2023 but remains above the RBA target range of 2%-3%.

The Consumer Price Index (CPI) increased by 0.59% over the quarter and 4.05% annually – this is almost half the peak annual growth rate of 7.83% over 2022. Housing remains a key contributor to inflation remaining above the target range; as supply constraints on residential construction and rental accommodation apply upward pressure to building costs and rents.

9 RPM Q4 2023 Economic and Residential Property Market Report
MARCH 2024 RBA Cash Rate Variable Rates 3 Year Fixed Rate 4.35% 7.31% 6.80% CPI - DEC 2023 Quarterly Inflation Annual Inflation 0.59% 4.05% MARCH 2023 RBA Cash Rate Variable Rates 3 Year Fixed Rate 3.54% 6.43% 6.27% DWELLING AND RENTAL INDEX
New Dwelling Index Rental Index 1.37% / 1.55% 0.74% / 0.89%
Inflation
(MELBOURNE / NATIONAL) - DEC 2023
Interest Rates

New Dwelling and Rental Index

10 RPM Q4 2023 Economic and Residential Property Market Report
New Dwelling Index Rental Index Quarterly % Change in New Dwelling Purchase Index Quarterly % Change in Rental CPI Index 1.35% 0.74% 0.63% -0.08% 1.28% -2.50% 0.29% 0.00% 0.89% -3.00% -2.50% -2.00% -1.50% -1.00% -0.50% 0.00% 0.50% 1.00% 1.50% 2.00% Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra National 1.05% 1.37% -0.47% 1.43% 5.56% 2.13% 0.16% 2.60% 1.55% -1.00% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra National

Victorian Employment and Unemployment

Employment figures saw a notable uptick in February, with 29,300 persons finding employment.

The majority of these were part-time positions with full-time roles comprising only 7%.

Despite the increase in employment, the unemployment rate held steady at 3.9%; attributed to the robust population growth expanding the labour force.

11 RPM Q4 2023 Economic and Residential Property Market Report Full Time Part Time Unemployment Rate Monthly Change in Employment Unemployment Rate
Source: Australian Bureau of Statistics
Total Employed 12 months to Feb 2024 12 months to Feb 2024 Unemployment Rate 124,200 3.9% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% -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 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 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 Jan-24

Wage Growth vs. Inflation

The hourly rate of pay index escalated by 0.9% over Q4, marking a 4.2% annual increase – the highest since Q1 2009.

Additionally, real wages in Q4 saw growth for the first time since Q1 2021, as the wage price index outpaced the consumer price index.

12 RPM Q4 2023 Economic and Residential Property Market Report Wage Price Index Consumer Price Index Percentage Change
Source: RPM Research, Data & Insights
0.90% 4.20% 0.59% 4.05% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% Quarterly Growth Annual Growth

Consumer Sentiment

The consumer sentiment index, while still in pessimistic territory at 86 in February, showed improvement – marking its highest reading since June 2022.

This uptick coincided with easing inflation and the growing likelihood of interest rate cuts; contributing to a brighter outlook for family finances in the coming year. As a result, households are gaining confidence in major household item purchases, with the index notably rising over February. This is in contrast with the cautious approach seen in 2023, when consumers tightened discretionary spending. However, there remains some hesitancy regarding property investment, as reflected in the marginal increase in the time to buy a dwelling index.

Consumer Sentiment Index (Index-100)

Source: Westpac-Melbourne Institute Consumer Sentiment Index

13 RPM Q4 2023 Economic and Residential Property Market Report
Index Feb-24 Index Feb-23 86.0 78.5 Consumer Sentiment Index - 100 70.0 75.0 80.0 85.0 90.0 95.0 100.0 105.0 110.0 115.0 120.0 Aug-15 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 Feb-23 May-23 Aug-23 Nov-23 Feb-24

Business Sentiment

Business conditions improved in February, driven by better trading and profitability conditions.

However, the outlook remains uncertain, with business confidence steady and below its long-term average. Supply side pressures persist for businesses, with challenges in both material and labour availability. These factors pose a risk to inflation outlook, especially as increased costs are transferred to consumers through higher prices. Industries sensitive to interest rates, such as retail and construction, saw weakening conditions, while manufacturing saw a solid increase.

