Melbourne November 2017

The month in review: Melbourne

By Herron Todd White
November 2017

In the past decade Victoria, and Melbourne in particular, have seen an unprecedented population growth becoming Australia’s fastest growing state and city respectively. While the number of new lettings across metropolitan Melbourne decreased by 5.2% from the June 2016 quarter to the June 2017 quarter, the average annual growth in the Victorian rental market over the past ten years has been 5.8%. In June 2016 the trend for the metropolitan rental rate was 2.5% which has since tightened to 2.2% in June 2017 (Source: DHHS 2017).

Melbourne rental vacancy rate

Inner Ring Property Update

Melbourne’s inner ring rental market, which includes suburbs located within five kilometres of Melbourne CBD, remains a landlord’s market with low vacancy rates for both houses and units. There is currently an under supply of detached and semi-detached housing available for rent and while experts have been vocal about their concerns of the potential oversupply of inner city apartments, it may have been preempted by recent changes in legislation that restricts developers from selling more that 50% of the new off the plan apartments in the development to overseas buyers. Additionally, there is continued demand for inner city strata units due to large amounts of foreign investment in off the plan apartments that typically are left vacant. There is a growing sentiment amongst experts in regard to the inner city apartment market, stressing that there might actually be an under supply of available apartments in the medium to long term, with rent levels still at a moderate level.

Melbourne CBD and the inner city suburbs are dominated by young professionals with a high proportion (63.3%) of renters according to RP Data (2017), due to the close proximity to universities, schools, nightlife, shopping and various other amenities. Typically, demand for apartments and smaller units from students in the rental market is stronger during the university period of the year (March to November) and dips slightly over the summer period as many students return home for the break.

Median rental prices for units in Melbourne’s inner ring suburbs such as the CBD, Carlton, Richmond and South Yarra range from $430 to $490 per week, with average rental yields of between 3.7% and 5.1%. Renting a house in the same suburbs will set tenants back $620 to $650 on average with an average rental yield of 1.7% to 2.5% (REIV 2017).

We believe that the market will continue to favour the landlord within the inner ring, even with a new wave of off the plan development projects coming close to settlement, due to changes in legislation. Yields within the inner ring have fallen in recent years with around a 4.5% yield for apartments. The National Australia Bank (NAB) estimates price drops of 2.6% by the end of 2017 and then a further drop of 2.4% in 2018. Even with price drops as extreme as this, Melbourne’s population growth continues to exceed expectations with 109,000 more people than previously expected and BIS Oxford Economics (BIS) warns of a shortage of apartments to cater for demand, with an expected under supply of potentially 2,000 dwellings in 2018. This strong interstate and overseas migration is expected to further tighten vacancy rates and push rent levels higher through a wide shortage of affordable housing options. This is also tied to a new tax under Victorian legislation which puts a 1% levy on the improved capital value of the property if it is not occupied for a period of six months. This is being used as a driver to push down rental levels in the market and tackle the affordability issue. This legislation is yet to be proven effective as it is still in its development stages.

Middle Ring Property Update

Melbourne’s middle ring suburbs located within five to 20 kilometres of the CBD, attract a diverse group of renters including students, young and established families as well as downsizers due to proximity to educational institutions, whether primary, secondary or tertiary, as well as availability of public transport, hospitals and shopping centres.

Apartments and smaller units are sought after either in the locality of the tertiary institution itself, such as Deakin University located in Burwood and LaTrobe University and RMIT University campuses in Bundoora, or nearby public transport for easy accessibility to schools. On the other hand, established families are seeking larger detached and semi-detached housing located within primary and secondary school zoning areas such as Mount Waverley Secondary College in Mount Waverley as well as several elite schools in Kew, Hawthorn and Balwyn.

Out of the mentioned rental centres, Bundoora is the most affordable with a median rental price of $390 per week for a house and $350 per week for a unit and rental yields of 2.8% and 4.7% respectively. An average weekly rental price in Burwood for houses and units is around $500, but while detached dwellings are yielding approximately 2%, units are averaging 3%.

Rental prices in more prestigious eastern suburbs such as Hawthorn, Kew and Balwyn are averaging $670 to $720 per week for houses and $380 to $420 for units, with average rental yields of 1.6% and 3% respectively.

Average rental prices for a 2-bedroom apartment in the middle ring’s eastern suburbs are around $330 per week and it appears that the suburb’s location does not have a major impact on the rent as long as the apartment is located within close proximity of public transport. Detached dwelling and townhouse rents, on the other hand, vary from suburb to suburb. Some rents are as low as $300 per week in Glen Waverley for older detached houses, whereas rents for larger modern houses can reach $850 per week.

The rental market in Melbourne’s middle ring currently heavily favours landlords and we predict further tightening of vacancy rates and growing rental rates due to Victoria’s growing population.

Outer Ring Property Update

Outer metropolitan suburbs, located approximately 20 kilometres or more from the Melbourne CBD are popular with families and those seeking more affordable rental rates. These suburbs generally have lower rental rates for houses than inner city units and the proximity to the city plays a large part in rental rates being achieved. Rental demand is also driven by proximity to education facilities, local amenities, public transport and road infrastructure.

The rental market of the outer suburbs is continuing to grow and as the availability of affordable properties continues to decline this demand is expected to continue to grow. In the June 2016 quarter the proportion of affordable new rentals was 8.2% which has since decreased to 6.6% in the June 2017 quarter (source: DHHS 2017).

In the outer eastern suburbs, a large portion of rental properties is located within the Melbourne southeast growth corridor as a result of local government housing strategies. The establishment of new suburbs such as Clyde North, Cranbourne East and Botanic Ridge has made a great contribution to the residential rental sector by creating new affordable housing stock.

Median rental prices for 3- to 4-bedroom houses in Melbourne’s outer south-eastern suburbs such as Cranbourne, Cranbourne West, Clyde and Officer range from $350 to $450 per week, with average rental yields of between 3.7% and 4.2% (REIV 2017). The median rental price for units is not available due to lack of rental evidence.

Meanwhile, median rental rates for 3- to 4-bedroom houses in outer western suburbs such as Werribee and Melton range from $290 to $330 per week with a rental yield of between 4.4% and 4.5%. Closer towards the city we are seeing higher rental rates with Tarneit and Hillside median rentals for 3- to 4-bedroom houses ranging from $370 to $400 per week with a rental yield of approximately 3.8% (source: REIV 2017).

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