Research indicates Melbourne is heading for undersupply

Melbourne’s market has gone from strength to strength in the last few years. Property price growth and sustained rental demand has been spurred on by high levels of population growth.

In 2017 and early 2018 we’ve seen Melbourne’s vacancy rate fall significantly. The downward trend is forecast to continue throughout 2018. According to SQM Research, vacancy rates were recorded at a five year low of 1.9% in the last quarter of 2017.

To identify an undersupply or oversupply in a market, vacancy rates need to be assessed relative to balanced levels. Traditionally, a vacancy rates of 3% indicates equilibrium of a market. Therefore, Melbourne vacancy rate data supports claims made by BIS Oxford Economics that Melbourne will move into undersupply after dwelling completions peak in the first quarter of this year.

The reduction in supply is the market’s reaction to increasingly stringent lending requirements, rising construction costs and foreign investment limitations restricting the feasibility of new development. This coupled with the sustained increase in demand and population will ensure Melbourne remains in a state of undersupply for some time. The Australian Bureau of Statistics released data in late December 2017, indicating that Victoria had added another 86,900 overseas migrants over the financial year ending June 2017 in what was our nation’s largest intake of net overseas migrants since 2008/09.

This rise in population and demand is likely to buoy the rental market in the short to medium term. We are also likely to see a rise in rental yields as the supply side of the rental market becomes strained.

Source: SQM Research

The next 12 months is set to be an interesting period for the Melbourne property market after much skepticism in 2017. With Sydney’s growth dampening and its vacancy jumping up to 2.5% (the highest rate since 2002), the spotlight is on Melbourne.

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