Source: National Australia Bank Business Survey

14 RPM Q4 2023 Economic and Residential Property Market Report NAB Business Conditions Index
Index Feb-24 Index Feb-23 6.5 16.6 -50.0 -40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0 30.0 40.0 Feb-15 May-15 Aug-15 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 Feb-23 May-23 Aug-23 Nov-23 Feb-24

Victorian Population

Population growth in Victoria remained near historically high levels in Q3, continuing to benefit from the surge in overseas migration after international borders reopened.

The state recorded a net gain of 49,917 persons in Q3. This marks a long-term high increase for a Q3 period. The state’s total population escalated by 192,723 persons over the 12 months to September.

Population Components

15 RPM Q4 2023 Economic and Residential Property Market Report
Source: Australian Bureau of Statistics
-30,000 -20,000 -10,000 0 10,000 20,000 30,000 40,000 50,000 60,000 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23
Natural Increase Net Overseas Migration Net Interstate Migration

Victorian Population

Natural Increase

Natural increase improved in Q3 2023, reversing the declining trend during the first half of the year. This is also 50% higher than the corresponding figure in Q3 2022. Over the 12 months to Q3, the net increase from natural increase was 32,084 persons, which equated to 13% annual growth.

Net Overseas Migration

Overseas migration remains the largest driver of population growth, recording a net inflow of 42,105 persons in Q3, which is well above pre-pandemic net inflows for a corresponding period.

Net Interstate Migration

The net outflow from interstate migration was a minor 39 persons in Q3, continuing the trend of minimal net outflows from the first half of the year. This is also a considerable improvement from Victoria’s loss of residents to other states during the 2020 and 2021 lockdowns.

16 RPM Q4 2023 Economic and Residential Property Market Report
+7,851 +42,105 -39 Population Projections -50,000 0 50,000 100,000 150,000 200,000 2022-23 2023-24 2024-25 2025-26 2026-27
(a) Actual (a) Natural Increase Net Overseas Migration Net Interstate Migration
Source: Australian Bureau of Statistics

Economic Outlook

An uncertain year lies ahead for the economy and property market with a host of headwinds and tailwinds fighting it out.

Consumer Confidence

Still characterised as pessimistic, although has started to pick up, in line with improved outlook for inflation and interest rates.

Inflationary Pressures

Although easing, it will likely remain above the target 2% to 3% range over the next 12 months, continuing to impact the standard of living.

Cash Rate

Appears to have peaked with the potential for an increase if necessary. High rates have placed pressure on household consumption and reduced borrowing capacity.

Population Growth

Strong overseas migration is increasing pressure on the occupier market and underpinning rent inflation.

Labour Markets

Wage growth outpaced CPI in Q4, leading to increased purchasing power for households. However, moderating economic growth is resulting in labour market conditions starting to ease.

Melbourne Reputation

Economist Intelligence Unit (EIU) ranks Melbourne the third most liveable city in the world, and the most liveable in Australia.

Compounding Demand

Strong population growth and millennial household formation are increasing demand. High construction and funding costs are underpinning a significant supply gap.

Australian Dream

The great Australian dream of home ownership remains. This is achievable through the supply of a diverse dwelling options.

17 RPM Q4 2023 Economic and Residential Property Market Report

Residential Market

RPM Q4 2023 Economic and Residential Property Market Report

Melbourne Residential Property Market

Potential buyers became more cautious in Q4 as they grappled with higher interest rates and reduced borrowing capacity – widening the gap between their housing desires and financial realities.

From July to October, interest rate stability hinted at a potential recovery in residential property demand. This was further bolstered by record population growth, supplementing the already moderate local demand. In response, vendors were more willing to list their properties and capitalise on the generally higher selling spring season. As a result, auctions during Q4 2023 were 19% higher than the previous corresponding period.

However, this initial sign of recovery was shortlived – dampened by the 25 basis point rate rise in November. Subsequently, property demand dwindled as prospective buyers grappled with higher interest rates and reduced borrowing capacity, widening the gap between their housing desires and financial realities. Consequently, many opted to postpone their decision to purchase to save up a larger deposit or await more favourable market conditions rather than compromise on their home preferences.

New home demand is weakening after record sales during the 18 months from the start of the HomeBuilder Grant (June 2020). Rising cost of living pressures, higher construction costs, and the rapid 435 basis point rise in the cash rate in a little over one year, are all contributing to cautionary buyer behaviour. Additionally, developers are restraining new supply to align with lower lot absorption rates, aiming to prevent an oversupply scenario that could drive down lot prices.

