The underperformance of Melbourne’s residential property market stems from a combination of economic and regulatory challenges.

Economic Setbacks

Victoria has faced significant economic hurdles, highlighted by a net reduction of 7,606 businesses during the 2022-23 financial year, according to the Australian Bureau of Statistics.

• Extended Lockdowns: The state’s prolonged lockdowns during the pandemic disrupted many businesses, leaving lasting financial scars.
• Increased Tax Burden:
  • A payroll tax surcharge introduced in the 2021-22 State Budget imposed a mental health and well-being levy on businesses with payrolls over $10 million.
  • This was followed by a 10-year COVID debt levy in the 2022-23 State Budget, further raising payroll taxes.

As Victoria’s economy struggles to recover, its property market is feeling the ripple effects. Economic health and job growth are closely tied to the strength of the housing market, and both have been under pressure in Melbourne.

Investor Disillusionment

Property investors are increasingly turning away from Melbourne due to unfavourable policies:

• Stricter Residential Tenancy Laws: Reforms have shifted the balance of power toward tenants, making property management more challenging for landlords.
• Higher Land Taxes: Increased taxes have further reduced returns, dissuading investors from remaining in or entering the market.

Opportunity Amidst Challenges

Despite these difficulties, Melbourne’s property market presents a unique buying opportunity. Current property prices are significantly below replacement costs, a situation reminiscent of Brisbane and Perth three years ago. Both cities were underperforming at the time, yet investors who purchased during the downturn reaped substantial capital growth as their markets recovered.

Melbourne’s current struggles could position it for a similar rebound, offering a chance for savvy investors to capitalize on undervalued properties. While the market is facing headwinds, its long-term potential remains strong.

What Is the Victorian Government Doing to Address the Housing Challenge?

The Victorian government has introduced key policies aimed at boosting housing supply and addressing the state’s growing housing demand:

1. Stamp Duty Reduction

Starting October 21, 2024, a 12-month reduction in stamp duty will apply to off-the-plan units, townhouses, and apartments—regardless of their price. This initiative aims to make these properties more attractive to developers and buyers, encouraging new construction.

2. Streamlined Planning in Activity Centres

To increase housing density near public transport, the government has designated 50 new activity centres for streamlined planning of multi-storey residential developments. This approach aims to fast-track the creation of housing in areas with established infrastructure.

The Current State of Housing Supply

Despite these efforts, the housing supply in Victoria is facing significant challenges:

• Construction Slowdown:
  • There are currently 63,700 dwellings under construction across Victoria, an 11% drop from a year ago.
  • High-density apartment projects have seen the most significant decline.
  • Detached houses, while still above the 10-year average, have dropped by 19% in the past year.
• Fewer Completions: 2024 is projected to record the lowest number of housing completions in a decade.
• Weak Approval Pipeline: Approved dwellings are 14% below the 10-year average, signalling ongoing supply constraints.

Demand Is Surging

While supply falters, demand is accelerating:

• Population Growth: Victoria’s population grew by over 183,000 people in the 12 months to March 2024, the largest increase of any Australian state. Overseas migration and interstate arrivals are major contributors to this surge.
• Housing Finance:
  • Total housing finance commitments in Victoria have risen, now 13% above the 10-year average, with $86.2 billion financed as of August 2024.
  • Non-first-home buyers and first-home buyers are both active, with commitments up 4% and 13%, respectively, over the past year.
  • Investor activity has increased, now accounting for 32% of total housing finance, up from 27% three years ago.

The Imbalance and Its Implications

This growing mismatch between supply and demand is exerting upward pressure on property prices and rental rates. With a tightening housing supply, strong population growth, and increasing investor interest, affordability challenges for owner-occupiers are expected to intensify.

While the government’s policies are steps in the right direction, their impact will take time to materialize. In the meantime, Melbourne’s housing market will likely remain competitive, with prices and rents continuing to rise.