The Australian economy has softened through the start of 2024 as higher interest rates and inflation adversely impact confidence and decision making. Urban Property Australia explores the latest indicators and discusses what may be next for Melbourne’s property markets in these uncertain times.

The global economy has been surprisingly resilient through the global disinflation as growth in employment and incomes held steady, reflecting supportive demand developments of government spending and household consumption. Global economic growth is projected to expand at 3.2% this year and in 2025, slightly higher than previously forecast. In comparison, the forecast for Australian economic growth is softer than three months ago, largely reflecting a weaker outlook for household consumption in the near term. From late 2024, growth is expected to pick up gradually as inflation declines and the pressures on household incomes ease with growth of 1.5% projected this year.

Despite the Victorian Government’s Housing Statement ambition to build 800,000 residential dwellings in Victoria over the next decade, the number of dwellings under construction across Victoria has fallen over the past 12 months. The level of new dwellings completed in Victoria in 2024 is likely to be the lowest level in seven years. With population growth of Melbourne running at record high levels and declining vacancy rates, rents for both houses and units have risen across all precincts to now all-time highs as at March 2024.

Values of Inner-City residential apartments increased by 5% over the year to March 2024, outperforming the broader metropolitan apartment market, led by 1-bedroom apartments, supported by a muted development pipeline. Currently there are 6,400 apartments under construction within the Inner-City Melbourne region, however with 2,500 apartments scheduled for completion this year, this year is projected to the second lowest level of new annual apartment supply to the market. Of the 48 new developments currently under construction, 42% of the apartments are located in Docklands, followed by 22% in Kensington and 21% in Southbank.

Following decade-low transactional volumes recorded last year, investment activity in Melbourne’s office remains subdued in 2024 to date with only $145 million of sales transacted in the first quarter. Based on the volume of sales recorded in the first quarter, the Melbourne office market is on track for its lowest annual level of sales in 20 years. While the vacancy rate of the Melbourne metropolitan office market rose slightly, it remains the lowest vacancy rate of all Melbourne’s office markets. In contrast, the Melbourne CBD office vacancy has continued to rise, increasing its highest level since 1997 with the vacancy rate of the St Kilda Road sitting at all-time highs.

Transactional activity in Melbourne’s industrial continues to decline. Having peaked in 2021 with more than $6 billion of industrial property sold, only $62 million of Melbourne industrial sales has been recorded in 2024 to date. Based on current transactional volume levels, sales across the Melbourne industrial is likely to its lowest level since 2010. Boosted by the growing penetration of e-commerce and a growing importance of supply chain efficiencies, transport and logistics the largest sector taking up industrial space followed by retailers and wholesale trade.

While retail trade in Victoria continues to outperform the national average the annual increase in sales has eased through the 12 months to February 2024 as consumer confidence weakens and the increased cost of living adversely impacts retail trade. Over the year to February 2024, annual retail trade in Victoria grew by 2.7%, its lowest rate since 2021 and well below its 10-year average of 5.3%. Online retail trade in Australia continues to gradually take a larger share of overall spending. Online sales made up 11% of total retail sales with Australian online sales with Australian consumers spending approximately $46 billion online over the past 12 months.

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