Subsequently, there has been a rise in rebates and discounts, offering 5%-10% off the headline lot prices, to stimulate sales activity and clear inventory of lingering titled and near-titled lots. While the headline median lot price increased by 1.5% over 2023 to $386,900 in Q4, the actual median lot value likely saw a correction when factoring in current buyer incentives.

Median House Price

Median Lot Price

$386,900

-2.2% vs. last quarter | -5.8% annually

$909,000 Q4 2023

-0.5% vs. last quarter | +1.5% annually

Q4 2023

Median Unit Price

Clearance Rate

65%

-0.1% vs. last quarter | +1.7% annually

$632,500 Q4 2023

From 1234 auctions.

Q4 2023

19 RPM Q4 2023 Economic and Residential Property Market Report
Source: REIV and RPM Research, Data and Insights

Melbourne Residential Property Prices

20 RPM Q4 2023 Economic and Residential Property Market Report Median Property Prices Median Property Price Change
Median House Price Median Unit Price Median Lot Price Median House Price Median Unit Price Median Lot Price
Source: REIV and RPM Research, Data & Insights
$0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Dec-23 -6% -19% 13% 51% 2% -8% 7% 29% 2% 12% 19% 95% -40% -20% 0% 20% 40% 60% 80% 100% 120% 1 Year 2 Years 5 Years 10 Years

Growth Area Affordability

21 RPM Q4 2023 Economic and Residential Property Market Report Principal Loan Amount Mortgage Repayments as a % of Income Source: RPM Research, Data & Insights Principal amount (80% Loan) Amount taken up by loan repayment (% of income) Historical 30% income used to finance a mortgage
0% 10% 20% 30% 40% 50% 60% 70% $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 Burnside Berwick Greenvale Officer South Point Lonsdale Craigieburn Mernda Wollert Eynesbury Cranbourne South Fyansford Mickleham Pakenham Kalkallo Cranbourne Botanic Ridge Bonnie Brook Clyde North Donnybrook Deanside Truganina Officer Nar Nar Goon Brookfield Fraser Rise Weir Views Ocean Grove Waurn Ponds Strathtulloh Junction Village Clyde Mount Duneed Cranbourne West Rockbank Manor Lakes Cranbourne East Nar Nar Goon North Melton South Truganina Sunbury Bacchus Marsh Tarneit St Leonards Mambourin Werribee Lara Diggers Rest Beveridge Armstrong Creek Aintree Thornhill Park Wallan Leopold Wyndham Vale Charlemont

Victorian Finance Activity

Loans by Owner Occupier Type

Owner occupier loans increased by 12.4% in Q4 to 27,589. Growth in first home buyer loans has been stronger at 16.3%, compared to 10.3% for non-first home buyer loans. Subsequently, first home buyers’ proportion of total owner occupier loans rose to 36%, its highest share since Q1 2021 when historically low borrowing rates and the HomeBuilder Grant stimulated demand.

Greater price correction in inner and middle ring suburban residential markets in Melbourne has likely impacted both trade up and trade down activity, as upgrades and downsizers delay their decision to place their property on the market, until prices rebound.

22 RPM Q4 2023 Economic and Residential Property Market Report
Number of Loans FHB % Share of Loans
Source: Australian Bureau of Statistics
Loans
FHB
10,030 17,559 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23
First home buyer Non-first home buyer FHB share of owner occupier
FHB
(Q4-23) Non
Loans (Q4-23)

Victorian Finance Activity

Average Loan Size by Buyer Type

The average size of a first home buyer loan increased by 3.1% in Q4 to $511,755, which was also a record high. Despite affordability concerns, moderate demand persists in the sub $600,000 property segment, where full stamp duty concessions apply, offering some support for first home buyers. Similarly, non-first home loan sizes rose by 2.6% to $603,924, yet this figure remains 3.4% lower than its peak in Q1 2022.

Diminishing borrowing capacity and declining established property prices have contributed to this reduction in loan size for non-first home buyers.

Source: Australian Bureau of Statistics

23 RPM Q4 2023 Economic and Residential Property Market Report
FHB Loan Size Non FHB Loan Size $511k $603k Average Loan Value $250,000 $300,000 $350,000 $400,000 $450,000 $500,000 $550,000 $600,000 $650,000 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23
First home buyer average loan size Non first home buyer average loan size

Victorian Finance Activity

24 RPM Q4 2023 Economic and Residential Property Market Report
Total New Loan Applications Established Loan Applications Newly Erected Dwelling Applications Construction of a New Dwelling Applications
+13.7% -0.1% +5.3% New Loan Applications Construction of a dwelling Newly erected dwelling Established dwelling Residential land 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23
Source: Australian Bureau of Statistics
26,029

Victorian Building Activity

Approvals and Commencements

Victoria recorded 13,778 dwelling approvals in Q4; this is a slight 0.8% increase from the last quarter but 16.3% lower than the same quarter in 2022. Approvals also remain below long-term averages, with supply likely to remain a key issue through into the medium term.

