Melbourne residential supply imbalance to persist over the next few years

Rents are expected to see upward pressure amidst tight supply.

In a report, JLL said the strength of Melbourne’s underlying demand growth from strong population inflow and continued low levels of new residential supply will see the market balance continue to swing towards under-supply over the next few years.

“There is little supply relief in an already tight rental market, with the upward pressure on rents likely to continue over the medium term. Similarly, supply imbalances and cost-push pressures from construction costs of new apartments should see unit price growth re-emerge over the next few years,” the report added.

Here’s more from JLL:

Pre-sales demand for Melbourne apartments generally remained muted but is expected to improve with residual unsold stock from previous construction cycles now largely gone. Demand remained mostly focused towards downsizers looking for high-end boutique developments.

Despite current demand headwinds, underlying demand for apartments is experiencing a considerable boost due to an enormous rebound in both overseas migration and international student numbers. While population inflow is likely to ease somewhat, it is expected to remain above pre-COVID-19 levels over at least the next few years.

Supply continues to moderate

Inner Melbourne apartment completions are expected to reach particularly low levels in 2024. Amid difficult development conditions, the commencement of new build-to-sell (BTS) or build-to-rent (BTR) projects has been limited in recent quarters. As a result, the supply of apartments is projected to remain moderate for at least several years, falling short of the underlying demand.

Following a peak of 5.5% in late 2020 during the COVID-19 pandemic, Melbourne’s rental vacancy rate has experienced a significant recovery, reaching 1.1% in March 2024 (SQM Research). This recovery can be attributed to the rebound in migrants and foreign students.

Prices recover

After falling early in COVID-19, Melbourne rents have not grown as much as other markets in the past three years, but have gained momentum in 2024 while other cities slow.

Existing apartment price growth has also lagged other markets in this cycle. Melbourne’s median unit price has been relatively stable over recent months, but is still 2.5% higher over the year to April 2024.

Note: Melbourne Residential refers to Inner Melbourne apartments. Inner Melbourne data: Supply from JLL, rents from JLL Valorem and vacancy from REIV. Greater Melbourne data: Price, sales volume and yields from CoreLogic.