Melbourne’s property market has been slow in recent years and one of the biggest issues has been the oversupply of units weighing it down.
According to CoreLogic, affordability is improving, but buyers in Melbourne aren’t interested in the larger off-the-plan type units that developers are rolling out.
One of the main reasons for Melbourne’s struggling unit market is a mismatch between supply and demand. During the 2010s, Melbourne experienced a construction boom, particularly in inner-city suburbs where investor demand was high. Developers built large numbers of units, largely geared toward investors rather than owner-occupiers. Many of these units, often smaller and densely packed, were marketed as investment-grade properties. However, as market conditions have changed, this type of stock is no longer in demand.
Post-2017, the market dynamic shifted dramatically. A temporary cap on interest-only lending was introduced to curb risky lending practices. This cap, alongside stricter lending conditions, saw many investors leave the market, leading to a sharp decline in demand for new units. On top of that, the interest rate hikes in recent years have dampened enthusiasm, particularly in areas where capital growth has been weak.
Over-supply and affordability issues
The sheer volume of new units constructed during the boom has also led to an oversupply in certain parts of Melbourne. While other regions have largely recovered from the glut of supply, many Melbourne unit markets are still struggling. Despite affordability improvements in some areas—where saving for a deposit has become easier and mortgage payments as a percentage of household income are manageable—buyers are not rushing in.
In fact, resale data indicates that in the Melbourne City Council area, a significant proportion of unit owners are sitting on losses when selling their properties. In the June quarter of 2024, over 42% of unit owners sold their properties at a loss, indicating that capital growth in these areas has been weak for many years.
Quality concerns and investor hesitation
Another factor contributing to the unit market’s underperformance is the widespread concern over construction quality. High-profile cases such as the structural issues with Mascot Towers and the cracks found in Opal Tower have had a lasting impact on buyer confidence. These incidents have highlighted the potential risks associated with buying newly built units, particularly in high-density developments. As a result, many buyers are now wary of purchasing in these areas, fearing potential defects or costly repairs.
This lack of confidence extends to investors as well. Although rental yields have increased in some areas, many investors are still deterred by the poor capital growth in Melbourne’s unit markets. With higher interest rates and a sluggish market, the appeal of large apartment buildings as an investment has dropped significantly.
The impact of population growth and household formation
Despite Melbourne’s population growth and an increased rate of household formation, the supply of new housing, particularly units, has not met the needs of today’s buyers. Many first-home buyers, who would typically turn to units as an affordable entry into the property market, are instead looking elsewhere. Concerns over build quality, small unit sizes, and high-density living have deterred many potential buyers from entering these markets.
A glimmer of hope for Melbourne
While the unit market has been sluggish overall, there are a few signs of recovery in certain pockets of Melbourne. For example, in Parkville, unit values have shown signs of growth over the past year, with the median unit price remaining below $600,000. This suggests that buyers may eventually be swayed by more affordable options in medium to high-density unit markets, but only if the price is right.
However, it’s clear that any meaningful recovery in Melbourne’s unit market will require more than just price adjustments. Melbourne buyer’s agents have been focused on buying elsewhere in recent years and that has not changed yet.
I’m always advising clients against purchasing into large apartment buildings. There is no scarcity and virtually unlimited supply. It makes more sense to buy into a small unit block in a blue chip area. These types of properties appeal to owner-occupiers and make for a far better investment.
A professional Melbourne buyers agency or a Melbourne buyers agent can provide tailored advice and assistance, making the process less daunting.
