Q4 2022 – Executive Summary

While the Australian economy is expected to grow in 2023, the likely recessions of the United Kingdom, Europe and possibly in the US has increased downward risks to Australia’s outlook. Urban Property Australia explores the latest indicators and discusses what may be next for Melbourne’s property markets in these challenging times.

The Australian economy is forecast to avoid recession, though a weakening global economy and domestic factors will see the rate of growth slow in Australia as well. Inflation and interest rate expectations have both been revised slightly higher than previously forecast. The resulting cost of living pressures are expected to weigh more heavily on private consumption – the largest single part of the economy – over the next few years. Higher interest rates are also accelerating the downturn in Australia’s housing market which is likely to flow through to less private investment in new housing, as well as downward pressure on household wealth.

Melbourne’s median residential house and unit prices have declined for four consecutive quarters with Melbourne’s median house prices having now fallen to their lowest levels in tow years. While prices have decreased, the vacancy rate for Melbourne residential property fell to 2.5%, down from its peak of 6.5%, and now sits below its 10-year average for the first time since the pandemic. Mirroring the improving vacancy trends, metropolitan residential rents for Melbourne houses across all precincts increased over the past year.

Melbourne Inner-City residential apartment rents have reached all-time highs vacancy rates fell to their lowest levels since early 2020. Average Inner Melbourne apartment rents rose by 14% over the year; the first time in 10 years when annual rental growth exceeded 10%. In contrast, values of Inner-City apartments have declined by 3.6% over the year led by declines of 1-bedroom apartments. With a growing population of Inner-City precinct again, the residential vacancy rate for the Inner-City precinct has fallen to their lowest levels in three years.

Although prices have not fallen to the extent of those in the Melbourne metropolitan area, Victorian Regional housing prices have declined for two consecutive quarters for the first time in 10 years. With demand surpassing availability, the vacancy rate for Regional Victoria remains very tight at 1.9% with the residential vacancy rate of Ballarat even lower at 1.3%.

Over 2022, sales activity in Melbourne’s metropolitan office market surpassed $1.6 billion in an annual year for the first time, accounting for 32% of all office sales transacted across Melbourne. Transactional activity across the metropolitan office market this year has been dominated by institutions with eight property sales in excess of $50 million, totalling almost $900 million. Victoria’s total employment has increased by 77,000 over the year which has also resulted in office occupancy levels increasing to a two-year high.

Transactional activity in the Melbourne industrial market totalled $4.8 billion over 2022, its second highest annual level on record. Driven by the growing penetration of e-commerce, industrial leasing activity in the Melbourne industrial market totalled 1,800,000sqm over 2022, an all-time record. As a result of the strong tenant demand, rental growth gained momentum across all precincts in the Melbourne industrial market, with 20% annual growth rates recorded for both prime and secondary Melbourne industrial assets over the past year.

Over the past 12 months, annual retail trade in Victoria grew by 13%, triple the 10-year trade and has now outperformed the national average since September 2021. Online retail trade in Australia continues to gradually take a larger share of overall spending with Australian consumers spending approximately $44 billion online over the past 12 months. Transactions across Melbourne’s retail property market reached $1.4 billion over the past year, below the 10-year average, with investors still cautious.

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