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Melbourne's Rental Market: A Year in Review

CEO Khai Intela
If 2023 had a defining theme in Melbourne's investor market, it would undoubtedly be the steady rise in rents. The latest figures from the Real Estate Institute of Victoria (REIV) revealed an annual increase in...

If 2023 had a defining theme in Melbourne's investor market, it would undoubtedly be the steady rise in rents. The latest figures from the Real Estate Institute of Victoria (REIV) revealed an annual increase in rent of 7.1% for houses and a staggering 14.3% for apartments. These numbers clearly indicate a significant upward trend in rental prices.

The Rise of Unit Rents in Melbourne's City Fringe

Interestingly, unit rents have experienced a more substantial increase compared to houses, particularly in the city fringe areas. Inner Melbourne, for example, witnessed a 17.6% jump in unit rents, while houses saw a more modest 4.5% increase. These statistics challenge the usual data trend and suggest that renters are opting for smaller, more affordable spaces in desirable locations.

According to Cath Stubbings, the Director of Property Management at Kay & Burton, these rising rents can be attributed to the fundamental laws of supply and demand. Melbourne is experiencing a shortage of available rental accommodation, particularly in well-located areas. This shortage has created a situation where quality homes are in high demand, driving up rental prices.

The Effect of Supply and Demand

The median rent price for houses in metropolitan Melbourne increased by 2.9% to $530 per week in the September quarter, while units saw a more substantial increase of 4.3% from $460 per week to $480. These numbers, coupled with the vacancy rates, paint a clear picture of the supply and demand dynamics in Melbourne's rental market.

SQM Research reported that Greater Melbourne's vacancy rate in October was only 1.2%, lower than last year's 1.5% rate. This situation is particularly evident in the inner city, where rental properties are in high demand. Rental hotspots such as South Yarra, Prahran, St Kilda, Hawthorn, and Middle Park are experiencing a shortage of available properties.

The Perfect Storm: Factors Contributing to Rising Prices

Several factors have converged to create the perfect storm that is driving up rental prices in Melbourne. Firstly, the post-pandemic return to the city has led to an increase in demand for rental properties. Additionally, the reopening of international borders has resulted in a significant influx of new arrivals, surpassing 600,000 in 2023. Lastly, some rental providers have decided to reduce their investment portfolios, further shrinking the available supply.

Research conducted by the Property Investment Professionals of Australia (PIPA) revealed that 24.8% of investors sold at least one property in Melbourne, with 31.35% selling in Victoria. Rising interest rates and land tax concerns were cited as the primary reasons for these sales. However, rental yields have also increased significantly, attracting new rental providers to the market. In October alone, Kay & Burton welcomed 51 new rental providers.

Future-Proof Investments in Melbourne

With rising rents and a potential for capital growth, rental providers entering the market can expect solid returns and long-term tenancies in sought-after pockets of Melbourne. Two-bedroom apartments and quality small houses priced between $500 and $800 per week are currently in high demand, especially among young professionals who value lifestyle amenities and connectivity to the city.

While houses gained popularity during the COVID era, as people needed more space for remote work, the trend is shifting towards smaller, well-located units. Renters are prioritizing location and affordability over space. However, it's worth noting that the luxury rental sector has also remained buoyant, with properties achieving higher than expected rental prices. Melbourne's top-end market seems to be somewhat immune to the wider marketplace factors affecting other segments.

As we bid farewell to 2023 and look ahead to a new year on the property calendar, becoming a rental provider in 2024 appears to be a promising venture. Increasing rental yields and a steady supply of renters seeking quality homes throughout Melbourne make it an opportune time to enter the market and capitalize on the city's rental demand.

Melbourne Rental Market Image source: Saigon Intela