Detached houses were the only dwelling type to record growth in approvals in Q4, lifting to 8,718 houses, and constituting 63% of total approvals. Townhomes fell by 1.5% to 2,673 approvals, which accounted for 20% of activity. Apartments saw the largest fall of 12.1%, declining to 2,387 approvals.

Total commencements declined by 19% over FY23, with both detached house and multi-unit starts experiencing a sizeable reduction in construction activity. This was in response to challenging market conditions, where diminished borrowing capacity and cost of living pressures adversely impacted demand, while escalating building and funding costs impacted the supply side.

Commencements are forecast to edge down slightly over FY24 and FY25, falling by 2.6% over the two years to 53,110 dwellings. Weak lot sales activity since the start of the rapid increase in interest rates from May 2022, has resulted in further declines in detached house construction. This is projected to decrease 20% to 28,240 starts in FY25. Despite recovering in FY26 and increasing by a forecast 7%, resultant detached house commencements will remain more than 11% below average annual starts over the 20 years to FY23.

Conversely, over the same two-year period, multi-unit starts are estimated to increase by 30%, as persistent affordability concerns boost new housing demand towards relatively inexpensive townhomes and apartments. This is also expected to support an additional 9% growth in multi-unit starts during FY26.

Detached Home Approvals

8,718

+5.8% over the quarter | -2.2% over the year

Townhome Approvals

2,673

-1.5% over the quarter | -5.8% over the year

Apartment Approvals

2,387

-12.1% over the quarter | -49.4% over the year

25 RPM Q4 2023 Economic and Residential Property Market Report

Victorian Building Activity

Approvals by Dwelling Type

Commencements by Property Type

Detached Houses Townhomes Apartments Houses Multi Units

13,778

54,550 +0.8% over the quarter | -16.3% over the year -18.9% over the year

26 RPM Q4 2023 Economic and Residential Property Market Report
Total Approvals Total Commencements (FY22/23)
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Dec-23 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 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 2024/25 2025/26 Forecast

Townhomes & Apartments

There have been notable declines in approvals and commencements for medium and higher-density dwellings – both are key components to the 70/30 plan.

The 2023 Housing Statement’s 70/30 focus seeks to allocate 70% of housing supply to established, infill areas and 30% to the greenfield sector to accommodate the state’s growing population. This means that based on the estimated 80,000 new dwellings needed each year over the next decade, 70% will be allocated to the infill areas. Of the required infill supply, it is not unrealistic to expect around 80% to be delivered through townhomes or apartments; both of which have been battling headwinds and experiencing notable drops in key leading indicators.

In CY23, Victoria’s total dwelling approvals hit their lowest level since 2013, with only 50,800 recorded approvals. Of these, 10,200 were for townhomes and only 7,900 for apartments, with recent figures indicating Q4 2023 saw lower approvals than the same time last year.

While Q4 2022 saw a slight increase in the commencements and completions of townhomes and apartments with 5,500 dwellings commencing construction by Q3 2023 (a notable surge compared to previous quarters and years), this positive trend may be short-lived. The declining approval numbers in 2023 suggest a shrinking pipeline of projects likely to result in low commencement figures in H1 2024.

In Q2 2023, 6,200 townhomes and apartments were completed marking the second-highest figure since Q4 2021. However, the low completion numbers in the preceding quarters means that only 22,400 medium and higher-density dwellings were constructed across the state over the 12 months to Q3 2023. This figure falls far short roughly 45,000 townhomes and apartments needed to meet the housing targets over the next decade.

Approvals

Commencements

5,477

-7% vs. last quarter | -29% rolling annual figure

5,060 Q4 2023

+49% vs. last quarter | +16% rolling annual figure

Q3 2023

Completions

6,249 Q3 2023

Median price $632,500

+54% vs. last quarter | +22% rolling annual figure

-1% vs. last quarter | +1.7% rolling annual figure

Q4 2023

Source: REIV and RPM Research, Data and Insights

27 RPM Q4 2023 Economic and Residential Property Market Report

Townhomes & Apartments

While material costs remain steady, market prices are sharply rising due to increasing labour costs.

