Meeting Plan Melbourne’s 70% target for future dwelling supply from infill areas hinges on increased construction of townhomes and apartments. However, the viability of higher-density housing faces several challenges, including investor participation, undersupply, and elevated costs.
As previously mentioned, investor activity is vital to boosting supply in the tight rental market, especially in the build-to-sell sector. Yet, since the mid- to late-2010s investors have faced cumulative tax increases and additional costs which have reduced their participation; which, in turn, is contributing to the undersupply of rental products.
This undersupply has intensified since the reopening of international borders. The population surge, driven by an influx of international students and pandemic-induced changes in household formation, has resulted in historically low vacancy rates and increased rents*.
Elevated (albeit stabilising) construction and funding costs are exacerbating the current situation.
Ongoing affordability constraints are supporting the expression of demand and sale with more affordable (higher density) products.
Despite these challenges, the build-to-rent sector presents a glimmer of home by providing much-needed support for new dwelling supply. However, it should be noted that initially, this supply will play a complementary role rather than serving as a standalone solution to the market’s undersupply issues.
This article references findings from our Q3 2023 Residential Market and Economic Review.
* Metropolitan Melbourne recorded a 2.5% vacancy rate as at October 2023 – REIV. Apartment rents recorded 16% growth through the 12 months to October 2023 – REIV.