The Australian economy continues to show strength despite higher interest rates and inflation with the outlook improving as economic risks diminish. Urban Property Australia explores the latest indicators and discusses what may be next for Melbourne’s property markets in these uncertain times.

The outlook for the global economy remains uncertain and inflation is still a key challenge in many economies. Global growth is expected to slow from 3.4% in 2022 to 3.0% in 2023 and 2024 as persistent inflation and higher interest rates weigh on economic activity. The Australian economy has slowed in expected ways in the face of global uncertainty, higher interest rates and high but moderating inflation. However, the Australian economy faces these challenges from a position of strength. Economic growth is expected to pick up from late 2024 as inflation subsides following its peak in 2022 and household disposable incomes improve.

Melbourne’s residential median house price has now declined for eight consecutive quarters, from its peak recorded in December 2021. Melbourne’s median house price has now fallen to its lowest level since September 2020. Although the rate of decreases of Melbourne’s median house price is slowing, the outlook for values remains subdued given the persistent cost of living pressures and worsening affordability challenges. In contrast, reflecting the largely tightening vacancy environment, residential rents have risen to record high levels for both houses and units.

Inner-City residential apartments rents have reached all-time high levels as the vacancy rate remains below average with average Inner Melbourne apartment rents increasing by 16% over the year. Inner Melbourne apartment rents have now grown by 33% over the past two years. Currently there are 6,100 apartments under construction within the Inner-City Melbourne region with the majority of these apartments in the build to rent sector. Of the 44 new developments currently under construction, 44% of the apartments are located in Docklands, followed by 22% in Southbank and 17% in Kensington.

Investment activity within the Melbourne’s metropolitan office market has been relatively resilient with more than $880 million transacted over 2023, accounting for 60% of all of Melbourne’s office sales (inclusive of the CBD), its highest proportion in 20 years. There is more than 160,000sqm of new office projects currently under construction in the metropolitan office market with much of the focus of the new development remains focused on the City Fringe. 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.

With Melbourne industrial vacancy rate sitting at 1.2%, Melbourne industrial rents continue to increase with prime rents increasing by 13% over the year and secondary rents having increased by 11% as tenants struggle to source accommodation of all qualities. After two record-breaking years of transactional activity, investment volume in the Melbourne industrial market declined sharply in 2023, falling by 60% compared to last year, impacted by higher capital costs and buyers and sellers disconnected on pricing leading to yields easing.

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. Over 2023, annual retail trade in Victoria grew by 3.5%, its lowest rate since 2021. Online retail trade in Australia continues to gradually take a larger share of overall spending accounting for 13% of total retail trade with Australian consumers spending approximately $45 billion online over the past 12 months. Total transactions in the Melbourne retail property market recorded in 2023 exceeded $1.4 billion, 9% higher than levels recorded in the previous year.

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