Almost half of pipeline projects in Melbourne apartment sector stalled

In a recent report, our team provided an in-depth analysis of the apartment market in Inner and Middle Melbourne over the last decade, examining the impact of policy interventions, market trends, and future supply pipelines. It serves as a call to action for the development industry and government to collaborate and unlock much-needed housing supply.

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The report, prepared for The Urban Development Institute of Australia (UDIA), reveals that between 2011 and 2021, Inner and Middle Melbourne saw significant apartment construction, with approximately 10,000 apartments delivered per year. This was largely driven by investment from both overseas and domestic buyers, however changes in policy settings and market conditions have since led to a decline in apartment supply.

One key finding from our research shows that the active pipeline of apartments going forward is around half the volume delivered during the peak of supply in 2015-2017. Specifically, the period from 2016-2021 saw an average of 12,265 apartments delivered per annum, while the forecast for 2022-2027 is significantly lower, with only 6,780 apartments expected to be produced per annum in the sample area.

The active pipeline of apartments going forward is around half the volume delivered during the peak of supply in 2015-2017.

Despite the pipeline’s potential supply, around half of it remains inactive. Many of these approved projects have been halted due to various factors, with 35,000 approved dwellings that are yet to begin construction.

With a focus on the Build-to-Rent (BTR) sector, our research shows that despite more than 12,000 BTR apartments being in permit-approved and under-application projects, only 48 per cent have financial backing. Without suitable financial solutions, this potential supply cannot be unlocked.

The rental market in Inner and Middle Melbourne has also been significantly impacted by the increasing demand and stalled supply. Melbourne’s rental vacancy rate stood at 1.3% in May 2024, well below the long-term average of 2.6% from 2018-2024. This scarcity in the rental market has driven up the median weekly rent by 4.8% over the past year and 16.4% on average over the last three years.

Our team looked at the government’s housing target and how Inner and Middle Melbourne are positioned to meet this target. It reveals a clear deficit when comparing annual housing targets with average annual building approvals between 2019-2023. Based on the existing pipeline and current forecasted demand, Melbourne will be in deficit of approximately 52,800 apartments by 2029.

The report delves into the impact of the existing tax regime, including the Foreign Purchaser Additional Duty and the changes to off-the-plan concessions, on the apartment market supply pipeline. It suggests that these policies have contributed to the decline in apartment supply.

Our experts have suggested a potential solution. Halving existing duties could double the sector’s output and catalyse approximately $640 million in tax revenue. This could be a significant step towards unlocking much needed housing supply and meeting the government’s housing targets.

For more detailed insights, you can access the full report on the UDIA website here.