What’s really happening in Victoria's residential property market

While interest rates are a key factor influencing housing market conditions, they are not the only consideration. The supply of housing is another major factor. There is a chronic undersupply across Australia, and Melbourne is no exception. As buyer demand has returned and supply issues in the rental market persist, there is a strong floor under prices and, in some markets, a return to price growth.

Economists are also suggesting that the housing market has moved through its inflection point. They are pointing to rising housing values off the back of strong auction clearance rates, rising positive sentiment, and home sales now trending back towards the five-year average.

There are several other tailwinds picking up pace that will positively impact the Melbourne housing market. One is population growth. The number of international migrants and expats returning to Australia is notable, with the Australian Government’s Centre for Population anticipating we will reach a population of 6 million by 2032^, positioning Melbourne to take the title of Australia’s largest city. The resilience and strength of the Melbourne brand cannot be underestimated. In 2023 we were named the most liveable city in Australia and the 10th most liveable city in the world.*

Over the past year, the rental market has faced incredible difficulties. Demand and supply imbalances driven by low levels of new development and affordability issues contributed to a challenging period. While vacancy rates are at historic lows and rents have been increasing strongly, increasing holding costs, in terms of interest costs, taxes and compliance, mean that many landlords are selling investment properties to deleverage their personal balance sheets. This is leading to further pressure in an already difficult rental market. It is crucial that governments at all levels take strong action to ensure Melbourne and broader Victoria see a greater supply of housing through increased development approvals, build-to-rent incentives and social housing.

Residential rental vacancy rates

My predictions for the next 12 months are based on longer term reflections about our property market trends. The market is cyclical, and the downturns don’t last as long as the upswings. The slower periods usually last 12 to 18 months, and we are approaching the 18-month mark of this slower cycle. The market has improved in recent months based on a belief that inflation is starting to be contained, interest rates are therefore nearing their peak, prices have stabilised and the market has reset to its new level. Many sellers have been sitting on the fence waiting for this stage of the cycle, and we are now seeing an increased level of activity heading into spring. This increasing level of supply will keep price growth at a moderate level. Heading into 2024, the sales market will continue to improve, and we may start to see some alleviation in the rental market as supply and demand factors start to rebalance.

^Source: Population.gov.au
*Source: Economist Intelligence Unit (EIU) Global Liveability Index, 2023