The Melbourne Rental Market

August 11, 2023

The Melbourne rental market is currently facing a severe housing shortage, which is not unique to the city but is also prevalent in many parts of Australia. In this article, we aim to explore the reasons behind this shortage and discuss its implications for both renters and rental providers.

One of the main factors contributing to the housing shortage is the high demand for housing in capital cities, particularly on the eastern coast. Australia has one of the highest population concentrations in the world due to the desire of people to live in these cities. The continuous growth of the population, especially in inner city and education precincts with the influx of international students, has driven up the cost of property.

Another contributing factor is the decline in the average number of people living in households. Since the mid-1980s, the average number of individuals living in a household has steadily decreased from around 2.9 to approximately 2.5 since the early 2000s. The COVID-19 pandemic has exacerbated this trend, as people sought additional space and privacy. The decrease in household size means that more properties are needed to accommodate the growing population, further straining the supply of rental homes.

It is important to note that the majority of investment properties are privately owned, often by individual investors. These property owners have experienced significant interest rate increases over the past year, resulting in higher repayment costs. Furthermore, recent budget announcements have introduced new compliance costs and land tax charges for investment properties, making them less appealing to hold for investors. The combination of rising costs and decreased rental income has led many investors to sell their properties, reducing the overall supply of rental homes.

In addition to cost factors, the rental market is also impacted by low levels of development. Some local government councils have been resistant to approving new developments or increasing population density, further limiting the supply of rental properties. The construction industry has also faced challenges, including disruptions in the supply chain, shortage and high cost of construction materials, and a scarcity of labour. These factors have discouraged investment in new housing development, resulting in a surge in demand for inner-city rental properties.

Looking ahead, it is difficult to see the current tightness in the rental market being alleviated, especially with the Federal Government committed to increasing immigration targets. However, there have been some positive steps taken by the government to address the issue. The creation of the $10 billion Housing Australia Future Fund and the commitment to supporting Build-to-Rent (BTR) housing developments in Victoria are promising initiatives aimed at expanding rental options for the population. Attracting both big and small investors will be crucial in re-balancing the rental housing shortfall, and this will require legislative and regulatory reforms.

In conclusion, the Melbourne rental market is currently experiencing a challenging period due to a housing shortage. The high demand for housing, declining household sizes, rising costs for property owners, and low levels of development have all contributed to this situation. While there are some promising steps being taken to address the issue, it will take time for the market to rebalance. In the short term, renters can expect continued challenges with limited relief, but in the medium to long term, an increase in housing supply is expected to alleviate the situation and provide more accessible and secure homes for all Australians.


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