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

Global economic growth is expected to remain subdued over the next few years as the effects of high inflation, restrictive macroeconomic policies, geopolitical tensions, and challenges in the Chinese economy weigh on the outlook. The Australian economy has slowed in response to the impact of global economic volatility. However, the domestic economy is well placed to face these global and local economic challenges, with moderating inflation, a resilient labour market, a return to annual real wage growth and strong business investment. The Victorian economy is performing well and continues to grow, despite the challenges of high inflation and elevated interest rates that are affecting the national and global economies.

The vacancy rate for Melbourne residential property decreased since the start of the year to 2.2% and also remains below the 10-year average of 3.0%. Reflecting the low vacancy environment, metropolitan residential rents across the precincts increased over the past year. The weekly median rent for houses in metropolitan Melbourne increased by 9% with rents for Melbourne units recorded even stronger rises having increased by 10% over the year. Despite the low vacancy rate and strong rental growth, the pipeline of new housing supply continues to decrease.

Inner-City residential apartments rents have reached all-time high levels in June 2024, having increased by 10% over the year. Over the year to June 2024, average rents for all sized-bedroom apartments in the Inner-City precinct rose by at least 8%, somewhat surprisingly led by 3-bedroom apartments which increased by 14% over the year. The outlook for further rental growth remains solid despite the elevated levels with the residential vacancy rate tightening through 2024. The residential vacancy rate for the Inner-City precinct (0-4km radius of the GPO) remains below the natural equilibrium level with latest results at 2.5%.

Investment activity in Melbourne’s office remains subdued in 2024 to date with around $600 million of sales transacted in the first half of the year. Based on the volume of sales recorded in the first half of the year, 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 remains modest compared to recent years. Having peaked in 2021 with more than $6 billion of industrial property sold, just over $1 billion of Melbourne industrial sales has been recorded in 2024 to date – below average. Based on current transactional volume levels, sales across the Melbourne industrial is likely to its lowest level since 2010. The lack of transactional activity has resulted in yields continue to soften as the disconnect between vendors and potential purchasers remaining.

While retail trade in Victoria continues to outperform the national average the annual increase in sales has eased through the 12 months to May 2024 as consumer confidence weakens and the increased cost of living adversely impacts retail trade. Over the year to May 2024, annual retail trade in Victoria grew by 1.7%, its lowest rate since 2021 and well below its 10-year average of 5.3%. More than $700 million transacted in the Melbourne retail property market over 2024 to date, well below average levels.

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