Urban IQ Economic and Residential Market Update
Executive Summary
• Annual GDP growth shows one of the smallest increases in over 30 years, with GDP per capita declining for six consecutive quarters.
• CPI growth continues to outpace wage growth, pushing households to rely on savings.
• High construction costs and declining dwelling commencements are reducing new housing supply, intensifying rental market pressures.
National economic growth remained steady in Q2 2024, with quarterly GDP (Gross Domestic Product) rising by 0.22%. While relatively consistent with the previous two quarters, this growth is historically low.
Over FY24, annual GDP increased by only 1.49%, marking one of the smallest gains in over 30 years (excluding the pandemic period). This subdued growth reflects deeper economic challenges, particularly as GDP per capita has now declined for its sixth consecutive quarter, driven by strong population growth.
Amid this backdrop, households are feeling the strain of intensifying cost of living pressures. CPI (Consumer Price Index) grew by 1.02% in Q2, again outpacing wage
growth, which lagged at 0.80%. As a result, financial burdens continue to mount, with many households navigating higher mortgage repayments or rental costs.
In response to these pressures, households have increasingly turned to their savings to cover daily expenses. The average household savings ratio remained at a low 0.6% in Q2, unchanged from the previous quarter. With this minimal savings buffer, many households are cutting back on discretionary spending, which fell by 1.1%. In contrast, spending on essential goods and services rose by 0.5%.
Affordability issues continue to hinder new dwelling investment, exacerbated by persistently high construction costs.
While building approvals showed a slight improvement from the previous quarter, they remain at the lower end of the past decade’s range. This indicates ongoing market uncertainty, further compounded by a projected decline in dwelling commencements. After an 18.3% drop in 2022/23, housing starts are expected to fall by another 2.3% in 2023/24, further constraining new supply.
The housing shortage is amplifying pressures on the already tight rental market, where record population growth has driven vacancy rates to historic lows, leading to increasing rents.
For more information, please visit RPM Group, UDIA Victoria’s Platinum Partner via contactus@rpmgrp.com.au
Gross Domestic Product
GDP grew by 1.49% in the year to June 2024, well below the 3.29% long-term average. Persistent inflation is weighing on both consumer and business sentiment, with rising costs impacting households and businesses alike.
Household spending fell as savings buffers diminished, reducing discretionary spending. While the stage 3 tax cuts are expected to increase disposable income, much of it is likely to be saved as households focus on rebuilding their financial safety nets.
Government spending has supported the post-pandemic recovery but has led to increased public debt, signalling the need for tighter fiscal policies, limiting the scope for government-driven stimulus.
GDP Growth 12 months to June 2024
1.49%
Source: Australian Bureau of Statistics
Household Savings & Consumption
Extremely low household savings have persisted in Q2 2024, as higher inflation and home loan mortgage repayments erode savings.
Source: Australian Bureau of Statistics
Household Savings & Consumption
Household consumption declined in Q2 2024, with spending on discretionary goods and services falling.
The highest growth in consumption categories were in essential items.
Source: Australian Bureau of Statistics
Interest Rates and Inflation
The cash rate has remained at 4.35% in 2024, but rising inflation in the first half of the year has raised concerns for the RBA.
Commonwealth and state energy rebates are expected to help ease inflation in the second half, reducing pressure to raise rates. This will be supported by other countries beginning to reduce interest rates. Major banks anticipate the next rate move to be a cut, though likely delayed until 2025, highlighted by the average three-year rate dropping 41 basis points to 6.27% in August.
CPI rose by 1.02% this quarter, bringing the annual increase to 3.81% - above the RBA’s 2%-3% target.
Housing sector pressures, driven by supply constraints in residential construction and record population growth, are fuelling inflation. This demand-supply imbalance is pushing up building costs and rents, sustaining inflationary pressures.
