The Australian economy continues to show surprising strength and resilience in a world of growing tensions. However, the impact of higher interest rates and inflation levels are 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 challenging times.

Economic activity has held up better than generally expected in a number of advanced economies, however the tightening of monetary policy aimed at containing inflation is now resulting in the global economy growing at below-trend levels. The world economy is expected to grow over the next two years at the slowest levels since the Global Financial Crisis. The Australian economy continues to show surprising strength and resilience in a world of growing geopolitical tensions and unrest. The Australian economy is projected to slow to 1.75% in the 12 months to June 2024 before strengthening to 2.25% 2024/25.

Melbourne’s residential median house price has now declined for seven consecutive quarters, from its peak recorded in December 2021. Despite the near two-year decline in values, Melbourne’s median house price remains above pre-pandemic levels. Whereas, Melbourne median unit prices have increased for the past two consecutive quarters, rising to their highest levels in 12 months. Despite the Melbourne residential vacancy sitting at 2.4% and Victoria’s population growing at record highs, the level of new dwellings completed in Victoria in 2023, is likely to be the lowest level in seven years.

While values of Inner-City residential apartments have declined over the year to September 2023, median prices of all Inner-City Melbourne apartment bedroom-sizes recorded positive price growth in the past three months. Reflecting the low vacancy rate and constrained development pipeline, Inner Melbourne apartment rents increased by 17% over the year, just shy of all-time highs. Currently there are 5,800 apartments under construction within the Inner-City Melbourne region with 35% of the apartments are located in Docklands, followed by 23% in Southbank. Looking ahead, new apartment supply in the Inner-City Melbourne precinct is projected to remain below the average annual levels for the next five years.

Having declined over the past 12 months, the median Victorian Regional residential house and unit prices remained stable in the September 2023 quarter. In contrast to the performance of median prices in Regional Victoria, rental levels in the Regional markets have remained resilient with the average weekly rental levels for both houses and units sitting at all-time highs as at September 2023. The vacancy rate for Regional Victoria remains very tight at 2.1%, slightly lower than the metropolitan average of 2.4%.

Sales activity in the Melbourne metropolitan office market has been relatively resilient with almost $650 million transacted in the market in 2023 to date, accounting for more than 40% of all of Melbourne’s office sales (inclusive of the CBD), its highest proportion in 15 years. The Melbourne CBD office vacancy has continued to rise, increasing to 15.0%, its highest level since July 1997. Outside of the CBD, the vacancy rate of the St Kilda Road office market rose to 25.5%, an all-time high. While tenant demand has been positive over the past 12 months, take up of stock remains subdued with occupiers focused on A-grade space.

Buoyed by the ongoing tenant demand and rental growth, industrial investor appetite remains solid with offshore groups and domestic funds active with portfolio sales boosting investment volumes. Despite the investor interest to the industrial sector, yields have continued to ease as access to capital remains constrained coupled with cost of debt increasing. Melbourne’s low vacancy rates have supported strong rental growth across all precincts in the Melbourne industrial market with prime and secondary rents growing by more than 10% over the past year.

Total transactions in the Melbourne retail property market recorded in 2023 so far has exceeded $1.4 billion, having been boosted by a number of major sales, already surpassing annual volume of retail property sales recorded last year, $1.3 billion. While retail trade in Victoria continues to outperform the national average the annual increase in sales has eased through 2023 as consumer confidence weakens and the increased cost of living has adversely impacted retail trade. Across most retail categories, sales growth recorded in 2023 is below that achieved in the preceding 12 months.

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