While the Australian economy is expected to grow strongly over 2022, rising interest rates and elevated inflation are weighing on consumer confidence and business investment decisions. Urban Property Australia explores the latest indicators and discusses what may be next for Melbourne’s property markets in these uncertain times.

The Australian economy has performed strongly over the past year and has recovered well from major disruptions caused by COVID-19 and public health restrictions in 2020 and 2021. Gross domestic product is above its pre-COVID-19 level, employment has fully recovered pandemic-related losses and the unemployment rate has fallen to very low levels. The global economy is projected to grow lower than previous forecasts impacted by economic downturns in China and Russia and higher inflation worldwide, triggering a sharp tightening in global financial conditions.

Having reached an all-time high as at December 2021, Melbourne’s residential prices have eased through 2022 with values down 12% from the peak and their lowest level since March 2021. While median prices have fallen, buoyed by improving vacancy rates, rents across the Melbourne increased over the past year. Investor finance continues to strengthen with levels increasing by 15% over the year and now account for 33% of total housing finance commitments in Victoria.

The vacancy rate for the Inner-City Melbourne residential market decreased to 3.9%, its lowest level since June 2020. Boosted by the declining vacancy rate, Inner Melbourne apartment rents continue to show signs of recovery. Having peaked at $460/week as at February 2020, Inner Melbourne apartment rents now average $430/week as at June 2022.

Regional house prices reached all-time highs as at June 2022. Regional house prices outperformed apartment prices over the year increasing the price spread between houses and prices to a record level. Housing rental levels in the Regional markets have continued to increase with rental growth in Ballarat outperforming both Geelong and Bendigo.

Despite potentially structural changes of working styles, sales activity in Melbourne’s metropolitan office market has surpassed $900 million in 2022 to date, accounting for almost 19% of all sales transacted across Melbourne this year. Reflecting the employment growth of Victoria, tenant enquiries and leasing activity continues to improve across the metropolitan office market. Elsewhere, the vacancy rate of the St Kilda Road office market rose to its highest rate in 30 years.

The growing penetration of e-commerce has resulted in a significant lift in industrial tenant demand. Retailers and wholesale trade boosted by the lift in non-discretionary spending have led tenant demand followed by logistics occupiers with leasing activity above the long-term average. As the growth of e-commerce has driven tenant demand outpacing new supply, the Melbourne industrial vacancy rate currently stands at 1.3%.

Retail trade has recovered strongly in Victoria and is now growing faster than the national average. Over the year to June 2022, annual retail trade in Victoria grew by 10.3%, more than double the 10-year trade average. Most discretionary spending industries experienced strong rises once again as consumer cautiousness lessened. Online retail trade in Australia continues to gradually take a larger share of overall spending accounting for 11% of total retail sales consumers spending $45 billion online over the past 12 months.

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