New Dwelling and Rental Index
New Dwelling Index
Rental Index
Victorian Employment and Unemployment
Employment in Victoria rose by 15,638 in August, with part time jobs rebounding by 7,933 positions after two months of decline and fulltime positions growing for the fourth consecutive month, this time by 7,706 positions.
The unemployment rate remains stable at 4.5%, the highest in the country, as job creation struggles to keep pace with strong population growth and rising labour market participation.
Source: Australian Bureau of Statistics
Wage Growth vs. Inflation
The hourly rate of pay rose 0.80% in Q2 2024, below the 1.02% CPI increase, leading to a decline in real incomes.
However, annual wage growth remains strong at 4.05%, surpassing the 3.81% rise in annual CPI, indicating solid wage growth over the year despite quarterly challenges.
Source: Australian Bureau of Statistics
Consumer Sentiment
Although still pessimistic, consumer sentiment improved to 85.0 index points in August 2024, driven by stage 3 tax cuts, government cost of living support, and the RBA’s decision to keep the cash rate unchanged.
Consumers feel more confident about family finances and the year ahead, with reduced concerns about interest rate changes.
However, homebuyer confidence remains weak, as the ‘time to buy’ index declined due to concerns over falling house prices and a potentially weakening labour market.
Consumer Sentiment Index (Index-100)
Source: Westpac-Melbourne Institute Consumer Sentiment Index
Business Sentiment
Business conditions improved slightly in June 2024, although the index remains below its long-term average. Business confidence also lags historical norms.
Businesses are grappling with persistent supply side pressures, particularly in material and labour costs. These pressures pose a risk to the inflation outlook, as higher costs could be passed on to consumers through increased prices for goods and services.
The impact of these conditions varies by industry. Retail and construction face weaker conditions due to interest rates, while finance, business, and property sectors have seen solid growth despite broader challenges.
Business Conditions Index
Index July 2024
2.8
Source: National Australia Bank Business Survey
Victorian Population
Victoria’s population growth picked up significantly in Q1 2024, underpinned by strong overseas migration and a spike in births.
The state grew by 55,333 persons over Q1 2024, responsible for one third of national population gain. Over the year to March 2024, Victoria’s population rose by a net 183,959 persons. Population Components
Source:
Victorian Population
+12,302
Natural Increase
Surged by 256% in Q1 2024, marking a long-term high in quarterly growth. This sharp rise signals recovery from 2022-23 birth rates, which were affected by the pandemic, rising cost of living, and housing affordability. Fluctuations are expected in future quarters
Projections
Net Overseas Migration
Overseas migration strengthened in Q1 2024, accounting for 76% of Victoria’s population growth over the period. This rise was driven by newly arrived overseas students and higher levels of permanent migration programs, significantly boosting the state’s overall population growth trajectory.
+42,264 +767
Net Interstate Migration
Interstate migration recorded its highest net inflow since just before the pandemic. Stronger property price growth in other capitals has widened Melbourne’s affordability advantage over Sydney, while eliminating much of the attraction for Victorians to move to other cities, such Brisbane, Adelaide, or Perth.
Source: Australian Bureau of Statistics
Melbourne Residential Property Market
Melbourne’s property market showed signs of recovery in early 2024, but uncertainty around interest rates and shifting buyer demand reversed gains by mid-year.
Melbourne’s residential property market showed early signs of recovery in early 2024, driven by easing inflation and a more stable interest rate environment. The RBA’s neutral monetary policy stance and the possibility of a rate cut boosted property demand, lifting the median house price by 1.6% in Q1 2024, following eight consecutive quarters of decline. This optimism led to a 32% increase in auctions, with a strong 74% clearance rate, supported by population growth.
However, uncertainty over future interest rates after Q1 inflation figures led to more price-conscious buyers, particularly in inner Melbourne. Consequently, much of the Q1 gains were erased in Q2, with the median house price dropping by 1.5% to $911,500, marking a 2.6% annual decline and a 19% fall from the Q4 2021 peak of $1,125,000.
