[+] Build Up, Think Broadly: What’s Ahead for Melbourne’s Housing Market

“The market is not crashing—it’s recalibrating.” Charter Keck Cramer’s director Richard Temlett is on the stage at The Urban Developer ’s Melbourne Residential Development Summit. The room is filled with developers, architects and other property professionals, all concerned about how to make their projects stack up in increasingly harder times. Their concern is understandable— there has been a raft of liquidations recently, construction and material costs keep rising on top of the labour shortage, Covid-induced delays are far from over, and planning system issues are creating their own problems. Then there is the knock-on effect of the cost of living, the competition for rental spaces, the housing affordability issue and the return of international students needing shelter. Victoria’s housing market has been chronically undersupplied for years. But Temlett is certain that developers can still make a profit despite the current situation. “You have to think long term,” he says. Melbourne’s housing supply woes Before the pandemic, Melbourne was the fastest-growing city in the fastest-growing state. Temlett says that now, post-pandemic, it remains on the same track and will be bigger than Sydney by 2051. But for many years the housing supply has not kept up. ▲ Supply and demand: the mismatch in the housing sector has been apparent for some time. “There is a mismatch between supply and demand,” Temlett says. “The market is very distorted.” A lack of supply, especially at specific price points, is driving the demand but the current supply will not be sufficient. Victoria’s Plan Melbourne 2017-2050 Strategy Plan predicts that Melbourne will have a population of more than 8 million people with another 1.5 million homes needed. The Victorian Planning Authority is trying to encourage 70 per cent of the new housing being developed to be in established areas in Melbourne’s middle ring of suburbs with 30 per cent in greenfield areas. But for some time about 50 per cent of the new housing developed in Victoria has been in greenfield sites in growth corridors supported by incentives, stimulus programs and other initiatives. “You can see over the past couple of years, the greenfield market was a beneficiary of low interest rates and home builder grants,” Temlett says. However, the Plan Melbourne’s estimated numbers of housing needed is not sufficient. Even with a conservative estimate of an increase of 90,000 people per year and assumption that all existing projects would get funding and pre-sales to go ahead, Charter Keck Cramer found that there was not enough build-to-sell or build-to-rent properties to meet the annual demand. “It’s the missing middle,” Temlett says. Migrant living preferences are key Migration as the borders have opened up will be a key part of that increase in population . “The federal government says that migration is actually forecast to get to pre-pandemic levels this financial year,” Temlett says. ▲ Research has found migrants are looking to buy their own homes in their fourth year in Australia. “That’s an incredibly strong recovery.” What migrants want in housing will also be important. Charter Keck Cramer’s research found that 30 per cent of migrants rented houses with 25 per cent renting apartments within the first year of their arrival in the country. But by their fourth year in Australia, they were starting to look at buying property instead. “That’s relevant for developers,” Temlett says. “They are looking to make their buying decisions in three to four years and particularly in the greenfield market. “If you’re getting a 100,000 migrants into Melbourne right now, a lot of them are going to drive that ownership for your projects in three to four years. “Whereas the apartment market actually needs to respond right now, to house people that are coming in today.” Generational needs Age cohorts also have different housing needs. Charter Keck Cramer’s research team also found that while Gen Z was slowly coming back to buying housing, they were most interested in inner-city apartments to rent or buy while millennials were most interested in either greenfield developments or build-to-rent with at least one-in-two millennials renting townhouses or apartments. ▲ Ratio Consultant’s Colleen Peterson, Mitchell Brandtmanz’s Zarron Smith, Maxcap’s Johnny Woodhouse, Charter Keck Cramer’s Richard Temlett onstage with The Urban Developer’s Adam Di Marco at the summit. “There’s a huge section of the millennial market that want this Australian dream, and they will save the 20 per cent deposits for the house and land package and a quarter-acre block of land as they’ve moving into the family forming stages of their lives,” Temlett says. “They will drive demand for that type of product and will go into the greenfield markets. “One in two right now are renting; some of it is a choice, a lot of it is just forced quite simply because house prices are so high.” Baby boomers were the surprising cohort showing interest in build-to-sell—“rightsizing” instead of downsizing into apartments that suited their needs and increasingly also interested in what build-to-rent could offer them. “[Baby boomers] are not actually impacted by interest rate rise as a lot of them have paid off their detached houses—they’re more impacted by past price change, but unfortunately, they are aging and they’re working against the clock in the sense that they do need to start to downsize.” House and rent prices Melbourne’s rental vacancy rates currently sit at under 1 per cent “Even in areas such as Docklands where we got to 13 per cent at the height of the pandemic, it is now under 1 per cent,” Temlett says. “It is supply being removed from the market. “You can turn on migration by opening the borders but supply takes two to four years to be mobilised. “So for the next couple of years, I can’t see vacancy rates getting any higher than where they are now.” ▲ Temlett says rental vacancies rates are unlikely to shift any time soon. Temlett estimates that there will be strong rental growth rates over the next few years to more than 5.5 per cent. He also thinks that developers will have to rethink pricing models as construction costs increase and that some already have. “We feel that there may be a 1 to 2 per cent fall in land values over the next couple of months or year,” he says, pointing out that a large amount of stock is being pre-sold and developers want to protect prices and will start offering incentives. Rates—and why there is a strong cycle coming Temlett thinks developers should be excited—they are operating in an environment where there is a huge demand for their product, so much so that competition may not even be much of a consideration. The only issue is if they can financially manage to create it in time for their target buyers and renters. And this, he says, is only going to accelerate when the Reserve Bank of Australia cuts rates, which he anticipates will be soon as he thinks the limit of how high the rates can be raised has been reached. “It is going to be a very elastic response,” he says. “There is a huge amount of demand in the market and a lot of buyers actually want to get into the market. “When they realise that the world is not going to end, they are going to start making their purchasing decisions. “And because of this mismatch between supply and demand, the next cycle will actually be very strong.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

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