Melbourne housing market prediction for 2023

What does the Melbourne property market have in store for the rest of 2023?

Before answering this question, it is worth mentioning that although the past is no guarantee of the future, it can provide a very important understanding of the current situation and likely future direction, especially considering that the property market traditionally moves in rather slow cycles.

As the second half of 2023 begins, there are a few key factors at play that will likely influence the progression of the Melbourne housing market over the short – medium term as discussed below.

Housing undersupply

There has been a chronic undersupply of property in Australia over the last decades. Plus, according to Corelogic (a research company that provides consumer information, analytics, and intelligence on property), building approvals for both houses and units are well below the 10-year long term average. This means that we are experiencing a property deficit, which is likely to continue.

There are also fewer houses for sale, and those that are, are taking longer to sell due to consumer fears about high interest rates. The high interest rates have cut borrowing capacity by approximately 30%, hence favouring the more affordable lower & middle parts of the market.

The Reserve Bank of Australia (RBA), Federal Treasurer and most respected economists have publicly stated that they believe inflation has peaked and that interest rate hikes will almost stop and start coming down soon.

In addition, the banking regulator, APRA, is under pressure to reduce the 3% buffer interest rate loading that banks use to calculate serviceability down to only 1%, as future interest rate rises are unlikely. This would allow more people to borrow and to borrow more.

All of this has begun to fuel the early buyers who have been waiting for more certainty before committing to a big purchase like a house. Therefore, despite the current high interest rates and borrowing restrictions, the property market is already showing signs of growth.

Rental prices

This housing undersupply has been putting significant pressure on rental vacancy rates, which in a balanced market typically hovers between 2.5 to 3.5%. In Melbourne it is currently 1.3% overall, but in high demand areas the vacancy rate is even lower. This has caused rental prices to jump by over 20% in capital cities across Australia since the beginning of the COVID-19 pandemic in 2020 This has attracted investors away from the other investments like shares and into the property market due to easy gearing and high total return.

Employment

Australia’s unemployment rate is still near a 50-year low. This means that the majority of Australians are very secure in their jobs and both consumer spending and consumer confidence are relatively strong, despite the current high interest rates. As a result, people are confident that they can service a mortgage (albeit with some belt tightening on non-essentials) but have chosen to wait until interest rates have stabilised or started to decline before purchasing a property.

Household formations

According to RBA figures, “household formations” across Australia (or the formation of a new household) have surged by 120,000 since the pandemic started – despite the country’s borders being shut for some time. Key drivers of this include:

• People wanting to live alone and not in shared accommodation.
• The reduced need to live close to the city due to being able to work from home (WFH).
• The increased desire for a better lifestyle by having more space and a backyard.

Many economists have dubbed this surge of new households as the “great spreading out” or the “first wave” that soaked up many available rentals.

Government policies

The Australian government has also been urged to make up for the loss in immigration during the pandemic by increasing migration over the next few years to help fill jobs and boost Australia’s economy. This has resulted in massive growth in immigration and is also considered to be the “second wave”. Australia has had many decades of uninterrupted economic growth, fuelled primarily by immigration and the country’s policy surrounding this. This policy allows skilled migrants to move to Australia if they possess a “required skill”, which includes anything from cooking to specialised medicine and engineering as examples. These skills are all in current demand across Australia and offer well paid employment opportunities, generally allowing migrants to move to Australia and start earning straight away. Data shows that 85% of new immigrants rent first for a while, after which these migrants will buy a home, with the majority eventually settling in Melbourne (due to Sydney’s congestion and high cost of living).

By some estimates, this could see between 800,000 to 1 million new immigrants moving to Australia over the next few years – all of whom will need somewhere to live. This surge in immigration, coupled with internal migration and births has recently made Melbourne Australia’s largest city once again.

The Federal Government is taking active steps to make home ownership accessible to a larger number of people. For example, they have announced an expansion of the Home Guarantee Scheme (HGS), allowing those on lower incomes and non-related friends to buy a property together with a 5% deposit and no Lenders Mortgage Insurance (LMI). This scheme has also expanded to include those who have previously owned a home but have not owned one in the last 10 years. Additionally, single parents can now enter the market with a 2% deposit and no LMI. This scheme has also been expanded to include permanent residents (as opposed to just Australian citizens).

Cost of supplies

Figures have shown that the cost of building a house has risen by approximately 24% since the start of the COVID-19 pandemic, largely due to the scarcity of materials and trades. And according to Resimax Group’s Tick Homes, whilst the supply of materials coming back into the market may bring the build time of houses back to normal timeframes, the price increase for materials, approvals and trades will likely not come down.

When considering the drivers of supply and demand together, it is evident that the Melbourne housing market will be in for some strong and sustained growth over the next few years. And with the WFH trend set to continue, “lifestyle” properties are set to see sustained and significant growth. This includes properties at an affordable price that provide great lifestyle benefits such as extra rooms, private backyards in friendly communities with great amenity including easy access to sport, schools, shopping, and work. Resimax creates masterplanned developments with many in-demand features and amenities. A great example is their Eynesbury development with a championship 18-hole golf course, restaurant in a historic building, plus a  future commercial centre, a resort style hotel, and day spa, – this being an ideal candidate for lifestyle living and maximised long term property growth.

Disclaimer: This article is for general information purposes only and should not be taken as advice. Always seek professional advice from suitably qualified professionals familiar with your situation and goals.

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Steven Molnar is Head of Research and Education for Resimax group. With over 25+ years in property and finance in Australia and internationally, he brings a unique perspective to his blogs with interesting property insights.