Melbourne housing shortage: supply unable to keep up with population growth

Australia’s fastest growing city is set to face a shortage of housing in the next few years, as rapid population growth continues to outpace the construction of new housing.

The Victorian government will need to increase approvals and commencements of new housing by more than 10% in order to meet demand, according to the latest Victorian Residential Development Index (RDI) report published by the Urban Development Institute of Australia (UDIA).

UDIA Victoria CEO, Danni Addison, told AFR that the supply of new housing being delivered right now was being driven by high population and employment growth.

“The numbers tell us that despite record high levels of building activity, we’ve still got a way to go before we can stop playing catch-up and ensure there’s enough new housing to meet the demands of population growth,” she said.

The report states that Victoria will need to approve and build about 75,000 new properties each year during 2018-2021 to meet the state’s housing needs – when only 66,440 building approvals were issued a year between 2014-15 and 2016-17.

While the Victorian government has committed to speeding up new approvals processes, the industry still faces a number of challenges in being able to close the demand-supply gap.

“The residential development industry in Victoria faces a number of challenges including an unclear future urban renewal pipeline, production capacity challenges for new housing in Melbourne’s growth corridors and increasing competition for materials and skilled labour from major infrastructure projects right across Australia,” Ms Addison said.

Record low vacancy rate

The latest figures show that Melbourne’s vacancy rate is now the lowest it has been since at least 2010, adding further pressure to rental prices.

In February, Melbourne’s vacancy rate dropped to 1.4%, down from 1.8% in January and down from 1.7% a year earlier.

“We’ve also seen a sharp drop in Melbourne’s vacancies, which has pushed up asking rents, which could continue to climb higher this year given the explosive population growth that Melbourne is currently experiencing,” said SQM Research Managing Director, Louis Christopher.

February Vacancy Rates in the 5 largest capital cities

City Jan 2018 Feb 2018
Adelaide 1.5% 1.4%
Perth 4.4% 4.1%
Melbourne 1.8% 1.4%
Brisbane 3.6% 3.4%
Sydney 2.3% 2.3%


New lifestyle choices

Last year, the cost of buying a standard housing lot in Melbourne’s greenfield suburbs increased by a substantial 36% – four times the growth of Melbourne house prices.

Figures from project marketers Red23 show the Melbourne median lot price reached $329,500 at the start of January, with the city now rapidly closing the gap on Sydney.

For an average family looking to buy a three-bedroom home under $500,000 within 10km of Melbourne’s city centre, an apartment would be their only choice.

The dream of a “quarter-acre block” house is also increasingly being reimagined, with recent Census data showing a strong cultural shift to apartment / higher-density living.

“Nowadays, a significant number of home buyers are opting to live in a smaller, low maintenance dwelling … while some of that demand is driven by relative affordability, the emergence of contemporary apartments and townhouses also reflects a cultural shift that’s really redefining and modernising the Australian dream of owning a home,” Ms Addison said.

Melbourne property outlook for 2018
Melbourne’s population is growing at unprecedented rates, with no immediate signs of slowing down. Supply on the other hand continues to be hampered by a range of factors including a time-consuming approvals process, planning changes effectively decreasing the amount of dwellings a development site can yield, as well as the removal of stamp duty concessions for investors, and increased taxes for foreign buyers. Melbourne’s vacancy rate is already incredibly tight at well below 2%, yet the full force of recent changes which effectively reduce supply have not yet been felt. As a result, it is expected the vacancy rate will remain low, if not decrease further which will result in stronger rental growth, strengthening yields and in time capital growth too,” said Ironfish National Apartments Manager, William Mitchell.

If you would like further info about the outlook for the Melbourne market in 2018 and beyond, please view our market review and outlook video presented by our head of research, Grant Ryan.

You can also download our quarterly market report here.

Looking to get your foot in the door of the Melbourne market? Book your complimentary appointment with one of our experienced Strategists to see how we can help you get started.

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