While there are positive signs emerging in 2023 that the inflation surge which has been plaguing most countries around the world is starting to ease, economic growth in Australia is projected to slow throughout 2023 under the impact of rising interest rates. Urban Property Australia explores the latest indicators and discusses what may be next for Melbourne’s property markets in these challenging times.

Despite strong headwinds, which are mostly related to the ripple effects from the war in Ukraine and high global inflation, the global economy has proven resilient so far in 2023. Reflecting the synchronous tightening of monetary policy by most central banks across the world, inflation appears to have peaked. Global economic growth is forecast to increase by 2.8% this year, boosted China rebounding strongly having dropped most of its COVID-19 restrictions earlier than expected.

While Melbourne’s median residential house and unit prices have declined for five consecutive quarters according to the REIV, the median house price of Melbourne remains above pre-pandemic levels. Looking ahead, although interest rates have risen and the economy is slowing, there are several factors placing upwards pressure on prices, including: increased population growth and the tight labour market. Reflecting the growing housing shortage in Melbourne, median house rents increased by 4% over the year with unit rents rising by 15% over the year.

Boosted by Inner-City residential apartment rents growing at 19%, the fastest rate in 10 years, transactional activity for apartments in the Inner-City region has begun solidly with more than 1,500 sales recorded in the first quarter of 2023 and is on track to its strongest year since 2016. The majority of transactions were focused on Southbank-located apartments which accounted for 45% of all sales followed by those based in the CBD-Core. While prices of Inner-City apartments have fallen recently, the strong rental growth should help stabilise further significant declines of values.

Although prices have not fallen to the extent of those in the Melbourne metropolitan area, Victorian Regional housing prices have declined for four consecutive quarters for the first time since 2014 according to the REIV. Victorian Regional house prices fell by 0.2% over the March 2023 quarter, the most modest decline of the quarterly decreases which suggest that prices may be stabilising.

Similar to Australia’s other commercial markets, sales activity has been modest in 2023 to date in Melbourne’s office Across Melbourne’s metropolitan office market there have only been two major sales in the Melbourne metropolitan office market totalling $50 million in 2023 so far. In comparison to last year, the volume of sales across the Melbourne metropolitan office market totalled $250 million in the first quarter. Mirroring the employment growth, tenant enquiries and leasing activity continues to improve with office occupancy rates also recovering.

After more than $4.8 billion transacted across the Melbourne industrial market last year, its second highest annual level on record, sales activity has been mute in 2023 to date. Across the Melbourne industrial market only $22 million of sales has been recorded in the first quarter of 2023. Vacant industrial space across the Melbourne market continues to decline, as tenant demand continues to outpace new supply with the Melbourne industrial vacancy rate at 1.0% as at March 2023.

Over the 12 months to February 2023, annual retail trade in Victoria grew by 11%, double the 10-year trade and has now outperformed the national average since September 2021. Online retail trade in Australia continues to gradually take a larger share of overall spending with Australian consumers spending approximately $44 billion online over the past 12 months. Impacted by rising interest rates and higher borrowing costs, yields have softened across assets in the 12 months to March 2023.

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