There has been some respite: lower energy prices are helping to bring down headline inflation, and the earlier-than-expected reopening of China has provided a boost to global activity. However, the impact of higher interest rates is increasingly being felt across the economy. Urban Property Australia explores the latest indicators and discusses what may be next for Melbourne’s property markets in these trying times.

The global economy is showing signs of improvement but remains fragile. Global economic growth in 2023 is projected at 2.6%, the lowest annual rate since the global financial crisis, with the exception of the 2020 pandemic period. The earlier-than-anticipated reopening of China’s economy has led to an upgrade in Australia’s major trading partner growth with Australia’s growth is expected to exceed all major advanced economies this year. The recent announcement of the Victorian Government’s decision to cancel its commitment to host the 2026 Commonwealth Games indicates that the state Government is increasingly struggling to manage its growing debt costs.

Although the Melbourne residential median house price has declined through the year to June 2023, the rate of quarterly decreases has eased indicating that prices appear close to stabilising. Interestingly, Melbourne median unit prices increased over the June 2023 quarter, the first rise in values since December 2021. While the downside risks to housing values are clear, there are some mitigating factors, including record levels of net overseas migration, a burgeoning housing undersupply, and an expectation that labour markets will hold reasonably tight.

Boosted by the return of international students, Inner-City residential apartment rents continue to increase with all-time highs recorded in June 2023 as vacancy rates fell to levels last recorded in 2019. Average Inner-City Melbourne apartment rents increased by 22% over the year; its highest annual increase in 10 years with 1-bedroom apartments outperforming other sized Inner-City apartments. Transactional activity for apartments in the Inner-City region has begun solidly with more than 2,900 sales recorded in the first half of 2023 and is on track to its strongest year since 2017 with the majority of transactions for Southbank and CBD-Core located apartments.

After declining for four consecutive quarters, median Victorian Regional residential house prices increased in the June 2023 quarter, rising by 0.6% however remain 2.7% lower than levels observed 12 months ago. Rental levels in the Regional markets also showing signs of easing with the average Regional Victorian weekly rental levels for houses seemingly having peaked while average weekly rental rates for Regional units have declined by 2.8% over the first half of 2023.

With investors remaining uncertain on the sector, across Melbourne’s metropolitan office market there have only been three major sales in the Melbourne metropolitan office market totalling $83 million in the first half of 2023, the lowest half-year result in 10 years. In comparison to last year, the volume of sales across the Melbourne metropolitan office market totalled almost $1.0 billion in the first half of 2022. The lack of transactions and stubborn low occupancy levels continue to place downward pressure on values of office properties with falls of 15% to be expected to be realised through 2023.

Vacant industrial space across the Melbourne market continues to decline, as the growth of e-commerce has driven tenant demand outpacing new supply. Melbourne’s industrial vacancy rate is estimated to currently stand at 1.1% which has supported strong rental growth across all precincts. Prime industrial rents have grown by 32% over the past 12 months with secondary rents having increased by 15%. The underlying strength in the retail trade and logistics demand is contributing to a rise in leasing activity with strong demand for new facilities.

Total transactions in the Melbourne retail property market in the first half of 2023 totalled more than $800 million, having been boosted by a number of major sales, compared with $570 million in the first half of last year. Impacted by rising interest rates and higher borrowing costs, yields have softened across retail assets in the past 12 months. Online retail trade in Australia continues to take a larger share of overall spending accounting for 11% of total retail sales with consumers spending $45 billion online over the past year.

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