The primary hindrance to building progress is labour costs. While raw material costs (or inputs) for building construction in Melbourne have remained relatively stable over the past year (a modest 1.3% increase in the year to Q4 2023), it was in stark contrast to the 14.2% increase recorded in the year to Q4 2022. This was helped by lower costs of earlystage construction materials including steel, timber, and cement, but balanced by increasing costs of late-stage construction goods such as electrical equipment.

However, outputs of ‘other building construction’ (the market price of completed townhomes and apartments) which take into account labour, material, plant, and subcontractor margins has seen a significant escalation. In Q4 alone, the index figure surged by 5.7%, marking the highest quarter-onquarter increase since Q3 2010.

Over the course of CY23, Victoria’s townhome and apartment output index rose by 8.3%, surpassing the increases seen in New South Wales (+5.5%), Queensland (+6.1%), and the national average (+6.3%). This notable rise, despite relatively stable input costs, strongly suggests a continued upward trend in labour costs associated with townhome and apartment construction in Victoria.

Furthermore, despite federal initiatives aimed at slowing the arrival of new migrants, January 2024 saw the highest long-term gross and net arrivals. While we note that arrivals do not translate exactly into migration, the high level of long-term arrivals, as well as international student numbers largely recovering to 2019 levels are expected to exacerbate pressure on local housing supply, which is already strained by low vacancy rates and a lack of significant planning reforms.

28 RPM Q4 2023 Economic and Residential Property Market Report
Approvals Total Townhomes Total Apartments Total Q4 2023 2,673 2,387 5,060 change from previous quarter -1.5% -12.1% -6.8% change from previous year -5.8% -49.4% -33.0% 12 months to Q4 2023 10,249 7,917 18,166 Rolling 12 month change -10.8% -44.1% -29.2% Commencements Other Dwellings Completions Other Dwellings Q3 2023 5,477 Q3 2023 6,249 change from previous quarter 47.7% change from previous quarter 53.9% change from previous year 16.9% change from previous year 21.6% 12 months to Q3 2023 19,791 12 months to Q3 2023 22,392 Rolling 12 month change -16.3% Rolling 12 month change 23.8% Total Apartment & Unit Prices Median price Change from Sep-23 Change from Dec-22 Dec-23 $632,500 -0.1% / -$500 +1.7% / +$10,500 Sep-23 $633,000 Dec-22 $622,000

Approvals, Commencements & Completions

29 RPM Q4 2023 Economic and Residential Property Market Report Townhomes Approvals Commencements Completions
2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23

Construction Costs

Inputs to Construction

Outputs to ‘Other Residential’ Construction Melbourne Victoria National National

30 RPM Q4 2023 Economic and Residential Property Market Report
Quarterly Quarterly 0.0% 5.7% 0.3% 2.6% Yearly Change Yearly Change 1.3% 8.3% 2.4% 6.3%

Rental Markets

Strong population growth coupled with smaller household sizes is expected to fuel continued demand for rental accommodation.

31 RPM Q4 2023 Economic and Residential Property Market Report
House Weekly Rents Beds Dec-22 Sep-23 Dec-23 Change from previous quarter Change from previous year 2 Year Average Annual Gain Inner 2 $595 $650 $650 $0 0% $55 9% 4.5% 3 $750 $750 $810 $60 8% $60 8% 3.9% 4 $898 $1,050 $1,100 $50 5% $203 23% 10.7% Middle 2 $430 $450 $470 $20 4% $40 9% 4.5% 3 $500 $550 $550 $0 0% $50 10% 4.9% 4 $650 $700 $730 $30 4% $80 12% 6.0% Outer 2 $398 $430 $450 $20 5% $53 13% 6.4% 3 $430 $480 $495 $15 3% $65 15% 7.3% 4 $490 $550 $550 $0 0% $60 12% 5.9% Geelong 2 $380 $400 $400 $0 0% $20 5% 2.6% 3 $450 $450 $450 $0 0% $0 0% 0.0% 4 $520 $525 $530 $5 1% $10 2% 1.0% Units and Apartments Weekly Rents Beds Dec-22 Sep-23 Dec-23 Change from previous quarter Change from previous year 2 Year Average Annual Gain Inner 1 $380 $450 $450 $0 0% $70 18% 8.8% 2 $500 $580 $595 $15 3% $95 19% 9.1% 3 $698 $795 $800 $5 1% $103 15% 7.1% Middle 1 $350 $390 $380 -$10 -3% $30 9% 4.2% 2 $430 $490 $500 $10 2% $70 16% 7.8% 3 $550 $600 $650 $50 8% $100 18% 8.7% Outer 1 $320 $350 $350 $0 0% $30 9% 4.6% 2 $400 $450 $450 $0 0% $50 13% 6.1% 3 $480 $500 $535 $35 7% $55 11% 5.6% Geelong 1 $295 $300 $310 $10 3% $15 5% 2.5% 2 $388 $400 $400 $0 0% $13 3% 1.6% 3 $480 $480 $480 $0 0% $0 0% 0.0%