The apartment market proved more resilient, with the median unit price steady at $629,000 in Q2 2024, unchanged from the previous quarter and the same period in 2023, though still 9% below its peak.
Demand for new homes remained weak due to the end of government incentives like the HomeBuilder Scheme, higher cash rates, and challenges in the construction sector, particularly high labour costs despite stabilising material prices. To avoid oversupply and downward pressure on lot prices, new lot supply reduced in line with absorption, while developers offered incentives and rebates of 5% to 10% on unsold lots. Excluding incentives, Melbourne’s median lot price edged up to $387,000 in Q2 2024.
House Price
Unit Price
Source: REIV and RPM Research, Data and Insights
Melbourne Residential Property Prices
Growth Area Affordability
Victorian Finance Activity
Loans by Owner Occupier Type
Owner occupier loans rebounded to 26,482 commitments in Q2 2024, escalating by 23.8% from the relatively low number in the previous quarter. Increases in residential land loans (+42.1%) and construction loans (+31.8%) both remain at lower levels than 2023 due to weak lot sales and reduced housing starts.
Loans for established dwellings rose 21.5% quarter-on-quarter and 16.4% year-on-year, driven by increased market turnover and improved affordability in the existing market. First home buyers held a stable 35%-36% share, with growth stronger than non-first home buyers, supported by government schemes like the First Home Owner Grant and the Federal First Home Guarantee.
Occupier Loans
Victorian Finance Activity
Average Loan Size by Buyer Type
First home buyer loans reached a record high in Q2 2024, with the average loan size increasing by 0.6% to $512,974.
Government incentives continue to sustain demand despite broader market challenges, especially in the sub-$600,000 segment due to full stamp duty concessions. Non-first home buyer loans also grew modestly, with a 0.4% rise to $598,140, though still 4.3% below the Q1 2022 peak of $625,141. Reduced borrowing capacity and falling established property prices have tempered growth in non-first home buyer loans.
Source: Australian Bureau of Statistics
Victorian Finance Activity
Source: Australian Bureau of Statistics
Victorian Building Activity
Approvals and Commencements
Victoria’s dwelling approvals saw a modest recovery in Q2 2024, with 12,491 approvals marking a 10.8% increase from the long term low recorded last quarter. Despite this rise, approvals remain at the lower end of the past decade’s range, largely due to elevated construction costs, weak vacant lot sales, and declining pre-sale activity. These factors have also affected the viability of medium and highdensity developments.
Detached house approvals increased by 14.1% to 8,715, and townhome approvals rose by 10.2% to 2,838 during Q2. However, both figures are just above decade lows, reflecting the ongoing challenges in the housing market. High density dwellings, particularly apartment approvals, dropped sharply, with just 938 approvals – marking a decade-low quarterly figure and a 50% decline from last quarter.
Total dwelling commencements are estimated to have fallen by 2.3% in 2023/24 to 53,750 dwellings, with an additional 4.9% contraction anticipated in 2024/25. These declines were driven by reduced borrowing capacity, cost of living pressures dampening demand, and rising building and
financing costs that are limiting supply. Weak lot sales since the interest rate hikes beginning mid-2022 have contributed to a projected 9.2% drop in detached house construction in 2023/24, with a further 10% reduction expected in 2024/25.
In contrast, multi-unit starts are expected to grow by 10.5% in 2023/24, with a moderate 2.9% increase forecast for 2024/25. This shift in demand toward more cost-effective housing options, including townhomes and apartments, is largely driven by ongoing affordability concerns. The buildto-rent market is also supporting this trend, as it is less dependent on presales and external financing.
The multi-unit sector is forecast to experience significant growth, with starts projected to rise by 25.4%. This is expected to be accompanied by a 4.2% rebound in detached house starts, leading to an overall 13.3% increase in total dwelling commencements for the financial year.
