Melbourne’s rental market - Navigating a challenging period and a changing landscape

Demand outstrips supply

Australians’ desire to live in capital cities, especially on the eastern coast of the country, has resulted in some of the highest population concentrations in the world. The continued population growth into our highly sought after capital cities, particularly in inner city and education precincts with the arrival of international students, has driven up the cost of land – notably, from $861 per sq m in Melbourne in 2012, to $1811 per sq m in 2022^.

Additionally, the average number of people living in a household has steadily declined from around 2.9 in the mid-1980s, to around 2.5 since the early 2000s#. This decline was exacerbated in a post-pandemic Melbourne, where people sought additional space of their own. Fewer individuals living in the same household means more property is required to house the population.

These factors are contributing to the core central issue: that demand is outstripping the supply of homes to either rent or buy.

Australian average household size

Cost factor

An often-overlooked fact is that most investment properties are owned privately or by ‘mum and dad investors’. All property owners with a mortgage have experienced significant interest rate rises over the last 12 months, and for private investors the cost of repayments have jumped considerably. At the same time, there are increased compliance costs and new land tax charges for investment properties recently announced in the 2023 Budget, with many investments now cashflow negative and hence less appealing to hold. With property prices going through a rebalance in late 2022 through to early 2023, coupled with holding costs for properties rising faster than rental income, many investment properties were sold and a lower percentage of investors entered the market.

These cost factors have reduced the viability for private owners, deterring investment, and again reducing the available rental stock.

Low levels of development

A lack of development approvals from some local government councils, who can be anti-development or anti-density, further impacts on supply not meeting demand.

Further amplifying the low levels of development in recent years have been the pressures on the construction industry. Supply-chain disruptions, a shortage of (and high cost of) construction materials, plus the scarcity in labour, has impacted volume-building businesses – those businesses that often specialise in new housing development. This, again, has deterred investment, impacted supply and resulted in a surge in demand – particularly for inner-city rental stock.

Where to from here?

The Federal Government is committed to increasing immigration targets, and if things continue the way they have been it is difficult to see the current rental tightness being alleviated. In positive news, however, we have seen some early steps from Federal Government to support new supply with the $10 billion Housing Australia Future Fund, and a commitment to addressing the problem. Similarly, Victoria is leading the nation in Build-to-Rent (BTR) housing developments, with state incentives helping to expand rental options for the population – with Melbourne being home to more than half of all BTR projects completed in Australia in 2022*.

But attracting investors – both big and small – is crucial to help to re-balance the rental housing shortfall. How investors can be encouraged back into the market will be up to legislative and regulatory reform.

There is no doubt that this is a difficult period for the rental market. In the short term we anticipate a period of continued challenge for renters, with little relief. However, in the medium to long term we anticipate that an increase in supply will help to alleviate the situation.

Early signs are that there are some promising steps in the right direction, but this will need to continue to be a priority for Government to ensure that all Australians have access to safe and secure homes.

^ Source: Domain
# Source: RBA
* Source: Premier.vic.gov.au