Rental Markets

Overall Melbourne Vacancy Rate Outer Regions Vacancy Rate 2.3% 1.1%

-0.02% over the quarter | -0.19% over the year -0.15% over the quarter | -0.27% over the year

32 RPM Q4 2023 Economic and Residential Property Market Report
Yields - Houses Yields - Units
Vacancy Rates
Inner Total Middle (10-20km) Outer Total Geelong Melbourne Total Melbourne Two Year Average Houses Dec-22 Sep-23 Dec-23 Inner 2.49% 2.57% 2.81% Middle 2.72% 3.06% 3.06% Outer 3.02% 3.57% 3.70% Metro 2.82% 3.28% 3.38% Regional 3.99% 4.15% 4.18% Units Dec-22 Sep-23 Dec-23 Inner 4.05% 4.83% 4.91% Middle 3.72% 4.31% 4.36% Outer 3.82% 4.48% 4.46% Metro 3.92% 4.63% 4.77% Regional 4.80% 4.73% 4.86% 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23

Market Outlook

While the RBA has relaxed its tightening bias, it remains wary that inflation is not completely under control.

Australia’s economic outlook for 2024 remains uncertain, with inflation easing at an unexpected rate since late 2023. This suggests that November’s cash rate increase may have been the end of the RBA’s tightening monetary policy cycle. Furthermore, household consumption is likely to remain subdued with labour market conditions starting to ease.

The path to bringing inflation within the 2%-3% target range is anticipated to face challenges, including weaker productivity outcomes or continued supply disruptions. These factors can lead to increased business costs and subsequent upward pressure on consumer prices.

Elevated construction and funding costs are likely to constrain new housing supply, affecting affordability and reducing purchaser activity. Strong population growth is expected to fuel continued demand for rental accommodation, leading to solid rental price growth due to the rental supply shortage.

Expected improvements in wage growth, along with the legislated tax cuts from July 2024, may increase households’ spending confidence despite low savings rates; supporting moderate consumption expenditure growth.

While the RBA has eased its tightening bias, the possibility of another interest rate rise has not been entirely ruled out.

RPM Q4 2023 Economic and Residential Property Market Report

Our Team

Research, Data & Insights

Michael Staedler

General Manager

Research, Data & Insights m.steadler@rpmgrp.com.au

Andrew Raponi Research Manager

a.raponi@rpmgrp.com.au

Executive, Sales and Marketing Leadership

Gary Dunne Chief Executive Officer gary@rpmgrp.com.au

Luke Kelly National Managing Director Project Marketing

luke@rpmgrp.com.au

Laurence Rao Senior Research Analyst - VIC laurence@rpmgrp.com.au

Simon Brinkman

Senior Research Analyst - QLD simon@rpmgrp.com.au

Tim Hyland

National Strategy Manager Transactions & Advisory tim@rpmgrp.com.au

Imogene Schaefer

General Manager

Marketing

imogene@rpmgrp.com.au

Michael Vilar General Manager Medium Density michaelv@rpmgrp.com.au

Rod Anderson National Managing Director Communities rod@rpmgrp.com.au

Greg Rankin General Manager Communities gregr@rpmgrp.com.au

Peter Grant

National Managing Director Business Development peter@rpmgrp.com.au

Johnathon Driessen General Manager Communities johnathon@rpmgrp.com.au

34 RPM Q4 2023 Economic and Residential Property Market Report

Unlocking Australia’s Property Landscape

rpmgrp.com.au
For detailed insights or custom reporting, contact the team at: contactus@rpmgrp.com.au

Turn static files into dynamic content formats.

Create a flipbook
Issuu converts static files into: digital portfolios, online yearbooks, online catalogs, digital photo albums and more. Sign up and create your flipbook.