Detached Home Approvals
8,715
Townhome Approvals
2,838
Apartment Approvals
938
Victorian Building Activity
12,182
Construction Costs
Land Market Snapshot
Growth areas included in this land market analysis
• South East LGAs of Casey and Cardinia
• Northern LGAs of Hume and Whittlesea, and Beveridge-Wallan area
• Western LGAs of Melton and Wyndham, and Bacchus Marsh area
• Geelong LGA
• Ballarat LGA
• Bendigo LGA
• Regional North (Macedon Ranges and Mitchell (part)
• Drouin and Warragul
Bendigo
Regional North (Macedon)
Northern
Ballarat
Western
Geelong
South East
Drouin and Warragul
Active Land Estates
The total number of estates in Victoria’s greenfield market continues to rise, up by 25 over the twelve month period to August 2024, to a total of 317 active estates.
Source: RPM Research, Data & Inisights
Lot Supply
New lot supply during the three months to August 2024 was up slightly by 2% from the corresponding period last year, although releases are down by a more sizeable 17% from the previous three months.
New Supply - 3 months to August 2024
Source: RPM Research, Data & Inisights
Lot Sales
Gross lot sales over the three months to August 2024 were 8% higher than the previous corresponding period. The Western growth corridor was the only Melbourne growth area to record more lot sales on an annual basis. Conversely, most regional growth areas recorded annual growth in lot sales, with Macedon growth corridor the exception.
Gross Lot Sales - 3 Months to August 2024
2,458 lots Gross Lot Sales
Source: RPM Research, Data & Inisights
Share of Sales by Corridor
Sales activity in the 3 months to August 2024 continues to be heavily concentrated in Melbourne growth areas. However, both the South East and Northern growth areas have lost market share, both over the quarterly and annually. Geelong's proportion of total sales increased from long term lows.
Source: RPM Research, Data & Inisights
Lot Prices
Affordability challenges are providing limit scope for growth, with only the Northern growth corridor and Bendigo recording a quarterly increase in their median lot price. However, price growth was attributed to median lot sizes also rising, with per sqm rates declining in Bendigo and most other growth areas.
Source: RPM Research, Data & Inisights
South East Northern Western Geelong Ballarat Bendigo Macedon Drouin & Warragul
Lot Sizes
South East experienced the greatest decline in median lot size, although it remains notably above corresponding figures in other Melbourne growth corridors of Northern and Western. Affordability reasons also Geelong's median lot size to diminish.
Source: RPM Research, Data & Insights
South East Northern Western Geelong Ballarat Bendigo Macedon Drouin & Warragul
Market Outlook
While some areas of the economy show resilience, the broader outlook remains uncertain.
Australia’s economic outlook remains subdued. The rebound in CPI growth during the first half of 2024 led to inflation again outpacing wage growth, exacerbating cost of living concerns for households and leading to a notable contraction in spending. Private consumption fell by 0.17% in Q2 – the largest quarterly decline since the Global Financial Crisis (GFC) outside of pandemic-related downturns.
Household finances may see some relief from the July income tax cuts and government rebates on utility bills. However, much of this additional income is expected to replenish savings, which stood at just 0.6% in the first half of the year.
The projected continuation of weak consumer spending is likely to help curb inflation and reduce the immediate risk of interest rate hikes, especially as overseas rates begin to fall. However, lower demand could negatively affect business investment and the labour market.
As spare capacity for businesses increases, their demand for labour may decrease, potentially leading to higher unemployment.
This would create another headwind for the property market, which is already facing challenges of high construction and funding costs constraining supply. At the same time, strong population growth is driving housing demand, leading to accelerated rental growth as the shortage of rental properties persists.
Despite these challenges, government spending is expected to provide some economic support. Increased consumption expenditure and investment in infrastructure projects will help offset subdued private demand in the short term. While pockets of resilience exist, the overall economic outlook remains uncertain. Persistent inflation, cautious consumer spending, and ongoing challenges in housing are likely to shape the remainder of the year.
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