The five biggest influences on the residential property market

The state of the economy is a major indicator for the performance of the residential property market. However, there are a myriad of other financial, social and political factors at play. Here, we look at some of the biggest influences on the residential property market.


In May 2022, in line with global inflation, the Reserve Bank of Australia (RBA) increased interest rates for the first time in 11 years. As evidenced by the post COVID-19 period, which saw acute supply chain shortages exacerbated by the war in Ukraine, the RBA attempted to return inflation to its target within a reasonable timeframe. In the 14-months since May 2022, the RBA determined that further increases were warranted and has since made an additional 12 cash rate raises. 

This has pushed borrowing costs to their highest level since April 2012 and in turn has reduced the borrowing power of mortgage applicants.

While the cost of living remains a challenge both in Australia and abroad, the Annual Consumer Price Index (CPI) was 5.6 per cent in May 2023, down from 6.8 per cent in April. A reduction in inflation should see interest rates peak and then stabilise. 

The future decisions of the RBA will be influenced by how the economy and price pressures evolve over time; however, projections indicate that inflation is expected to reach 4.6 per cent in mid-2023 and fall to 3 per cent in 2025^. This, in conjunction with the fact that employment remains strong and mortgage stress relatively minimal, are positive signs for the housing market.

Cash Rate Target

Cash Rate Target

Demand versus supply

Rising demand for homes as a result of population growth and other factors has collided with historically low levels of available supply. In fact, the flow of new listings in Melbourne is tracking at roughly 18 per cent below the previous five-year average for the autumn period, while total stock levels are approximately 7 per cent below average*.

This increase in underlying demand relative to supply has meant that, despite the rise in interest rates, house prices in many areas have risen in recent months and are expected to rise over the medium term.

Whereas traditionally there may have been two or three parties interested in a home, the lack of supply, combined with pent-up demand and construction costs means there are now multiple additional parties interested in the same type of home. Currently, it is not unusual to see at least three or four underbidders at auctions for established homes in inner Melbourne.

New listings - Melbourne dwellings

New Listings Melbourne


The composition of a population – including factors such as age, migration and population growth – has a significant impact on the housing market. After two-and-a-half years of net negative migration in Victoria – due to both COVID-19 resulting in no overseas arrivals and people choosing to leave the state – we are now seeing a return of migration. This dramatic shift in direction and renewed population growth is a key pillar in the demand for property. 

According to the latest Census data, released in April 2023, Greater Melbourne’s population grew by 1.1 per cent or 55,000 people, and based on data from the ABS as well as projections from the Centre for Population, Melbourne is on track to gain the title as the largest city in Australia by 2032#. 

Population growth is a significant factor in driving the pendulum of high demand, and the future population increase in Melbourne will continue to result in a mismatch between demand and supply.

Components of annual population change in Victoria

Components Of Annual Population Change


Pressures on the construction industry are twofold. First, supply chain disruptions and a shortage of materials for homeowners wanting to build or renovate is impacting consumers’ hip pockets. Second, the same high material costs, plus a scarcity in labour (and resultant increase in labour costs) is impacting builders and there have been repeat instances of mainly volume-building businesses getting into financial difficulty. 

This has driven up demand for premium property, particularly in the established homes market, where there is consistently high demand for quality homes that require minimal work. 

However, after two years of unabated increases in the price to build a new home or renovate, there are signs pressures on construction costs are easing. CoreLogic’s Cordell Construction Cost Index (CCCI), which tracks the cost to build a typical new home, returned a growth rate of 0.9 per cent for the first three months of 2023, a level not seen since March 2021. This growth rate was a dramatic slowdown compared to the September 2022 quarter results of 4.7 per cent. 

The plunge in new home building to a 10-year low, colliding with a record influx of migration into the state, has exacerbated housing shortages, driving up demand for inner city property across both the sales and rental markets.

Consumer confidence

Sentiment is a powerful force and behaviour is influenced by perception. Regardless of how the economy is faring or how fast a population is growing, if people believe the market is trending in a certain way, this will influence their behaviour. Confidence and a strong emotional link have always existed in Melbourne’s residential property market. 

The Australian Consumer Confidence Index, measuring changes in the level of consumer confidence in economic activity, fell from 86 per cent in April 2023 to 79 per cent in May 2023. The index was impacted by a surprise rate hike and the consequent budget impact on finances. Dampening consumer confidence tends to negatively impact the property market. 

Australian Consumer Confidence Index

Consume Confidence Index

However, while we anticipate there are still some challenges ahead concerning economic conditions and the rapid rate-hike cycle, tailwinds are becoming more evident. Inflation is reducing, interest rates are peaking, migration is high and inventory remains extremely low. These mean that on balance sentiment is improving, which should result in a lift in housing activity across the board, and we anticipate a subtle growth in housing values through the second half of the year.

^Source: (2023)
*Source: CoreLogic

Want to learn more? Nick Carah, Jellis Craig Group General Manager and CEO Nick Dowling, take a deep dive into the factors shaping our residential property market, in our new podcast series: Inside Melbourne's Property Market.